A2 - Engagement Quality And Acceptance, Planning And Internal Control

Question 1

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

Answer 1

A) establish whether preconditions for an audit are present

Question 2

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

Answer 2

B) auditor is required by law to accept the engagement and report on the FS

Question 3

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

Answer 3

B) management has reputation within the business community for materially overstating its revenue

Question 4

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

Answer 4

B) not be permitted to have access to sensitive information regarding the salaries of senior management

Question 5

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

Answer 5

D) unlikely that sufficient appropriate audit evidence is available to support an opinion on FS

Question 6

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

Answer 6

B) inherent limitations of an audit

Question 7

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

Answer 7

D) extent to which auditor plans to use work of company personnel

Question 8

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

Answer 8

B) managements responsibility to correct deficiencies in internal control

Question 9

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

Answer 9

C) involve information technology specialist in performance of audit

Question 10

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

Answer 10

C) specify any arrangements concerning the involvement of the company’s internal auditors on the audit

Question 11

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

Answer 11

D) prospective clients consent to make inquiries of predecessors audit

Question 12

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

Answer 12

D) disagreements with management as to auditing procedures

Question 13

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

Answer 13

NO and NO

Question 14

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

Answer 14

C) independent CPA who was engaged to perform, but did not complete an audit of FS

Question 15

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

Answer 15

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

Question 16

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

Answer 16

C) entity principal creditors no longer require entity to furnish audited FS

Question 17

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

Answer 17

A) review risk assessment of the opening balances of FS

Question 18

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.

Answer 18

C) Management’s disregard of its responsibility to maintain an adequate internal control environment.

Question 19

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.

Answer 19

A) Limits the auditor’s responsibility to detect errors and fraud.

Question 20

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.

Answer 20

C) Hill, the successor auditor.

Question 21

Human Resources
Engagement client acceptance
Leadership responsibilities
Performance of engagement
Monitoring
Ethical requirements

…are all examples of

Answer 21

Quality control elements

Question 22

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

Answer 22

C) assessing client’s ability to establish effective internal control

Question 23

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

Answer 23

C) minimize likelihood of association with clients whose management lacks integrity

Question 24

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

Answer 24

Planning an audit engagement personnel requirements

Question 25

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

Answer 25

C) auditors responsibility to ensuring that those charged with governance are aware of significant deficiencies in internal control that come to auditors attention

Question 26

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

Answer 26

A) follow firms policies and procedures for resolving differences of opinion

Question 27

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

Answer 27

B) refrain from issuing audit report until after the quality control review has been completed

Question 28

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

Answer 28

C) show that the accounting records agree or reconcile with the FS

Question 29

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

Answer 29

D) experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained

Question 30

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

Answer 30

C) form and extent of documentation should be influenced by nature, size, and complexity of the entity and IC

Question 31

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

Answer 31

D) auditor must not make any “deletions” to documentation before the end of the specified retention period

Question 32

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

Answer 32

D) 7 years *5 years applies to auditors of nonissuers*

Question 33

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

Answer 33

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

Question 34

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

Answer 34

C) 60 days

Question 35

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

Answer 35

A) within 60 days after the report release date

Question 36

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

Answer 36

D) 3/30 Y7 - from the date of audit report release date 5 years

Question 37

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

Answer 37

A) narrative description of the internal control system

Question 38

Permanent (continuing file) of audit documentation most likely would include copies of: A) lead schedules B) attorney letters C) bank statements D) debt agreements

Answer 38

D) debt agreements

Question 39

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

Answer 39

A) bank statement

Question 40

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

Answer 40

A) auditor should document findings that could result in modification of the auditors report

Question 41

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

Answer 41

D) high level goals established by leadership to develop entity’s mission

Question 42

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

Answer 42

D) entity’s ability to process and summarize financial data

Question 43

Three categories of entity objectives include

Answer 43

Reliability of financial reporting Effectiveness of efficiency of operations Compliance with laws and regulations

Question 44

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

Answer 44

A) ensure entity’s financial survival

Question 45

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

Answer 45

D) independence and oversight responsibilities of the BOD

Question 46

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

Answer 46

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

Question 47

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

Answer 47

B) obtain and use information

Question 48

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

Answer 48

B) demonstrating commitment to retain competent individuals in alignment with objectives

Question 49

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

Answer 49

A) establishing control baseline

Question 50

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

Answer 50

C) control activities

Question 51

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

Answer 51

D) selects and develops activities contributing to mitigation of risks to achievement of objectives to acceptable levels

Question 52

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

Answer 52

C) accounting records Accounting records pertain to information and communication system

Question 53

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

Answer 53

D) management operations style

Question 54

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

Answer 54

C) control environment

Question 55

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

Answer 55

C) control environment

Question 56

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

Answer 56

C) management is dominated by one individual who is also shareholder

Question 57

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

Answer 57

D) tone at the top

Question 58

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

Answer 58

A) risk identification and analysis

Question 59

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

Answer 59

C) it is done to understand how management addresses risks relevant to financial reporting

Question 60

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

Answer 60

D) eliminating controls that are not operating effectively

Question 62

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

Answer 62

D) monitoring

Question 63

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

Answer 63

C) establishing budgets and forecasts to identify variances from expectations

Question 64

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

Answer 64

D) perpetrate and conceal errors and fraud

Question 65

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

Answer 65

A) physical control

Question 66

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

Answer 66

A) information and communication

Question 67

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

Answer 67

A) To help businesses assess internal control.

Question 68

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.

Answer 68

D) Proper segregation of duties.

Question 70

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

Answer 70

C) audit fee by client

Question 71

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

Answer 71

C) assuming primary responsibility for all phases of the audit PRIMARY RESPONSIBILITY IS TO THE AUDIT PARTNER

Question 72

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

Answer 72

D) accepting the engagement team conclusion despite resolution after orally discussing the concern with supervisor

Question 73

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

Answer 73

D) outline nature, extend and timing of audit procedures THIS IS PART OF THE AUDIT PLAN, NOT AUDIT STRATEGY

Question 74

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

Answer 74

D) plan the timing of the audit and nature of the communications required based on engagement reporting objectives

Question 75

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

Answer 75

D) forms the basis for a more detailed audit plan

Question 76

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

Answer 76

B) audit plan setting forth the procedures necessary to accomplish the engagement objectives

Question 77

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

Answer 77

C) substantive procedures

Question 78

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

Answer 78

B) fairness and accuracy

Question 79

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

Answer 79

B) perform planned auditing procedures closer to balance sheet date

Question 80

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

Answer 80

D) assess the difficulty in controlling the incremental risk

Question 81

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

Answer 81

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

Question 82

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

Answer 82

B) agree the number of employees included on the vacation accrual calculation to the final payroll register

Question 83

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

Answer 83

A) substantive procedures and test of controls

Question 85

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

Answer 85

NO and NO Independent auditor is solely responsible for reporting on FS, no judgments

Question 86

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

Answer 86

C) auditor can rely on the work of an internal auditor in limited circumstances, as long as its not high subjectivity or judgment

Question 87

Work of internal auditors may affect the independent auditors: ( 3 key points)

Answer 87

obtaining an understanding of the system of internal control assessing the risk of material misstatement Substantive procedures performed in gathering audit evidence

Question 88

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

Answer 88

C) existence of fixed asset additions

Question 89

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

Answer 89

NO and NO Independent auditor may not share responsibility with an independent auditor on these items

Question 90

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

Answer 90

D) determine organizational level to which internal auditors report

Question 91

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

Answer 91

A) organizational status of the director of internal audit

Question 92

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

Answer 92

C) comprehensive is more detailed and covers areas that would normally not be covered by CPA

Question 93

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

Answer 93

A) perform test of internal controls

Question 94

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

Answer 94

A) management specialist

Question 95

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

Answer 95

A) auditor must assess competency of both internal auditor and specialist

Question 96

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

Answer 96

A) auditor is required to understanding the objective and scope of the actuary work

Question 97

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

Answer 97

C) auditor modifies report b/c of difference between client and specialist valuation of asset

Question 98

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

Answer 98

B) reference to auditors external specialist does not reduce auditors responsibility for that opinion

Question 99

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

Answer 99

C) make no reference to specialist in audit report

Question 100

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

Answer 100

A) evaluate the nature and level of expertise of actuary

Question 101

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

Answer 101

D) group auditor have unrestricted access to those charged with governance to group and component

Question 102

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

Answer 102

B) auditor considers materiality for FS as a whole in terms of largest aggregate level of misstatements that could be material

Question 103

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

Answer 103

C) transaction cycles with misstatements in PY audit

Question 104

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

Answer 104

D) information that is likely to be viewed by reasonable investors as altering the mix of available information

Question 105

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

Answer 105

C) FS of the prior year

Question 106

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

Answer 106

A) determining tolerable misstatement threshold, auditor should take account the amount of misstatements from PY

Question 107

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

Answer 107

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”

Question 108

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

Answer 108

D) raise or lower the materiality level as appropriate to the situation

Question 109

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

Answer 109

C) component materiality that is lower than the materiality for the group FS

Question 110

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

Answer 110

D) successor independent auditor

Question 111

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

Answer 111

C) assessment of engagement quality reviewer of instances of fraud identified by audit team

Question 112

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

Answer 112

C) dual dating may be used to indicate the appropriate dates for each audit

Question 113

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

Answer 113

A) categories of objectives, internal control components, and entity organization levels

Question 114

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

Answer 114

D) after performing preliminary analytical procedures, we will discuss with you other procedures we consider necessary to complete the engagement

Question 115

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

Answer 115

C) disclosed in the notes as FS of current year

Question 116

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

Answer 116

C) exist independently of the FS audit Detection risk is related to auditors procedures and can be changed at auditors sole discretion

Question 117

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

Answer 117

B) decrease detection risk Detection risk works inversely with risk of material misstatement

Question 118

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

Answer 118

A) involves an estimate

Question 120

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

Answer 120

D) nonroutine related party transactions

Question 121

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

Answer 121

D) risk of material misstatement includes the auditors assessment of inherent risk as well as control risk

Question 122

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

Answer 122

B) entity’s enters into derivative transactions as hedges

Question 123

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

Answer 123

A) entity’s industry is experiencing declining customer demand

Question 124

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

Answer 124

A) assurance provided by substantive tests

Question 125

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

Answer 125

B) if assessed level of fraud is high, auditor should attempt to reduce detection risk

Question 126

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

Answer 126

B) postpone the planned timing of substantive tests from interim dates to year end

Question 127

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

Answer 127

A) extent of tests of details

Question 128

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

Answer 128

A) acceptable level of detection risk decreases, and extent of substantive procedures increase

Question 129

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

Answer 129

C) sample size would be lower

Question 130

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

Answer 130

D) when combined assessed level of inherent and control risk over the sale is high

Question 131

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

Answer 131

C) select more effective substantive tests

Question 132

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

Answer 132

A) review control procedures on inventory; perform physical inventory account on EOY

Question 133

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

Answer 133

D) overly complex organizational structure involving unusual lines of authority

Question 134

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

Answer 134

D) management is interested in maintaining earnings trend by using aggressive accounting practices

Question 135

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

Answer 135

B) lack of independent checks

Question 136

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

Answer 136

B) fraud

Question 137

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

Answer 137

A) audit procedures that are effective for detecting an unintentional misstatement may be ineffective for intentional misstatement that is concealed through collusion

Question 138

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

Answer 138

D) auditor performs fraud risk assessment only during the planning and fieldwork phases of audit

Question 139

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

Answer 139

B) fraud risk factor should be discussed by engagement personnel during planning

Question 141

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?

Answer 141

A) how did you communicate to employees your views on business practice and ethical behavior?

Question 142

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

Answer 142

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

Question 143

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

Answer 143

B) supporting accounting records and files that should be readily available are not produced promptly when requested

Question 144

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

Answer 144

B) reevaluate the risk of fraud, and design alternative test for related transactions

Question 145

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

Answer 145

B) appropriate level of management

Question 146

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

Answer 146

C) communicate the matter to those charged with governance

Question 147

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;

Answer 147

B) bring the attention of an appropriate level of management

Question 148

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

Answer 148

C) existence of fixed asset additions

Question 149

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

Answer 149

A) significantly fewer responses to confirmation requests are received than expected

Question 150

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

Answer 150

D) accountability for internal control responsibilities

Question 151

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

Answer 151

D) limited to the specific event referenced.

Question 152

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

Answer 152

C) support the audit perfomed in accordance with GAAS

Question 153

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

Answer 153

D) managements disregard of its responsibility to maintain adequate internal control environment

Question 154

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

Answer 154

C) definitions of common sense approaches to software piracy to ensure that the company is competitive

Question 155

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

Answer 155

B) understand the events and transactions that may have an effect on client’s FS

Question 156

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.

Answer 156

C. Proper segregation of duties.

Question 157

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

Answer 157

C) incorrect rejection Erroneously concluding that the account balance is materially misstated when it is not…

Question 158

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

Answer 158

D) incorrect acceptance

Question 159

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

Answer 159

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

Question 160

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

Answer 160

B) less than the deviation rate in the auditors sample

Question 161

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

Answer 161

A) the risk of incorrect acceptance of a misstatement

Question 162

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

Answer 162

C) deviation rate in auditors sample is less than tolerable rate, but deviation rate in population exceeds tolerable rate

Question 163

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

Answer 163

D) control risk based on auditors sample is greater than the true operating effectiveness of the clients control activity

Question 164

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

Answer 164

D) effectiveness of audit

Question 165

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

Answer 165

C) efficiency of the audit

Question 166

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

Answer 166

B) deviations from specific control activities at a given rate ordinarily result in misstatements at lower rate

Question 167

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

Answer 167

B) non sampling risk can arise because an auditor failed to recognize misstatements

Question 168

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

Answer 168

B) deviations from pertinent controls at a given rate ordinarily result in misstatement at a lower rate

Question 169

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

Answer 169

A) identifying entries posted to incorrect accounts ATTRIBUTE SAMPLING - estimate a rate of occurrence

Question 170

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

Answer 170

A) auditor selecting inappropriate auditing procedures OTHERS ARE INAPPROPRIATE AUDIT EVIDENCE AND FAILURE TO RECOGNIZE MISSTATEMENTS IN DOCUMENTS EXAMINED

Question 171

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

Answer 171

A) treat the items as deviation from prescribed control

Question 172

Sample size of test of control varies inversely with Expected population deviation rate - YES OR NO Tolerable rate - YES OR NO

Answer 172

NO and YES

Question 173

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

Answer 173

A) likely rate of deviations ONLY

Question 174

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

Answer 174

D) auditors allowable risk of assessing control risk too low THIS HAS AN INVERSE RELATIONSHIP WITH SAMPLE SIZE

Question 175

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

Answer 175

D) population size has little effect on sample size

Question 176

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

Answer 176

C) level of sampling risk that the auditor is willing to accept affects the sample size

Question 177

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

Answer 177

D) sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate

Question 178

formula for calculating the allowance for sampling risk = excess of the upper % deviation rate - sample deviation rate

Question 179

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

Answer 179

A) planned reliance on prescribed control

Question 180

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

Answer 180

D) increase assessed risk of material misstatement

Question 181

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.

Answer 181

D. Proper segregation of duties.

Question 182

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.

Answer 182

C. Educational background and professional certification of the internal auditors.