2.18.19

Question 1

For which of the following audit tests is an auditor most likely to use attribute sampling?

Answer 1

Identifying entries posted to incorrect accounts.

Attribute sampling enables the auditor to (1) estimate the actual rate of control deviations and (2) determine its relation to the tolerable rate. Thus, attribute sampling is used for tests of controls, and variables sampling is used for substantive tests of details. Identifying entries posted to incorrect accounts is an example of a test of controls.

Question 2

Which of the following control objectives is achieved by reviewing and testing control procedures over physical inventory count?

Answer 2

Verification of existence of inventory.

Observation tests the assertion of existence. The auditor should observe and make test counts but is not responsible for taking inventory.

Question 3

Effective internal control activities over the payroll function may include

Answer 3

Verification of agreement of job time tickets with employee time clock card hours by a timekeeping department employee.

The total time spent on jobs should approximate the total time indicated on time clock cards. Timekeeping’s comparison of these records should provide an independent check of the accuracy of time reported on the time clock cards.

Question 4

Which of the following statements is correct regarding a management representation letter?

Answer 4

The date of the representation letter should typically be the same as the audit report.

The written representations should be (1) addressed to the auditor, (2) dated as of the date of the auditor’s report, and (3) signed by responsible and knowledgeable members of management. The CEO and the CFO usually should sign the representations.

Question 5

An auditor’s report contains the following: “We did not audit the financial statements of JK Co., a wholly owned subsidiary whose statements reflect total assets and revenues constituting 17% and 19%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Company, is based solely on the report of the other auditors.” These sentences

Answer 5

Assume no responsibility for the audit of JK Co.

The decision to refer to the work of a component auditor in the report signifies that the group engagement partner does not assume responsibility for the audit of the component auditor.

Question 6

When financial statements audited by the independent auditor contain notes that are captioned “unaudited” or “not covered by the auditor’s report,” the auditor

Answer 6

May refer to these notes in the auditor’s report.

If information included in the basic statements is (1) not required by the applicable reporting framework, (2) not necessary for fair presentation, and (3) clearly differentiated from the statements, the information may be identified as “unaudited” or “not covered by the auditor’s report” (AU-C 700). If the auditor wishes to draw attention to such a matter that is appropriately presented or disclosed, (s)he may include an emphasis-of-matter paragraph in the auditor’s report (AU-C 705). If (1) the information constitutes other information, (2) the information is materially inconsistent with the audited statements, and (3) management has not revised the information after a request by the auditor, the auditor should (1) include an other-matter paragraph in the report, (2) withhold the report, or (3) withdraw from the engagement. If the information contains a material misstatement of fact that management refuses to correct, the auditor should take further appropriate action (AU-C 720).

Question 7

Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?

Answer 7

Inquiring of the entity’s legal counsel about litigation, claims, and assessments.

The letter of inquiry requests, among other things, that legal counsel evaluate the likelihood of unfavorable outcomes of pending or threatened litigation, claims, and assessments. It also requests that legal counsel estimate, if possible, the amount or range of potential loss (AU-C 501). Thus, the inquiry may reveal information indicating that the auditee’s existence is threatened.

Question 8

Under which of the following circumstances might an auditor disclaim an opinion?

Answer 8

There are significant uncertainties affecting the financial statements for which the auditor is unable to obtain sufficient evidence to support management’s assertions.

If the auditor is unable to obtain sufficient evidential matter to support management’s assertions about a matter, a qualified opinion or disclaimer of opinion should be expressed.

Question 9

On August 13, a CPA dated the audit report on financial statements for the year ended June 30. On August 27, an event came to the CPA’s attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual-date the auditor’s report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for

Answer 9

All subsequent events that occurred through August 27.

Subsequent events are material events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements. They require adjustment or disclosure in the financial statements. If the auditor dates the report August 27, the auditor is assuming responsibility for all subsequent events that occurred through August 27.

Question 10

Which of the following is a computer-assisted audit technique that permits an auditor to insert the auditor’s version of a client’s program to process data and compare the output with the client’s output?

Answer 10

parallel simulation.

Parallel simulation is the computer-assisted audit technique in which the auditor inserts the auditor’s version of the client’s program to reprocess client data and compare the output with the client’s output.

Question 11

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year’s physical inventory. Which of the following actions would the auditor most likely take?

Answer 11

Audit the prior year inventory using alternative substantive procedures.

If the auditor did not observe the prior year’s physical inventory, the auditor should use alternative substantive procedures to audit the prior year inventory to ensure that the inventory is fairly stated.

Question 12

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year end if

Answer 12

Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed.

When the majority of the returned positive confirmation requests indicate smaller balances at year end than those in the client’s records, the client may have held open the sales journal after year end. Thus, the client debited customers’ accounts for the period under audit rather than for the subsequent period. The effect is to overstate sales and receivables.

Question 13

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s disclosures concerning this matter are adequate and no other issues prevail, the audit report may include a

Disclaimer of opinion:
Qualified opinion:

Answer 13

Yes
No

By itself, a substantial doubt about an entity’s ability to continue as a going concern does not require a modification of the opinion paragraph. Thus, a qualified opinion is inappropriate. However, an auditor may disclaim an opinion in these circumstances.

Question 14

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the

Answer 14

Sample size.

Statistical theory permits the auditor to measure sampling risk and to restrict it to an acceptable level. Statistical methods determine the sample size that will accomplish the auditor’s objectives.

Question 15

The financial statements of Smith Company, a nonissuer, for the prior period were compiled by a different accountant. These financial statements will be presented in comparative form with the current year’s financial statements. The predecessor accountant’s report will not be presented with the current-period auditor’s report. Which of the following items is included in the auditor’s report?

Answer 15

The date of the predecessor accountant’s report.

When the financial statements of a prior period have been compiled or reviewed by a predecessor whose report is not presented, the auditor should include an other-matter paragraph in the current-period report. This paragraph should state (1) the service performed in the prior period, (2) the date of the report on that service, (3) material modifications noted in that report, and (4) that the service (a) was smaller in scope than an audit and (b) did not provide a basis for an opinion.

Question 16

Green Company, an issuer, uses the first-in, first-out method of costing for its international subsidiary’s inventory and the last-in, first-out method of costing for its domestic inventory. The different costing methods will cause Green’s auditor to issue a report with a(n)

Answer 16

unqualified opinion.

The objective of the evaluation of consistency for the periods presented is to communicate in the report when the comparability of financial statements between periods has been materially affected by a change in accounting principles or by adjustments to correct a material misstatement in previous statements. Thus, the use of two different cost flow assumptions does not, by itself, affect the comparability of the entity’s financial statements between periods if no accounting changes have occurred.

Question 17

The element of the audit-planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Answer 17

Timing of inventory observation procedures to be performed.

The client is responsible for taking the physical inventory. The auditor is responsible for observing this process and performing test counts. The audit procedures are dependent upon management’s plans. Thus, the auditor must coordinate the collection of this evidence with management.

Question 18

What type of evidence would provide the highest level of assurance in an attestation engagement?

Answer 18

Evidence obtained from independent sources.

Evidence is usually more reliable when it (1) is obtained from independent sources; (2) is generated internally under effective internal control; (3) is obtained directly by the auditor; (4) is in documentary form, whether paper, electronic, or other medium; and (5) consists of original documents. Thus, evidence obtained from independent sources outside the entity typically is more reliable than evidence from sources inside the organization.

Question 19

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Answer 19

Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.

The information presented on a statement of cash flows is taken from the income statement and balance sheet. Indeed, a reconciliation of net income and net operating cash flow is required to be presented. Thus, reconciliation of amounts in the statement of cash flows with other financial statements’ balances and amounts is an important procedure in the audit of the statement of cash flows.

Question 20

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

Answer 20

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

Tests of the details of transactions at year end are most effective given that total sales consist mostly of a few transactions. Also, because most occur in the last month of the year, the auditor should establish that management made a proper cutoff.