A2 - Engagement Quality And Acceptance, Planning And Internal Control Flashcards
Primary objective of auditor when considering the acceptance of initial audit engagement for nonissuer is
A) establish whether preconditions for an audit are present
B) agree with management on timing of tests at interim and year end
C) limit auditors responsibility if management fails to provide written representations
D) specify degree to which management intends to rely on auditors testing of internal controls
A) establish whether preconditions for an audit are present
Under which circumstances, if any, can an auditor who is NOT independent perform an audit engagement of a nonissuer?
A) auditor has performed the FS in multiple prior years
B) auditor is required by law to accept the engagement and report on the FS
C) auditors lack of independence is not due to financial reasons
D) auditor is precluded from accepting the engagement and report on the FS under any circumstances
B) auditor is required by law to accept the engagement and report on the FS
Which of the following would prevent an auditor from accepting a new client engagement?
A) auditor does not have clear understanding of client accounting methodology
B) management has reputation within the business community for materially overstating its revenue
C) client’s accounting system is computerized, and is unable to access without IT help
D) accounting data is only maintained on paper form for short period of time
B) management has reputation within the business community for materially overstating its revenue
Before accepting an audit engagement, CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which would do such?
A) significant differences between entity’s forecasted financial statement and FS to be audited
B) not be permitted to have access to sensitive information regarding the salaries of senior management
C) substantial inventory write offs just before year end in each of past 4 years
D) become aware of existence of related party transactions while reading the draft
B) not be permitted to have access to sensitive information regarding the salaries of senior management
Which of the following factors most likely would lead CPA to conclude that potential audit engagement should not be accepted?
A) significant related party transactions that management claims occurred in the ordinary course of business
B) internal control activities requiring segregation of duties are subject to management override
C) management continues to employ inefficient system of information technology to record financial transactions
D) unlikely that sufficient appropriate audit evidence is available to support an opinion on FS
D) unlikely that sufficient appropriate audit evidence is available to support an opinion on FS
Auditors engagement letter most likely would include a statement :
A) advantages of statistical sampling
B) inherent limitations of an audit
C) Billings to be paid in form of stock
D) assessment of risk of material misstatement
B) inherent limitations of an audit
As part of communicating the overall strategy for an audit of an issuer internal control over financial reporting, an auditor should communicate which the following to audit committee?
A) extent of interim testing to be performed
B) accounts that will be tested
C) effect of specific internal controls on FS
D) extent to which auditor plans to use work of company personnel
D) extent to which auditor plans to use work of company personnel
Which of the following is not a required part of the understanding between the client and auditor?
A) managements responsibility to adjust FS if auditor identifies material misstatements
B) managements responsibility to correct deficiencies in internal control
C) auditors responsibility to obtain reasonable assurance if FS is free of material misstatement due to fraud
D) auditors responsibility to obtain reasonable assurance if FS is free of material misstatement due to unintentional error
B) managements responsibility to correct deficiencies in internal control
Which of the following most likely would be included in engagement letter from auditor to client?
A) provide absolute assurance about whether FS are free of material misstatement
B) responsible for ensuring the client complies with applicable laws
C) involve information technology specialist in performance of audit
D) adjust the FS to correct misstatements before issuing report
C) involve information technology specialist in performance of audit
Connection with an audit of nonissuer, auditor would ordinarily use an engagement letter to
A) mutually agree upon contingent fees between company and auditor
B) assert that properly planned audit will detect and identify all material misstatements
C) specify any arrangements concerning the involvement of the company’s internal auditors on the audit
D) determine which of the company’s FS notes will be compiled by the auditor during the audit
C) specify any arrangements concerning the involvement of the company’s internal auditors on the audit
Before accepting an engagement to audit a new client, CPA is required to obtain
A) understanding of prospective client’s industry and business
B) prospective client’s signature to representation letter
C) preliminary understanding of prospective clients control environment
D) prospective clients consent to make inquiries of predecessors audit
D) prospective clients consent to make inquiries of predecessors audit
Successor auditor most likely would make specific inquiries of the predecessor auditor regarding
A) specialized accounting principles of clients industry
B) competency of clients internal audit staff
C) uncertainty inherent in applying sampling procedures
D) disagreements with management as to auditing procedures
D) disagreements with management as to auditing procedures
Accountant who begun an audit of the FS was asked to change the engagement to a review because of restriction on the scope. If there is reasonable justification, the review report should include reference
Scope limitation that caused the change - YES OR NO
Original engagement that was agreed to - YES OR NO
NO and NO
Who would qualify as a “predecessor auditor”?
A) client’s accounting employee who audits the company’s branches, subsidiaries, or other outlying locations
B) client’s accounting employee responsible for preparation of company’s financial statements
C) independent CPA who was engaged to perform, but did not complete an audit of FS
D) independent CPA who is considering accepting an engagement to audit financial statements
C) independent CPA who was engaged to perform, but did not complete an audit of FS
Which is true about communication with predecessor auditor?
A) contact with predecessor auditor before client acceptance is not mandatory, but encouraged, and client permission is required
B) contact with the predecessor auditor before client acceptance is mandatory, but client permission is required
C) contact with the predecessor audit should not take place prior to engagement acceptance, but such communications may take place after test work has begun
D) contact with the predecessor auditor before client acceptance is mandatory and based on this requirement, client permission is not required prior to communication
B) contact with the predecessor auditor before client acceptance is mandatory, but client permission is required
REQUIRED TO SPEAK WITH PRIOR AUDITOR, AND PERMISSION IS REQUIRED
Which is reasonable basis for agreeing to change the engagement to compilation?
A) management does not provide signed rep letter
B) prohibited from corresponding with entity’s legal counsel
C) entity principal creditors no longer require entity to furnish audited FS
D) accountant is prevented from examining minutes BOD meetings
C) entity principal creditors no longer require entity to furnish audited FS
If predecessor auditor refuses to give current auditor access to documentation, what should current auditor do?
A) review risk assessment of the opening balances of FS
B) withdraw from engagement
C) disclaim opinion due to scope limitation
D) discuss matter with legal counsel
A) review risk assessment of the opening balances of FS
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A) Management’s refusal to permit the CPA to perform substantive tests before the year-end.
B) The CPA’s lack of understanding of the prospective client’s internal auditor’s computer-assisted audit techniques.
C) Management’s disregard of its responsibility to maintain an adequate internal control environment.
D) The CPA’s inability to determine whether related party transactions were consummated on terms equivalent to arm’s-length transactions.
C) Management’s disregard of its responsibility to maintain an adequate internal control environment.
An auditor’s engagement letter most likely would include a statement that:
A) Limits the auditor’s responsibility to detect errors and fraud.
B) Describes the auditor’s responsibility to evaluate going concern issues.
C) Explains the analytical procedures that the auditor expects to apply.
D) Lists potential significant deficiencies discovered during the prior year’s audit.
A) Limits the auditor’s responsibility to detect errors and fraud.
Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday’s predecessor auditor was Post, CPA, who has been notified by Monday that Post’s services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
A) The chairman of Monday’s board of directors.
B) Monday’s controller or CFO.
C) Hill, the successor auditor.
D) Post, the predecessor auditor.
C) Hill, the successor auditor.
Human Resources
Engagement client acceptance
Leadership responsibilities
Performance of engagement
Monitoring
Ethical requirements
…are all examples of
Quality control elements
Which of the following is not an element of CPA firm quality control system to be considered in establishing quality control policies and procedures?
A) deciding to accept or continue client relationship
B) selecting personnel for advancement who have necessary qualifications
C) assessing client’s ability to establish effective internal control
D) monitoring effectiveness of professional development activities
C) assessing client’s ability to establish effective internal control
Primary purpose of establishing quality control policies and procedures for deciding whether to accept a new client is to
A) enable CPA firm to attest to reliability of the client
B) satisfy CPA duty to the public concerning acceptance of new clients
C) minimize likelihood of association with clients whose management lacks integrity
D) anticipate before performing any fieldwork whether an unmodified opinion can be expressed
C) minimize likelihood of association with clients whose management lacks integrity
Engagement size and complexity
Personnel availability
Special expertise
Timing of the work
Continuity and periodic rotation
On the Job training opportunity
Are all considered for
Planning an audit engagement personnel requirements
Auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding is
A) auditors responsibility for determining preliminary judgments about materiality and audit risk factors
B) management responsibility for identifying mitigating factors when auditor has doubt about entity’s ability to continue as going concern
C) auditors responsibility to ensuring that those charged with governance are aware of significant deficiencies in internal control that come to auditors attention
D) management responsibility for providing auditor with assessment of the risk of material misstatement due to fraud
C) auditors responsibility to ensuring that those charged with governance are aware of significant deficiencies in internal control that come to auditors attention
If difference of opinion arise between engagement partner and quality control reviewer, then engagement partner should
A) follow firms policies and procedures for resolving differences of opinion’
B) issue disclaimer of opinion and report the issue to the audit committee
C) discuss the differences with entity’s management and issue modified auditors report
D) withdraw from engagement with permissible under law or regulation
A) follow firms policies and procedures for resolving differences of opinion
If an audit determines that a quality control review is required, but has not yet been performed, what should engagement partner do?
A) issue unqualified audit report with explanatory paragraph
B) refrain from issuing audit report until after the quality control review has been completed
C) issue a qualified audit report with explanatory paragraph
D) request that audit engagement team member perform the quality control review in timely manner
B) refrain from issuing audit report until after the quality control review has been completed
Audit documentation should
A) not be permitted to serve as a reference source for the client
B) not contain critical comments concerning management
C) show that the accounting records agree or reconcile with the FS
D) considered the primary support for the FS being audited
C) show that the accounting records agree or reconcile with the FS
Audit documentation should be prepared in enough detail so that:
A) an experienced auditor who has worked with the client in the past can understand the procedures performed and evidence
B) reader of the FS who has no previous connection with the audit can understand the procedures performed and the evidence obtained
C) reader of the FS who has a background in financial analysis can understand the procedures performed and the evidence obtained
D) experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained
D) experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained
Which statement is correct regarding an auditors documentation of the risk assessment during an audit of a non-issuer?
A) extent of documentation must be consistent among all audits
B) auditor must document complete understanding of non-issuer industry
C) form and extent of documentation should be influenced by nature, size, and complexity of the entity and IC
D) auditors risk assessment should be documented separately from auditors documentation
C) form and extent of documentation should be influenced by nature, size, and complexity of the entity and IC
Which statement is correct about actions taken after the documentation completion date?
A) auditor must not make any amendments to documentation before the end of the specified retention period
B) auditor must not make any additions to documentation before the end of the specified retention period
C) auditor must not make any changed to documentation before the end of the specified retention period
D) auditor must not make any deletions to documentation before the end of the specified retention period
D) auditor must not make any “deletions” to documentation before the end of the specified retention period
Under provisions of Sarbanes-Oxley Act of 2002, registered public accounting firms are required to prepare and maintain audit work paper and other information for a period of
A) 1 year
B) 3 years
C) 5 years
D) 7 years
D) 7 years
5 years applies to auditors of nonissuers
Best describes documentation completion date?
A) 14 days from report release date, based on PCAOB
B) 60 days from report release date, based on PCAOB
C) 7 years from report release date, based on PCAOB
D) 5 years from report release date, based on PCAOB
A) 14 days from report release date, based on PCAOB
60 days - according to auditing standards following the report release date
7 years - required retention period under PCAOB
5 years - required retention period under SAS rules for nonissuer
Maximum number of days in which nonissuer auditor should complete the assembly of the final audit file following the report release date?
A) 30 days
B) 14 days
C) 60 days
D) 75 days
C) 60 days
Which correctly identifies the deadline for the completion of audit documentation of a nonissuer?
A) within 60 days after the report release date
B) within 14 days after the report release date
C) within 90 days after the last day of fieldwork
D) within 45 days after the last day of fieldwork
A) within 60 days after the report release date
Which date is appropriate for nonissuer to discard audit documentation if:
Engagement letter was 6/30 Y1
Audit completed on 9/1 Y1
Audit report released 3/15 Y2?
A) 6/30 Y3
B) 6/30 Y6
C) 9/1 Y6
D) 3/30 Y7
D) 3/30 Y7 - from the date of audit report release date 5 years
Which is not required documentation in an audit in accordance with GAAS?
A) narrative description of the internal control system
B) auditors assessment of the risk of material misstatement
C) engagement letter
D) written audit program describing audit procedures to be performed
A) narrative description of the internal control system
Permanent (continuing file) of audit documentation most likely would include copies of:
A) lead schedules
B) attorney letters
C) bank statements
D) debt agreements
D) debt agreements
Audit documentation that makes up the current file most likely would include a copy of
A) bank statement
B) pension plan contract
C) articles of incorporation
D) flowchart of internal control
A) bank statement
Which of the following is most accurate regarding audit documentation requirements
A) auditor should document findings that could result in modification of the auditors report
B) if different audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should not be included in the workpapers
C) if an oral explanation serves as sufficient support for the work the auditor performed, the explanation should be documented in the work papers
D) if the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed
A) auditor should document findings that could result in modification of the auditors report
Internal Control - Integrated Framework contains objectives that cover each of the following EXCEPT
A) ensuring all applicable laws and regulations are followed
B) transparency of internal and external financial reporting
C) safeguarding of entity’s assets against potential losses
D) high level goals established by leadership to develop entity’s mission
D) high level goals established by leadership to develop entity’s mission
Auditor would most likely be concerned with controls that provide reasonable assurance about:
A) efficiency of management decision making process
B) appropriate prices the entity should charge for products
C) methods of assigning production tasks to employees
D) entity’s ability to process and summarize financial data
D) entity’s ability to process and summarize financial data
Three categories of entity objectives include
Reliability of financial reporting
Effectiveness of efficiency of operations
Compliance with laws and regulations
According to COSO, establishing maintaining and monitoring an effective internal control system can do each of following, except
A) ensure entity’s financial survival
B) promote entity’s compliance with laws and regulations
C) help entity’s achieve performance targets
D) provide protection for an entity’s resources
A) ensure entity’s financial survival
Control environment component of Internal Control - Integrated Framework includes which principle?
A) identification and analysis of risk
B) selection and development of control activities
C) appropriate communication of control deficiencies
D) independence and oversight responsibilities of the BOD
D) independence and oversight responsibilities of the BOD
Which matches a “factor” with the related “Internal control component”?
A) human resource policies and practices are part of control activists
B) internal audit function is part of monitoring
C) recording the proper monetary value of transactions is part of control activists
D) participation of audit committees is monitoring
B) internal audit function is part of monitoring
Human resource is control environment
Recording monetary value is information and communication
Audit committee participation is control environment
Corporation uses budget vs actual data for managers. This is used to track personnel costs and division variances greater than 5%, anything over will be investigated to determine if budgeted positions have not been filled or if there was overtime. Timely exception resolution illustrates principles with
A) financial reporting information
B) obtain and use information
C) internal communication
D) external communication
B) obtain and use information
Internal audit manager requested info detailing the amount and type of training the IT departments staff received during last year. According to COSO, training records would provide documentation to
A) exercising oversight of the development and performance of internal control
B) demonstrating commitment to retain competent individuals in alignment with objectives
C) developing general control activities over technology to support achievement of objectives
D) holding individuals responsible for internal control responsibilities in pursuit of objectives
B) demonstrating commitment to retain competent individuals in alignment with objectives
According to COSO, what is the first ongoing monitoring step in evaluating the effectiveness of an internal control system?
A) establishing control baseline
B) identifying changes in internal control that have taken place
C) reevaluating design and implementation to establish baseline
D) periodically retaliating operations where no know change has occurred
A) establishing control baseline
According to COSO, which component applies to entity’s deployment of policies and procedures?
A) control environment
B) risk assessment
C) control activities
D) information and communication
C) control activities
According to COSO, each is principle relating to risk assessment component of internal control EXCEPT
A) considers potential for fraud in assessing risk to achievement of objectives
B) organization identifies and assess changes that could significantly impact the system of internal control
C) specify objectives with sufficient clarity to enable identification and assessment of risks related to objectives
D) selects and develops activities contributing to mitigation of risks to achievement of objectives to acceptable levels
D) selects and develops activities contributing to mitigation of risks to achievement of objectives to acceptable levels
Which items does not pertain to control environment?
A) management philosophy and operating style
B) partipation of those charged with governance
C) accounting records
D) personnel policies and practices
C) accounting records
Accounting records pertain to information and communication system
Which would an auditor most likely consider in evaluating the control environment of audit client?
A) overall employee satisfaction with assigned duties
B) entities process to regularly monitor control performance
C) management reviews of monthly financial statements
D) management operations style
D) management operations style
Which component of internal control would be the foundation for the other components
A) information and communication
B) risk assessment
C) control environment
D) control activities
C) control environment
Company has established and communicated baseline expectations for performance to all employees. Focus is to which COSO internal control framework ?
A) control activities
B) monitoring activities
C) control environment
D) information and communication
C) control environment
Managements attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals would influence the control environement when
A) audit committee is active in overseeing entity’s financial reporting policies
B) external policies established by parties outside the entity affect accounting practices
C) management is dominated by one individual who is also shareholder
D) internal auditors have direct access to those charged with governance
C) management is dominated by one individual who is also shareholder
Employees feel pressure to do the right thing
Management deals with signs that problems exist
Resolves issue and dealings with customers, suppliers and other parties
A) strategic goals
B) operational excellence
C) reporting reliability
D) tone at the top
D) tone at the top
Chief internal auditor is using the framework to improve their system. With the use of “tone at the top” they will focus on everything EXCEPT
A) risk identification and analysis
B) university organization structure
C) development and retention of competent employees
D) holding employees accountable
A) risk identification and analysis
Which is true regarding risk assessment component of internal control?
A) it is done because it is a component of overall audit risk in a FS audit
B) it may not be applicable to the audit of every entity
C) it is done to understand how management addresses risks relevant to financial reporting
D) not needed to consider because they are concerned with audit risk in a financial statement audit
C) it is done to understand how management addresses risks relevant to financial reporting
Monitoring component of internal control EXCLUDES
A) assessing information derived from external parties
B) assessing the quality of control performance overtime
C) improving controls that are not operating effectively
D) eliminating controls that are not operating effectively
D) eliminating controls that are not operating effectively
Non profit periodically conducts focus groups of employees, service beneficiaries and governance board members to reevaluate its mission vision and values to determine the accuracy of the strategic statements to refine where necessary. Activity relates to which internal control?
A) control activities
B) risk assessment
C) information and communication
D) monitoring
D) monitoring
What is a management control that most likely could improve managements ability to supervise company activities?
A) monitoring compliance with control requirements imposed by regulatory bodies
B) limiting direct access to assets by physical segregation and protective devices
C) establishing budgets and forecasts to identify variances from expectations
D) supporting employees with resources necessary to discharge their responsibilities
C) establishing budgets and forecasts to identify variances from expectations
Segregation of duties reduces the opportunities to allow persons to be in positions to both
A) journalist entires and prepare FS
B) record cash receipts and cash disbursements
C) establish controls and authorize transactions
D) perpetrate and conceal errors and fraud
D) perpetrate and conceal errors and fraud
Organization installed an uninterrupted power supply at its facility. This can most accurately be categorized as
A) physical control
B) logical control
C) general control
D) information processing control
A) physical control
According to Committee of Sponsoring Organizations of Treadway Comission, which component framework addresses the dissemination of information regarding control objectives and responsibilities?
A) information and communication
B) Control environment
C) Risk assessment
D) Control activities
A) information and communication
The Committee on Sponsoring Organizations prepared the Internal Control Integrated Framework:
A) To help businesses assess internal control.
B)To respond to the internal control assessment requirements of the Sarbanes-Oxley Act of 2002.
C)As part of the Congressional task force known as the Treadway Commission.
D)To compliment the overarching concepts of the enterprise risk management framework
A) To help businesses assess internal control.
Which of the following is not a control environment factor?
A) Hiring and advancement policies.
B) Management’s approach toward business risks.
C) Participation of those charged with governance.
D) Proper segregation of duties.
D) Proper segregation of duties.
Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff
A) knowledge, skill and ability of each audit engagement
B) risk of material misstatement in audit
C) audit fee by client
D) size and complexity of company
C) audit fee by client
Joe has been promoted to audit supervisor prior to upcoming audit a large existing client. Assuming that Joe is assigned 5 assistants for the client audit, his supervisory duties may include all of the following except
A) staying informed with his assistants on audit issues or difficulties encountered with client
B) communicating to his assistants the susceptibility of the clients FS to material misstatements
C) assuming primary responsibility for all phases of the audit
D) reviewing work performed by his assistants to determine adequacy and whether the objectives were met
C) assuming primary responsibility for all phases of the audit
PRIMARY RESPONSIBILITY IS TO THE AUDIT PARTNER
During the end of an audit, one member does not agree with the conclusion reached by the remaining audit members on a key client issue. Under this scenario, dissenting auditor may take any of the actions, except:
A) request that their opinion is documented
B) consulting with engagement partner
C) disassociating from audit conclusion in event there is not an adequate resolution
D) accepting the engagement team conclusion despite resolution after orally discussing the concern with supervisor
D) accepting the engagement team conclusion despite resolution after orally discussing the concern with supervisor
Which of the following would NOT be a primary function of an audit strategy?
A) provide preliminary assessment of materiality and tolerable misstatement
B) outline reporting objectives
C) provide scope of the audit
D) outline nature, extend and timing of audit procedures
D) outline nature, extend and timing of audit procedures
THIS IS PART OF THE AUDIT PLAN, NOT AUDIT STRATEGY
In establishing overall audit strategy for an audit of nonissuer, auditor should:
A) assess the risk of material misstatement and develop substantive procedures to mitigate the risk
B) form a conclusion on compliance with independent requirement that apply to audit engagement
C) perform internal control walk through of non issuer to determine type of audit procedures required
D) plan the timing of the audit and nature of the communications required based on engagement reporting objectives
D) plan the timing of the audit and nature of the communications required based on engagement reporting objectives
Which of the following statements best describes an audit strategy?
A) identifies the risk of material misstatements
B) identifies the relevant assertions for material account balances
C) professional responsibility to comply with GAAS
D) forms the basis for a more detailed audit plan
D) forms the basis for a more detailed audit plan
Which is required documentation in an audit in accordance with GAAS?
A) flowchart or narrative of the IS relevant to financial reporting
B) audit plan setting forth the procedures necessary to accomplish the engagement objectives
C) planning memo establishing the timing of the audit procedures
D) internal control questionnaire
B) audit plan setting forth the procedures necessary to accomplish the engagement objectives
Engagement partners is creating the audit plan which includes outlining which audit procedures to be performed. In order to detect material misstatements, audit would use
A) test of controls
B) other GAAS related procedures
C) substantive procedures
D) risk assessment procedures
C) substantive procedures
Which is NOT a type of FS assertion
A) rights and obligation
B) fairness and accuracy
C) valuation and allocation
D) understandability of presentation and classification
B) fairness and accuracy
Holding other planning considerations equal, decrease in amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause auditor to
A) apply the planned substantive tests prior to balance sheet date
B) perform planned auditing procedures closer to balance sheet date
C) increase assessed level of control risk for relevant FS assertions
D) decrease extent of auditing procedures to be applied to class
B) perform planned auditing procedures closer to balance sheet date
Before applying principal substantive tests to an entity’s accounts receivable at an interim date, auditor should
A) consider likelihood of assessing the risk of incorrect rejection too low
B) project sampling the risk at the maximum for tests covering the remaining period
C) ascertain that accounts receivable are immaterial to the FS
D) assess the difficulty in controlling the incremental risk
D) assess the difficulty in controlling the incremental risk
Which accounts would an auditor most likely test prior to balance sheet date
A) interest receivable
B) accrued liabilities
C) short term debt
D) maintenance and repairs expense
D) maintenance and repairs expense
INCOME STATEMENT ACCOUNTS INCLUDE TRANSACTIONS THAT TOOK PLACE DURING FULL PERIOD OF FS
BALANCE SHEET ACCOUNTS ARE REPORTED AS OF A POINT IN TIME. THEREFORE AMOUNT WOULDN’T BE KNOWN PRIOR TO BALANCE SHEET DATE
In an audit, auditor plans to recalculate the year end employee vacation accrual with list of employees and banked vacation hours. In order to validate the COMPLETENESS of the information, auditor would
A) use payroll system to validate the sample of employee salaries
B) agree the number of employees included on the vacation accrual calculation to the final payroll register
C) review a list of employees who were terminated after year end to verify they were removed from client detail
D) verify the number of vacation hours accrued by each employee for each pay period and comply with the corresponding policy set by HR
B) agree the number of employees included on the vacation accrual calculation to the final payroll register
Which type of procedure would an auditor use to test a clients FS assertion at the account, transaction or disclosure level?
A) substantive procedures and test of controls
B) substantive test ONLY
C) analytical test ONLY
D) test of controls ONLY
A) substantive procedures and test of controls
Which judgment may an independent auditor share responsibility with an entity’s auditor who is assessed to be both competent and objective?
Assessment of inherent risk - YES OR NO
Assessment of control risk - YES OR NO
NO and NO
Independent auditor is solely responsible for reporting on FS, no judgments
Which of the statements regarding the use of an internal auditor is correct?
A) auditor cannot rely on work of internal auditor, b/c they are not independent of the client
B) auditor can rely on the work of an internal auditor for any decision b/c they report to BOD
C) auditor can rely on the work of an internal auditor in limited circumstances, as long as its not high subjectivity or judgment
D) use of internal auditors can only be allowed if firm is contracting with and reimbursing internal auditors
C) auditor can rely on the work of an internal auditor in limited circumstances, as long as its not high subjectivity or judgment
Work of internal auditors may affect the independent auditors: ( 3 key points)
obtaining an understanding of the system of internal control
assessing the risk of material misstatement
Substantive procedures performed in gathering audit evidence
Internal auditors work would most likely affect the nature, timing and extent of independent CPA auditing procedures when internal auditor work relates to assertions on
A) existence of contingencies
B) valuation of intangible assets
C) existence of fixed asset additions
D) valuation of related party transactions
C) existence of fixed asset additions
Which judgment may an independent auditor share responsibility with an entity’s internal audit function, which is assessed to be competent, objective and apply a systematic approach
Evaluation of significant accounting estimates - YES OR NO
Materiality of misstatements - YES OR NO
NO and NO
Independent auditor may not share responsibility with an independent auditor on these items
In assessing the objectivity of internal auditors, independent auditor should
A) evaluate the quality control program in effect for the internal auditors
B) examine documentary evidence of the work performed by internal auditors
C) test a sample of the transactions and balances that the internal auditors examined
D) determine organizational level to which internal auditors report
D) determine organizational level to which internal auditors report
Which factors most likely would assist independent auditor in assessing the “objectivity” of internal auditor?
A) organizational status of the director of internal audit
B) professional certification of the internal audit staff
C) consistency of internal audit report with results of work performed
D) appropriateness of internal audit conclusions in circumstances
A) organizational status of the director of internal audit
What is the comparison between how detailed the audit plan is for a CPA to audit a large publicly held company versus comprehensive internal audit program
A) comprehensive plan and CPA plan is substantially identical, using the same areas
B) comprehensive is less detailed and covers fewer areas than would be covered by CPA
C) comprehensive is more detailed and covers areas that would normally not be covered by CPA
D) comprehensive is more detailed, although it covers fewer areas than would normally be covered by CPA
C) comprehensive is more detailed and covers areas that would normally not be covered by CPA
The company being audited has an internal auditor that is competent and objective. Independent auditor wants to assign tasks for internal auditor to perform. Independent auditor may:
A) perform test of internal controls
B) audit major subsidiary of company
C) not assign any task b/c of internal auditors lack of independence
D) perform analytical procedures, but not be involved with any tests
A) perform test of internal controls
While working on current audit for an insurance company, auditor discovers the client uses an actuary to assist in technical matters related to the prep of the FS. The actuary above is a
A) management specialist
B) general specialist
C) auditors specialist
D) external accounting expert
A) management specialist
Which is true about auditors use of internal auditor and specialist?
A) auditor must assess competency of both internal auditor and specialist
B) specialist may be related to clients but internal auditor may not
C) auditor may share responsibility for audit report with an internal auditor who is both objective and competent, but not for specialist
D) auditor may share responsibility for audit report with a specialist who is both objective and competent, but not for an internal auditor
A) auditor must assess competency of both internal auditor and specialist
Which statement is correct concerning auditors use of work of an actuary in assessing pension obligations?
A) auditor is required to understanding the objective and scope of the actuary work
B) reasonableness of the actuary assumptions is strictly the auditors responsibility
C) client is required to consent to auditors use of actuary’s work
D) actuary has a relationship with client, auditor may not use actuary work
A) auditor is required to understanding the objective and scope of the actuary work
Auditor who uses the work of a specialist may refer to specialist in the auditors report if
A) specialist findings are reasonable in the circumstances
B) specialist findings support related assertions in FS
C) auditor modifies report b/c of difference between client and specialist valuation of asset
D) specialist findings provide auditor with greater assurance of reliability about managements representations
C) auditor modifies report b/c of difference between client and specialist valuation of asset
Auditor of nonissuer intends to reference the work of an auditor external specialist in audit report b/c reference was relevant to modification to the auditors opinion. In the audit report, auditor should include:
A) specialist was responsible for evaluating an item material to the FS
B) reference to auditors external specialist does not reduce auditors responsibility for that opinion
C) specialist has been employed by the client
D) auditor planned and evaluated the adequacy of the specialist work
B) reference to auditors external specialist does not reduce auditors responsibility for that opinion
During course of new client, audit uses an appraisal specialist. How should the report be written for unmodified opinion?
A) reference the scope and findings of the specialist in detailed separate paragraph of report
B) reference specialist in audit report with prior permission from specialist
C) make no reference to specialist in audit report
D) reference specialist in audit report without obtaining specialist permission
C) make no reference to specialist in audit report
Management of nonissuer engaged an actuary to calculate year end asset and liabilities balances of employee pension plan. Actuary report provided year end balances that were consistent with balances reported in year end balance sheet. Audit would most appropriately
A) evaluate the nature and level of expertise of actuary
B) recalculate year end pension plan assets and liabilities balances using original source data
C) conclude the pension plan assets and liabilities accounts are free from material misstatements
D) prepare agreement with actuary detailing nature scope and objective of work performed
A) evaluate the nature and level of expertise of actuary
Group audit engagement of nonissuer, which is not required to be communicated by group auditor to component auditor?
A) ethical requirements relevant to group audit including independence requirements
B) component auditor will cooperate with group audit team
C) component auditors communicate on a timely basis newly identified related parties to the group audit team
D) group auditor have unrestricted access to those charged with governance to group and component
D) group auditor have unrestricted access to those charged with governance to group and component
Statements is not correct about materiality?
A) concept recognized that some matters are important to fair presentation of FS in conformity with GAAP, while other matters are not important
B) auditor considers materiality for FS as a whole in terms of largest aggregate level of misstatements that could be material
C) materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments
D) auditors consideration of materiality is influenced by auditors perception of needs of reasonable person who will rely on FS
B) auditor considers materiality for FS as a whole in terms of largest aggregate level of misstatements that could be material
As part of developing an audit strategy for an existing client, the auditor may determine a materiality level for all of the following except
A) certain classes of transactions
B) financial statements as a whole
C) transaction cycles with misstatements in PY audit
D) performance materiality
C) transaction cycles with misstatements in PY audit
Which one of the following statement best describes concept of materiality
A) information that is not likely to influence the decision of reasonable investors
B) information that meets strict quantitative thresholds
C) information that impacts income statement
D) information that is likely to be viewed by reasonable investors as altering the mix of available information
D) information that is likely to be viewed by reasonable investors as altering the mix of available information
Which would an auditor most likely use in determining auditors preliminary judgment about materiality
A) results of initial assessment of control risk
B) anticipated sample size for planned substantive tests
C) FS of the prior year
D) assertions that are embodied in FS
C) FS of the prior year
What should be considered when an auditor is planning and performing a FS audit of an issuer?
A) determining tolerable misstatement threshold, auditor should take account the amount of misstatements from PY
B) determine tolerable misstatement threshold at the overall FS level, but not at the account or disclosure level
C) auditor does not need to express materiality as specified quantitative amount
D) reevaluation of materiality results in significantly lower amount that initially established, audited would generally not modify audit procedures
A) determining tolerable misstatement threshold, auditor should take account the amount of misstatements from PY
If an auditor has a “high likelihood of un corrected and undetected misstatements”
Overall materiality is $140k
Performance materiality in range 50% to 70%,
What would performance materiality most likely be set at?
A) 98,000
B) 70,000
C) 140,000
D) 168,000
B) 70,000
Use lower end of % when language has “high likelihood of uncorrected and undetected misstatements”
Use upper end of % when language has “low likelihood of uncorrected and undetected misstatements”
If new information becomes available that could require a reevaluation of the quantitative level of materiality applied during audit of issuers, auditor
A) not change the materiality level once established
B) lower the materiality level, but not raise it
C) raise the materiality level, but not lower it
D) raise or lower the materiality level as appropriate to the situation
D) raise or lower the materiality level as appropriate to the situation
In order to reduce the risk that the aggregate of undetected misstatements in the group financial statements of a nonissuer exceeds the materiality for the group financial statements as a whole, the auditor should establish a
A) materiality for group FS that is lower than the component materiality
B) materiality for the Group FS that exceeds prior year materiality for the group FS
C) component materiality that is lower than the materiality for the group FS
D) component materiality that is equal to the materialists for the group FS
C) component materiality that is lower than the materiality for the group FS
Predecessor auditor who audited the prior period FS generally should obtain the letter of representation from
A) client audit committee
B) principal underwriter
C) Securities and Exchange Commission
D) successor independent auditor
D) successor independent auditor
According to PCAOB, each of the items should be included in documentation of engagement quality review, except
A) identification of engagement quality reviewer and others who assisted reviewer
B) identification of documents reviewed by engagement quality reviewer and others who assisted
C) assessment of engagement quality reviewer of instances of fraud identified by audit team
D) date on which engagement quality reviewer provided concurring approval of issuance
C) assessment of engagement quality reviewer of instances of fraud identified by audit team
Jules CPA is reporting on comparative FS, but Shah CPA conducted the PY audit, which is not true in this situation?
A) if Shah report is not presented, other matter paragraph should be included
B) If Shah report was qualified due to scope limitation, Jules may still issue an unmodified opinion on CY FS
C) dual dating may be used to indicate the appropriate dates for each audit
D) if Shahs report will be presented, management will need to provide a representation letter to Shah
C) dual dating may be used to indicate the appropriate dates for each audit
COSO Cube is used to illustrate the relationship between
A) categories of objectives, internal control components, and entity organization levels
B) 5 components of internal Control, 3 categories of objectives, and 17 principles
C) internal controls, enterprise risk management, and Sarbanes and Oxley requirements
D) risk management strategies, internal control components, and elements of Audit Framework C
A) categories of objectives, internal control components, and entity organization levels
Which of the following statement would least likely appear in auditors engagement letter?
A) arrangement to be made with predecessor auditor
B) our engagement is subject to the risk that material error or fraud including defalcations, if exist, will not be detected
C) fees for our services are based on regular per diem rates, plus travel
D) after performing preliminary analytical procedures, we will discuss with you other procedures we consider necessary to complete the engagement
D) after performing preliminary analytical procedures, we will discuss with you other procedures we consider necessary to complete the engagement
If an accounting change has NO material effect on the FS in the current year, but the change is reasonably certain to have a material effect in later years, the Change should be
A) disclosed in notes to the FS and referred to in auditors report for current year
B) treated as subsequent event
C) disclosed in the notes as FS of current year
D) treated as consistency modification in auditors report for current year
C) disclosed in the notes as FS of current year
Inherent risk and control risk differ from detection risk in that they
A) arise from misapplication of auditing procedures
B) may be assessed in either quantitative or nonquantitative terms
C) exist independently of the FS audit
D) can be changed at auditors discretion
C) exist independently of the FS audit
Detection risk is related to auditors procedures and can be changed at auditors sole discretion
On basis of audit evidence gathered and evaluated, auditor decides to increase assessed risk of material misstatement from that originally planned. To achieve an overall audit risk that is substantially the same as planned audit risk, auditor would
A) decrease substantive testing
B) decrease detection risk
C) increase inherent risk
D) increase materiality levels
B) decrease detection risk
Detection risk works inversely with risk of material misstatement
In financial statement audit of nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that
A) involves an estimate
B) exists b/c of no statistical sampling performed by auditor
C) arises from flaw in accounting system
D) arises from routine calculation
A) involves an estimate
Risk of material misstatement may be greater from matters arising from
A) significant increase in fixed asset purchase
B) routine transactions subject to a high level of systematic processing
C) minimal management intervention to specific accounting treatment
D) nonroutine related party transactions
D) nonroutine related party transactions
Which statements regarding the risk of material misstatement is correct?
A) only factual misstatements should be considered when making the assessment of risk and the determination of any adjustment that may need to be made
B) risk that material misstatement may occur to complex calculations, faulty estimates, or high volume transactions is known as control risk
C) detection risk is risk that material misstatement will not be detected by entity’s control
D) risk of material misstatement includes the auditors assessment of inherent risk as well as control risk
D) risk of material misstatement includes the auditors assessment of inherent risk as well as control risk
Which matters relating to entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit
A) entity’s fiscal year ends on 6/30
B) entity’s enters into derivative transactions as hedges
C) entit’s financial statement are generated at an outside service center
D) entity’s financial data are available only in computer readable form
B) entity’s enters into derivative transactions as hedges
Which would most likely heighten an auditors concern about the risk of material misstatement in an entity’s financial statements?
A) entity’s industry is experiencing declining customer demand
B) employees who handle cash receipts are not bonded
C) bank recs usually include DIT
D) equipment is often sold at a loss before being fully depreciated
A) entity’s industry is experiencing declining customer demand
Acceptable level of detection risk is inversely related to
A) assurance provided by substantive tests
B) risk of misapplying auditing procedures
C) preliminary judgment about materiality levels
D) risk of failing to discover material misstatement
A) assurance provided by substantive tests
Which is true?
A) fraud risk is comprised of risk of material misstatement and detection risk
B) if assessed level of fraud is high, auditor should attempt to reduce detection risk
C) audit risk and fraud risk are synonymous terms
D) if fraud risk is assessed at minimum level, audit risk will also be minimal
B) if assessed level of fraud is high, auditor should attempt to reduce detection risk
As acceptable level of detection risk decreases, auditor may
A) reduce substantive testing by relying on assessment of inherent risk and control risk
B) postpone the planned timing of substantive tests from interim dates to year end
C) eliminate assessed level of inherent risk from consideration as planning factor
D) lower the assessed level of control risk
B) postpone the planned timing of substantive tests from interim dates to year end
When auditor increases the planned assessed level of control risk because certain control activities were determined to ineffective, the auditor would most likely increase
A) extent of tests of details
B) level of inherent risk
C) extent of test of controls
D) level of detection risk
A) extent of tests of details
Which best identifies the effect of an increase in risk of material misstatement on detection risk and extent of substantive procedures
A) acceptable level of detection risk decreases, and extent of substantive procedures increase
B) acceptable level of detection risk increases, and extent of substantive procedures increase
C) acceptable level of detection risk decreases, and extent of substantive procedures decrease
D) acceptable level of detection risk increases, and extent of substantive procedures decreases
A) acceptable level of detection risk decreases, and extent of substantive procedures increase
As a result of control testing, CPA decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant
A) sample size would be irrelevant
B) sample size would be higher
C) sample size would be lower
D) sample size would be unaffected
C) sample size would be lower
Which circumstance would an auditor consider confirming the terms of large complex sale?
A) assessed level of control risk over the sale is low
B) assessed level of detection risk over the sale is high
C) when combined assessed level of inherent and control risk over the sale is moderate
D) when combined assessed level of inherent and control risk over the sale is high
D) when combined assessed level of inherent and control risk over the sale is high
Which is most appropriate if auditor concludes there’s a high risk of material misstatement?
A) use smaller, rather than larger sample sizes
B) perform substantive test as of interim date
C) select more effective substantive tests
D) increase test of controls
C) select more effective substantive tests
Audit team concluded that inventory is highly susceptible to misappropriation and potential misstatement would be material to FS. How to address:
A) review control procedures on inventory; perform physical inventory account on EOY
B) review control procedures on inventory; incorporate use of substantive analytical procedures and develop expectation
C) review client’s control procedures over safeguarding of inventory, but do not modify substantive procedures over inventory
D) review clients control procedures over safeguarding of inventory, and perform physical inventory counts throughout the current year
A) review control procedures on inventory; perform physical inventory account on EOY
Which factors would most likely heighten an auditors concern about the risk of fraudulent financial reporting?
A) large amounts of liquid assets that are easily convertible into cash
B) low growth and profitability as compared to other entities in the same industry
C) financial management participation in initial selection of accounting principles
D) overly complex organizational structure involving unusual lines of authority
D) overly complex organizational structure involving unusual lines of authority
Which circumstance would an auditor most likely consider a risk factor relating to misstatement arising from fraudulent financial reporting?
A) several members of mgmt purchased additional shares of entity’s stock
B) several members of BOD recently sold shares of the entity’s stock
C) entity distributes financial forecasts to financial analysts that predict conservative operating results
D) management is interested in maintaining earnings trend by using aggressive accounting practices
D) management is interested in maintaining earnings trend by using aggressive accounting practices
Which represents a risk factor that relates to misstatements arising from “misappropriation of assets”
A) high turnover of senior management
B) lack of independent checks
C) strained relationship between management and predecessor auditor
D) inability to generate cash flow from operations
B) lack of independent checks
CFO assigned inflated salvage values and extended the useful life of company equipment in order to decrease depreciation expense
A) error
B) fraud
C) embezzlement
D) collusion
B) fraud
Which describes why a properly designed and executed audit may not detect a material misstatement due to fraud?
A) audit procedures that are effective for detecting an unintentional misstatement may be ineffective for intentional misstatement that is concealed through collusion
B) audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material misstatement due to fraud
C) factors considered in assessing control risk indicated an increase risk of intentional misstatement, but only a low risk of unintentional errors in the FS
D) auditor didn’t consider factors influencing audit risk for account balances that have effects pervasive to FS taken as a whole
A) audit procedures that are effective for detecting an unintentional misstatement may be ineffective for intentional misstatement that is concealed through collusion
What is a false state,ent as it relates to auditors/management responsibility for fraud or risk assessment?
A) auditor is responsible for performing an audit that will obtain reasonable assurance that the clients FS are free from misstatement cause by error or fraud
B) management is responsible for prevention and detection of fraud within their organization
C) during planning phase, auditor must assess the risk of material misstatement to FS due to fraud and design the audit procedures accordingly
D) auditor performs fraud risk assessment only during the planning and fieldwork phases of audit
D) auditor performs fraud risk assessment only during the planning and fieldwork phases of audit
Which is true regarding the three fraud risk factors - incentives/pressures, opportunity, and rationalization/attitude)?
A) auditor to determine whether and to what extent fraud risk factors are present as part of the final overall review stage of audit
B) fraud risk factor should be discussed by engagement personnel during planning
C) existence of all 3 risk factors indicates that fraud occurred
D) lack of observation for all 3 risk fraud factors indicate fraud has not occurred
B) fraud risk factor should be discussed by engagement personnel during planning
Each of the following questions is appropriate to ask internal audit personnel, except?
A) how did you communicate to employees your views on business practice and ethical behavior?
B) do you have any knowledge of any fraud or suspected fraud affecting the entity?
C) what procedures did you perform to identify or detect fraud during the year?
D) has management responded satisfactorily to any findings from fraud related procedures you performed?
A) how did you communicate to employees your views on business practice and ethical behavior?
Which statement is correct with respect to fraud encountered during an audit engagement of a nonissuer?
A) distinguishing factor between fraud and error is materiality of the transaction involved
B) auditor who initially detects fraud ultimately makes the legal determination of whether fraud has actually occurred
C) fraudulent financial reporting can include the unintentional misstatement of amounts or disclosures in FS
D) it is often difficult to detect fraud intent in matters involving accounting estimates and the application of accounting principles
D) it is often difficult to detect fraud intent in matters involving accounting estimates and the application of accounting principles
THIS IS DUE TO A HIGH DEGREE OF MANAGEMENT JUDGMENT AND SUBJECTIVITY
Which circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s FS?
A) senior financial management participates in the selection of accounting principles and determination of significant estimates
B) supporting accounting records and files that should be readily available are not produced promptly when requested
C) related party transactions take place in ordinary course of business with an entity that is audited by another CPA firm
D) senior management has an excessive interest in upgrading the entity information technology capabilities
B) supporting accounting records and files that should be readily available are not produced promptly when requested
Tests performed on cash disbursements
-photocopy of vendor invoices are given instead of originals
-original invoices have been misplaced
What should be done next?
A) increase random number of items in the substantive test to increase the reliance that may be placed on overall test
B) reevaluate the risk of fraud, and design alternative test for related transactions
C) increase testing by agreeing more of the payments to this particular vendor to photocopies of invoices
D) count the missing original documents as misstatements, and project the total amount of error based on size of the population and dollar amount of the errors
B) reevaluate the risk of fraud, and design alternative test for related transactions
Which party should auditor notify first when discovering an immaterial fraud is committed by an accounting clerk
A) audit committee
B) appropriate level of management
C) client’s legal counsel
D) clients internal auditor
B) appropriate level of management
Auditor finds evidence that an officer has entered fraudulent transactions in FS. Fraud transactions can be adjusted so the statements are not materially misstated. What should the auditor do?
A) report the matters to regulatory authorities
B) consider the fraud a scope limitation and disclaimer an opinion
C) communicate the matter to those charged with governance
D) immediately withdraw from engagement
C) communicate the matter to those charged with governance
Auditor discovers fradulaent expense reimbursement for a low level manager. Auditor determines that this transaction is inconsequential and several similar transactions would not be material to the FS in the aggregate. Which of the following best describes the auditors required response to discovery?
A) fully investigate other transactions related to this manager to determine if fraud exists
B) bring the attention of an appropriate level of management
C) report this funding to those charged with governance
D) auditors responsibility is satisfied by documenting that the singe transaction is inconsequential;
B) bring the attention of an appropriate level of management
Internal auditors work would most likely affect the nature, timing and extent of an independent CPA auditing procedures when internal auditor work relates to assertions about
A) valuation of related party transactions
B) valuation of intangible assets
C) existence of fixed asset additions
D) existence of contingencies
C) existence of fixed asset additions
Which would cause an auditor to suspect that material misstatements arising from fraud exist in a clients FS?
A) significantly fewer responses to confirmation requests are received than expected
B) property and equipment are usually sold at a loss before fully depreciated
C) monthly bank recs usually include several DIT
D) clerical errors are listed on EDP generated exception report
A) significantly fewer responses to confirmation requests are received than expected
Each of the principles relates to risk assessment component of Internal Control Integrated Framework except
A) specification of objectives
B) change identification and assessment
C) consideration for potential of fraud
D) accountability for internal control responsibilities
D) accountability for internal control responsibilities
Auditor issued audit report that was dual dated for subsequent event occurring after the original date of the auditors report but before issuance of the related FS. Auditor responsibility first events occurring subsequent to
The original date was
A) limited to include only events occurring up to the date of the last subsequent event referenced
B) extended to include all events occurring since the original report date
C) extended to subsequent events occurring through the later date
D) limited to the specific event referenced
D) limited to the specific event referenced.
Primary purpose of audit documentation
A) maintain professional judgment
B) prevent legal liability related to audit performed
C) support the audit perfomed in accordance with GAAS
D) assure that fraudulent financial reporting did not occur
C) support the audit perfomed in accordance with GAAS
Which of the factors would most likely cause a CPA to decide NOT to accept a new Audit engagement?
A) CPA inability to determine whether related party transactions were consummated on terms equivalent to arms length transactions
B) CPA lack of understanding of the prospective client’s internal auditor computer assisted audit techniques
C) managements refusal to permit the CPA to perform substantive tests before year end
D) managements disregard of its responsibility to maintain adequate internal control environment
D) managements disregard of its responsibility to maintain adequate internal control environment
Kamp’s goods seeks to establish the code of conduct “tone at the top” to all employees. Contents of the code will most likely include
A) prohibitions against conflict of interest and self dealing
B) prohibitions or limits on gifts and gratuities or establishes required reporting
C) definitions of common sense approaches to software piracy to ensure that the company is competitive
D) descriptions of the organization commitment to compliance and confidentiality
C) definitions of common sense approaches to software piracy to ensure that the company is competitive
Auditor obtains knowledge about new clients business and its industry to
A) evaluate whether the aggregation of identified misstatement causes the FS taken as a whole to be materially misstated
B) understand the events and transactions that may have an effect on client’s FS
C) make constructive suggestions concerning improvements to the client’s internal control
D) develop an attitude of professional skepticism concerning managements FS assertions
B) understand the events and transactions that may have an effect on client’s FS
Which of the following is not a control environment factor?
A. Participation of those charged with governance.
B. Management’s approach toward business risks.
C. Proper segregation of duties.
D. Hiring and advancement policies.
C. Proper segregation of duties.
When performing test of details during an audit, auditor determined that sample results supported the conclusion that the recorded amount balance was materially misstated. It was, in fact, not materially misstated. This situation is a risk of
A) assessing control risk too high
B) assessing control risk too low
C) incorrect rejection
D) incorrect acceptance
C) incorrect rejection
Erroneously concluding that the account balance is materially misstated when it is not…
If an auditor had concluded that the account was fairly presented when, in fact, it was not, would be an example of
A) assessing control risk too high
B) assessing control risk too low
C) incorrect rejection
D) incorrect acceptance
D) incorrect acceptance
As a result of controls, an auditor assessed risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population
A) less than the risk of assessing control risk too low, based on the auditors sample
B) less than the deviation rate in the auditors sample
C) more than the risk of assessing control risk too low, based on auditors sample
D) more than the deviation rate in the auditors sample
D) more than the deviation rate in the auditors sample
If deviation rate in population exceeds the maximum deviation rate based on sample, control risk is understated, because the control will be less effective than sample results would indicate
As a result of controls, an auditor assessed risk too high and increased substantive testing. This assessment occurred because the true deviation rate in the population
A) less than the risk of assessing control risk too low, based on auditors sample
B) less than the deviation rate in the auditors sample
C) more than the risk of assessing control risk too low, based on the auditors sample
D) more than the deviation rate in the auditors sample
B) less than the deviation rate in the auditors sample
Each of the following is a qualitative factor that an auditor of a nonissuer may consider relevant when evaluating whether misstatements are material, except:
A) the risk of incorrect acceptance of a misstatement
B) potential effect of misstatement on entity’s compliance with contractual agreement
C) significance of FS element affected by the misstatement
D) masking effect of misstatement on a change in earnings in context of industry conditions
A) the risk of incorrect acceptance of a misstatement
As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk lower than appropriate. The most likely explanation for this situation is
A) deviation rate of both auditors sample and population exceed tolerable rate
B) deviation rate of both auditors sample and population is less than tolerable rate
C) deviation rate in auditors sample is less than tolerable rate, but deviation rate in population exceeds tolerable rate
D) deviation rate in auditors sample exceeds the tolerable rate, but the deviation rate in the population is less than tolerable rate
C) deviation rate in auditors sample is less than tolerable rate, but deviation rate in population exceeds tolerable rate
As a result of test of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because
A) control risk based on auditors sample is less than the true operating effectiveness of the clients control activity
B) auditor believes that the control activity relates to the clients assertions when in fact, it does not
C) auditor believes that the control activity will reduce the extent of substantive testing when, in fact, it will not
D) control risk based on auditors sample is greater than the true operating effectiveness of the clients control activity
D) control risk based on auditors sample is greater than the true operating effectiveness of the clients control activity
Risk of incorrect ACCEPTANCE and likelihood of assessing control risk TOO LOW relate to
A) allowable risk of tolerable misstatement
B) preliminary estimates of materiality levels
C) efficiency of audit
D) effectiveness of audit
D) effectiveness of audit
The risk of incorrect REJECTION and likelihood of assessing control risk TOO HIGH relates to
A) allowable risk of tolerable misstatement
B) preliminary estimates of materiality levels
C) efficiency of the audit
D) effectiveness of the audit
C) efficiency of the audit
Which of the statements is correct concerning statistical sampling in tests of controls?
A) as population size increases, sample size should increase proportionately
B) deviations from specific control activities at a given rate ordinarily result in misstatements at lower rate
C) there’s an inverse relationship between expected population deviation rate and sampling size
D) determining tolerable rate, an auditor considers detection risk and sample size
B) deviations from specific control activities at a given rate ordinarily result in misstatements at lower rate
Which statement about audit sampling risk is correct for nonissuer?
A) no sampling risk arises from possibility that, when substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in population
B) non sampling risk can arise because an auditor failed to recognize misstatements
C) sampling risk is derived from uncertainty in applying audit procedures to specific risk
D) sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective
B) non sampling risk can arise because an auditor failed to recognize misstatements
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, auditor should consider
A) deviations from pertinent controls do not affect the risk of material misstatement in the accounting records
B) deviations from pertinent controls at a given rate ordinarily result in misstatement at a lower rate
C) when the degree of assurance desired in a sample is high, the auditor should allow for high level of sampling risk
D) increase number of items selected for test of controls usually increases the tolerable rate of deviations
B) deviations from pertinent controls at a given rate ordinarily result in misstatement at a lower rate
Which audit test would a CPA most likely use attribute sampling?
A) identifying entries posted to incorrect accounts
B) estimating the amount in an expense account
C) evaluating reasonableness of depreciation expense
D) selecting receivables for confirmation of account balances
A) identifying entries posted to incorrect accounts
ATTRIBUTE SAMPLING - estimate a rate of occurrence
What is an example of non sampling risk?
A) auditor selecting inappropriate auditing procedures
B) control being more effective than the auditor believes
C) auditor concluding the account balance is not materially misstates when it is, in fact, materially misstated
D) control not being as effective as auditor believes
A) auditor selecting inappropriate auditing procedures
OTHERS ARE INAPPROPRIATE AUDIT EVIDENCE AND FAILURE TO RECOGNIZE MISSTATEMENTS IN DOCUMENTS EXAMINED
If an auditor is unable to apply a designed audit procedure to an item selected as part of a sample and no alternative procedures are possible, then auditor should
A) treat the items as deviation from prescribed control
B) treat the item as misstatement
C) perform the designed procedure on replacement item
D) revise the sample selection method to more random selection method
A) treat the items as deviation from prescribed control
Sample size of test of control varies inversely with
Expected population deviation rate - YES OR NO
Tolerable rate - YES OR NO
NO and YES
In determining number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, auditor should consider tolerable rate of deviation from control activity. Auditor should also consider
A) likely rate of deviations ONLY
B) allowable risk of assessing control risk too high ONLY
C) both likely rate of deviations and allowable risk of assessing control risk too high
D) either A or B
A) likely rate of deviations ONLY
Which of the following would be a consideration in planning an auditors sample for a test of controls
A) preliminary judgments about materiality levels
B) auditors allowable risk of assessing control risk too high
C) level of detection risk for the account
D) auditors allowable risk of assessing control risk too low
D) auditors allowable risk of assessing control risk too low
THIS HAS AN INVERSE RELATIONSHIP WITH SAMPLE SIZE
Which statement is ordinarily correct about sample size in statistical sampling when testing controls?
A) expected population deviation rate has little effect on determining the sample size
B) as population size doubles, sample size should also double
C) as tolerable deviation rate increases, sample size should also increase
D) population size has little effect on sample size
D) population size has little effect on sample size
With regard to performance of Audit sampling during the audit of nonissuer client, which statement is correct?
A) professional judgment is not a valid justification in deciding whether to use statistical or nonstatistical sampling
B) sample size is a valid criterion in deciding between statistical or non statistical sampling approach
C) level of sampling risk that the auditor is willing to accept affects the sample size
D) sampling unit must be stated in monetary terms
C) level of sampling risk that the auditor is willing to accept affects the sample size
An auditor who uses statistical sampling for attributes in testing controls should reduce the planned reliance on a prescribed control when
A) sample rate of deviation plus allowance for sampling risk equals the tolerable rate
B) sample rate of deviation is less than the expected rate of deviation used in planning the sample
C) tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation
D) sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate
D) sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate
formula for calculating the allowance for sampling risk
= excess of the upper % deviation rate - sample deviation rate
Auditor is using statistical sampling in testing whether cash disbursements were properly authorized. Sample results indicate the sample rate of deviation plus allowance for sampling risk exceeds tolerable rate. Under these circumstances, auditor most likely would reduce
A) planned reliance on prescribed control
B) assessed level of control risk
C) planned reliance on substantive test
D) tolerable rate of deviations
A) planned reliance on prescribed control
If an auditor of nonissuer discovers unexpectedly high number of deviations during procedures performed on a sample to test managements review and approval of time sheets, then auditor most appropriately
A) increase tolerable rate of deviation
B) extrapolate impact of expectations on other key controls requiring management review
C) propose audit adjustment
D) increase assessed risk of material misstatement
D) increase assessed risk of material misstatement
Which of the following is not a control environment factor?
A. Participation of those charged with governance. B. Hiring and advancement policies. C. Management's approach toward business risks. D. Proper segregation of duties.
D. Proper segregation of duties.
When assessing the internal auditors’ competence, the independent CPA should obtain information about the
:
A. Internal auditors’ access to records and information that is considered sensitive.
B. Organizational level to which the internal auditors report.
C. Educational background and professional certification of the internal auditors.
D. Policies prohibiting the internal auditors from auditing areas where relatives are employed.
C. Educational background and professional certification of the internal auditors.
