A3 - Becker wrong answers Flashcards
The objective of performing analytical procedures in planning an audit is to identify the existence of:
A. Acts of noncompliance with laws and regulations that went undetected because of internal control weaknesses. B. Unusual transactions and events. C. Recorded transactions that were not properly authorized. D. Related party transactions.
Choice “B” is correct. The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit.
Choice “A” is incorrect. Analytical procedures are not effective in identifying acts of noncompliance with laws and regulations that went undetected due to internal control weaknesses.
Choice “C” is incorrect. Analytical procedures are not effective as tests of controls to identify unauthorized transactions.
Choice “D” is incorrect. Analytical procedures are not effective in identifying related party transactions.
Which of the following are leading economic indicators of business cycles?
A. Ratio of manufacturing and trade inventories to sales in constant dollars, average prime rate charged by banks, and the ratio of consumer investment credit outstanding to personal income. B. Number of employees on nonagricultural payrolls, total industrial production, and manufacturing and trade sales in constant dollars. C. Results of decisions requiring clear knowledge of the state of the economy. D. Manufacturers' new orders for consumer goods in constant dollars, number of new building permits, and change in manufacturers' unfilled orders for durable goods in constant dollars.
Choice “D” is correct. Leading indicators tend to predict economic activity. Orders for goods, building permits, and unfilled orders are all examples of leading indicators.
Choice “A” is incorrect. Inventories-to-sales ratios, the prime rate charged by banks and the consumer debt-to-income ratio are all examples of lagging indicators. Lagging indicators follow economic activity and leading indicators predict economic activity.
Choice “B” is incorrect. The number of employees on nonagricultural payrolls, production, and sales are examples of coincident indicators. These indicators change at approximately the same time as the whole economy, as opposed to leading indicators, which predict economic activity.
Choice “C” is incorrect. Leading indicators tend to predict economic activity. Therefore, the results of decisions made would not be a leading indicator because the results would have happened after something impacted the economic activity.
Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?
A. Communicate with those charged with governance concerning the prior year's audit adjustments. B. Obtain representations from management regarding the availability of all financial records. C. Compare recorded financial information with anticipated results from budgets and forecasts. D. Make inquiries of the client's attorney regarding pending and threatened litigation and assessments.
Choice “C” is correct. The planning process should include application of analytical procedures, such as comparison of the financial statements with budgeted or anticipated results.
Choice “A” is incorrect. Assuming all of those charged with governance are not also involved with managing the entity, the auditor is required to communicate with those charged with governance concerning adjustments arising from the current year’s audit, not adjustments from the previous year.
Choice “B” is incorrect. Management representations are typically obtained at the end of the audit, not during the planning stage.
Choice “D” is incorrect. Inquiries are typically made of the client’s attorney during the fieldwork stage of the audit, not during the planning stage.
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?
A. Various account assertions in the planning memorandum. B. Unaudited information from internal quarterly reports. C. The control risk assessment relating to specific financial assertions. D. Comments in the prior-year's management letter.
Choice “B” is correct. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. During the planning stage, analytical procedures generally use financial data, such as unaudited information from internal quarterly reports.
Choice “A” is incorrect. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. Various account assertions in a planning memorandum would not necessarily be helpful in developing expectations.
Choice “C” is incorrect. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. The control risk assessment would not be useful in developing expectations.
Choice “D” is incorrect. Analytical procedures involve comparison of recorded amounts to independent expectations developed by the auditor. Comments from the prior year’s management letter would not necessarily provide a basis for developing expectations.
An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable?
A. A decrease in accounts payable. B. A decrease in costs of goods sold as a percentage of sales. C. A decrease in notes payable. D. A decrease in retained earnings.
Choice “D” is correct. A decrease in retained earnings would be an unreasonable expectation because the auditor noticed a significant increase in net income. Net income closes to retained earnings; therefore, absent any other information, the auditor would expect there would be an increase in retained earnings.
Choice “A” is incorrect. A decrease in accounts payable would be a reasonable expectation for the increase in net income because accounts payable may have decreased as a result of decreases in expenses. A decrease in expenses results in an increase in net income.
Choice “B” is incorrect. A decrease in cost of goods sold as a percentage of sale would be a reasonable expectation. This could explain the increase in net income.
Choice “C” is incorrect. A decrease in notes payable would be a reasonable expectation for the increase in net income as the decrease in notes payable may result in less interest expense. A decrease in interest expense would result in an increase in net income.
Which of the following is not a risk assessment procedure recommended by PCAOB standards when performing an issuer audit?
A. Performing preliminary test of controls over selected transaction cycles. B. Performing analytical procedures related to the client’s revenue. C. Developing an understanding of the client’s internal control over financial reporting. D. Inquiring of client management and the audit committee about the risks of material misstatement.
Choice “A” is correct. This is not a recommended risk assessment procedure by PCAOB standards. Instead, performing tests of controls is done after the auditor completes his or her risk assessment and may be done in conjunction with substantive audit procedures if they are deemed insufficient alone.
Choice “B” is incorrect. PCAOB recommends that the auditor perform analytical procedures especially related to client’s revenue as part of risk assessment procedures.
Choice “C” is incorrect. As part of their risk assessment procedures, PCAOB recommends that the auditor develop an understanding of the client’s internal control over financial reporting.
Choice “D” is incorrect. PCAOB recommends that when auditing issuers, the auditor make inquiries to client management, the audit committee, and to others within the company regarding any potential risks of material misstatement of which they are aware.
Which of the following activities should an auditor perform to obtain sufficient knowledge of the information system as it relates to financial reporting?
A. Understand the related electronic records and specific accounts involved in initiating, authorizing, recording, processing, and reporting transactions. B. Understand the financial reporting process used to prepare financial statements, excluding significant accounting estimates. C. Inquire of management about business risks to identify, analyze, and manage risks that affect the entity's objectives. D. Inquire of internal audit personnel as to the likelihood of material misstatements.
Choice “A” is correct. The auditor must obtain an understanding of the entity’s use of IT. This knowledge includes initiating, authorizing, recording, processing, and reporting of transactions. If an auditor does not have this understanding, it may impact their ability to properly assess risks and therefore plan and perform audit procedures to address those risks.
Choice “B” is incorrect. If an accounting estimate is deemed significant, the auditor’s understanding of the financial reporting process should include an understanding of how significant accounting estimates are determined.
Choice “C” is incorrect. While inquiring of risks is helpful for the auditor, it is not typically focused on obtaining knowledge of the information system related to financial reporting.
Choice “D” is incorrect. An auditor’s inquiry of internal audit is not focused on obtaining knowledge of the information system. Auditors should perform their own assessments on the likelihood of material misstatements.
The trough of a business cycle is generally characterized by:
A. Increasing purchasing power and increasing capital investments. B. Shortages of essential raw materials and rising costs. C. Declining purchasing power and unused productive capacity. D. Unused productive capacity and an unwillingness to risk investments.
Choice “D” is correct. The trough of a business cycle is an economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.
Choice “A” is incorrect. Increasing purchasing power and increasing capital investments come with recovery.
Choice “B” is incorrect. Shortages may occur during a peak.
Choice “C” is incorrect. Declining purchasing power comes with inflation; unlikely in a trough.
Which of the following economic indicators tends to occur as a result of economic activity?
A. Building permits for residences. B. Manufacturing and trade sales. C. Average new unemployment claims. D. Average duration of unemployment.
Explanation
Choice “D” is correct. The average duration of unemployment is a lagging economic indicator. Lagging economic indicators tend to follow economic activity, or occur as a result of economic activity. If the average duration of unemployment increases, it is likely a result of employers being reluctant to hire due to economic results. Other lagging indicators include the prime rate charged by banks and bank loans outstanding. Lagging indicators give signals after the fact.
Choice “A” is incorrect. Building permits for new residences is an example of a leading economic indicator. Leading indicators tend to occur before the fact or predict economic activity. A decrease in the number of new building permits is one factor that would tend to signal the economy is heading toward a downturn.
Choice “B” is incorrect. Manufacturing and trade sales are coincident indicators and occur contemporaneously with economic activity. Industrial production is another example of a coincident indicator.
Choice “C” is incorrect. The average new unemployment claims is an example of a leading economic indicator. Leading indicators tend to occur before the fact or predict economic activity. An increase in the number of new unemployment claims is a signal that the economy is heading for falling economic activity and growth. Other leading indicators include the average length of the workweek, money supply, prices of selected stocks, orders for goods, price changes of materials and index of consumer expectations.
In trying to predict how long the economy will be in its current recovery phase before entering an expansionary phase, economists will look at all of the following indicators except:
A. Building permits for new home construction. B. Prices for materials used in production. C. The length of time, on average, that job seekers are unemployed. D. Data regarding new claims for unemployment.
Choice “C” is correct. Average time for unemployment is a lagging indicator, which means it follows economic activity and provides signals after the fact. If economists are trying to predict the length of business cycles, they will look to leading indicators.
Choice “A” is incorrect. Building permits for new home construction is a leading indicator.
Choice “B” is incorrect. The change in prices for materials used in production is a leading indicator.
Choice “D” is incorrect. The data for new unemployment claims is a leading indicator.
Which of the following types of control best describes procedures to ensure appropriate systems software acquisition?
A. General. B. Monitoring. C. Information-processing. D. Physical.
Choice “A” is correct. General controls are policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system. General controls include procedures to ensure appropriate systems software acquisition.
Choice “B” is incorrect. Monitoring controls help assess the quality of control operation.
Choice “C” is incorrect. Information-processing controls apply to the processing of individual transactions and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and reported.
Choice “D” is incorrect. Physical controls relate to safeguarding assets, such as using security devices to limit access to programs and restricted areas.
IMPORTANT QUESTION
Which of the following is the most complete and accurate list of the walkthrough procedures usually performed in an issuer’s integrated audit?
A. Inquiry, observation, inspection of relevant documentation, and reperformance of controls. B. Inquiry, inspection of relevant documentation, sampling, and reperformance of controls. C. Inquiry, observation, analytical procedures, and testing of controls. D. Inquiry, sampling, analytical procedures, and testing of controls.
Choice “A” is correct. Walkthrough procedures usually performed in an issuer’s integrated audit include inquiry, observation, inspection of relevant documentation, and reperformance of controls.
Choice “B” is incorrect. Sampling is not typically part of walkthrough procedures. In addition, this answer is incomplete because walkthrough procedures also include observation.
Choice “C” is incorrect. Analytical procedures and testing of controls are not typically part of walkthrough procedures. In addition, this answer is incomplete because walkthrough procedures also include inspection of relevant documentation and reperformance of controls.
Choice “D” is incorrect. Analytical procedures, sampling, and testing of controls are not typically part of walkthrough procedures. In addition, this answer is incomplete because walkthrough procedures also include observation, inspection of relevant documentation, and reperformance of controls.
Which of the following statements is correct regarding internal control?
A. A well-designed and operated control environment should detect collusion perpetrated by two people. B. A system of internal control is a necessary business function and should be designed and operated to detect all errors and fraud. C. A well-designed control environment ensures the achievement of an entity's control objectives. D. An inherent limitation to a system of internal control is the fact that controls can be circumvented by management override.
Choice “D” is correct. Since management generally has the authority to implement and assign responsibilities under the controls, they will generally also have the ability to circumvent those controls. This is an inherent limitation of internal control.
Choice “A” is incorrect. Controls generally rely in some manner on segregation of duties. Because of this, collusion by two or more people can generally destroy this segregation of duties and thus potentially cause circumvention of the controls that may not be immediately detected.
Choice “B” is incorrect. No system of internal control can guarantee the detection of all errors and fraud. The purpose of a system of internal control is to significantly reduce the likelihood that errors or fraud will be committed and go undetected.
Choice “C” is incorrect. Although the design of a system of internal control is important, it needs to be paired with the proper implementation and monitoring, and even then cannot ensure that the entity’s control objectives will be met.
A company that provides professional services identified the cost of fieldwork as a risk to the achievement of profit goals. Which detective control activity will help to mitigate the risk?
A. Writing agreements requiring clients to reimburse travel and lodging costs. B. Requiring all travel arrangements to be made by a single, dedicated resource. C. Establishing a per diem for meals. D. Performing a weekly review of travel budget variances.
Choice “D” is correct. If the cost of fieldwork is a risk in achieving profit, performing a weekly review of actual travel expenses compared to budget is the most effective detective control to mitigate the risk. If the reviewer identifies significant variances, the company can act regarding that expense and manage future expenses.
Choice “A” is incorrect. Writing agreements that require clients to reimburse travel and lodging costs will address the risk. However, it is not a detective control and is more of a preventative measure that the professional services company can take to mitigate the risk that they would have excessive costs.
Choice “B” is incorrect. Having all travel arrangements to be made by a single, dedicated resource may help the professional services company address the risk that individuals overpay or charge personal travel to the company. However, it is not a detective control.
Choice “C” is incorrect. Establishing a per diem for meals will help to minimize the risk of excessive meal cost. However, this is not a detective control and would be more appropriately classified as a preventative control.
An auditor was testing whether shipments were made only to credit-worthy customers. The client informed the auditor that the information technology system would not print bills of lading for customers that were on credit hold. The auditor would most likely next perform which of the following?
A. Review recent shipments for a sample of customers on credit hold and verify with the accounting manager that all shipments were shipped by the due date. B. Review the customer files for the names of all customers on credit hold and verify with the accounting manager that no shipments were made to these customers after they were listed on credit hold. C. Select a sample of customers on credit hold, attempt to print bills of lading for these customers, and verify with the information technology department that only a few customers are on credit hold. D. Attempt to print a bill of lading for one customer on credit hold and verify with the information technology department that this control cannot be overridden without approval.
Choice “D” is correct. Automated controls are inherently consistent and, therefore, the auditor would likely expect that the function of the control tested through the sample of one credit-hold customer would function consistently across all customer transactions. It is important to test that the control could not be overridden without approval in order to consider the control to be automated and consistently applied. The required approval would allow the auditor to obtain the list of approved overrides and determine if further testing was necessary.
Choice “A” is incorrect. Verifying that certain shipments were made by their due date to customers on credit hold would not be an effective means of testing the automated control that restricts the IT system from printing bills of lading for customers on a credit hold.
Choice “B” is incorrect. This method of testing would not be an effective means of testing the automated control that restricts the IT system from printing bills of lading for customers on a credit hold. With this approach, it is not known to the auditor whether the customers on credit hold ever tried to obtain a shipment after being placed on credit hold and, therefore, does not test the control. Additionally, it is not necessary for an auditor to test all customers when testing an automated control.
Choice “C” is incorrect. As automated controls are inherently consistent, it would not be necessary for the auditor to test a sample of transactions. Rather, the results of testing the control through the sample of one credit-hold customer could be applied across all transactions of the same type.
Which of the following is least likely to be a continuous activity that an auditor would be expected to perform throughout an audit engagement?
A. Considering client continuance B. Inquiring as to the design of controls C. Understanding the entity and its environment D. Assessing the risk of material misstatement
Choice “B” is correct. Inquiring regarding the design of controls would typically be done once. It is possible that the auditor may perform the tests of operating effectiveness of the control throughout the engagement, but the test of design typically would be done one time after the auditor has obtained an understanding of the system of internal control.
Choice “A” is incorrect. While the auditor considers client continuance before the audit engagement begins, as events may arise during the engagement, the auditor may need to consider withdrawing from an engagement and the client relationship. Therefore, client continuance may be considered throughout the audit engagement.
Choice “C” is incorrect. Understanding the entity and its environment is an important component of risk assessment. Risk assessment is a process that continues and evolves throughout the audit.
Choice “D” is incorrect. Assessing the risk of material misstatement is an ongoing activity that continues and evolves throughout the audit. While assessing the risk of material misstatement is done around the beginning of the audit, it is also continuously assessed as the auditor may detect misstatements or determine controls are not operating effectively.
Which of the following is the most complete and accurate list of the walkthrough procedures usually performed in an issuer’s integrated audit?
A. Inquiry, observation, inspection of relevant documentation, and reperformance of controls. B. Inquiry, inspection of relevant documentation, sampling, and reperformance of controls. C. Inquiry, observation, analytical procedures, and testing of controls. D. Inquiry, sampling, analytical procedures, and testing of controls.
Choice “A” is correct. Walkthrough procedures usually performed in an issuer’s integrated audit include inquiry, observation, inspection of relevant documentation, and reperformance of controls.
Choice “B” is incorrect. Sampling is not typically part of walkthrough procedures. In addition, this answer is incomplete because walkthrough procedures also include observation.
Choice “C” is incorrect. Analytical procedures and testing of controls are not typically part of walkthrough procedures. In addition, this answer is incomplete because walkthrough procedures also include inspection of relevant documentation and reperformance of controls.
- Choice “D” is incorrect. Analytical procedures, sampling, and testing of controls are not typically part of walkthrough procedures. In addition, this answer is incomplete because walkthrough procedures also include observation, inspection of relevant documentation, and reperformance of controls.
Calibro, CPA, believes that there is substantial doubt about the ability of Canto Company, a nonissuer, to continue as a going concern and the concern has not been alleviated based on management’s plans. This matter is appropriately disclosed in Canto’s financial statements. Calibro should:
A. Issue an unmodified opinion with an other-matter paragraph describing the situation. B. Issue an unmodified opinion and add a separate section with the heading "Substantial Doubt About the Entity's Ability to Continue as a Going Concern" describing the situation. C. Withdraw from the engagement, to minimize the association with financial statements that may be misleading. D. Issue a qualified opinion due to the fact that there is substantial doubt about the ability of Canto Company to continue as a going concern.
Choice “B” is correct. Calibro should issue an unmodified opinion and add a separate section to the auditor’s report with the heading “Substantial Doubt About the Company’s Ability to Continue as a Going Concern” describing the situation.
Choice “A” is incorrect. In situations in which there is substantial doubt about the entity’s ability to continue as a going concern, the auditor generally should add a separate section to the auditor’s report with the heading “Substantial Doubt About the Company’s Ability to Continue as a Going Concern” (not other-matter paragraph) to the unmodified opinion.
Choice “C” is incorrect. In situations in which there is substantial doubt about the entity’s ability to continue as a going concern, the auditor generally should add a separate section to the auditor’s report with the heading “Substantial Doubt About the Company’s Ability to Continue as a Going Concern” with an unmodified opinion. As long as the auditor adds the appropriate language to the auditor’s report, there would be no need to withdraw from the engagement.
Choice “D” is incorrect. In situations in which there is substantial doubt about the entity’s ability to continue as a going concern, the auditor generally should add a separate section to the auditor’s report with the heading “Substantial Doubt About the Company’s Ability to Continue as a Going Concern” with an unmodified opinion. There is no need to qualify the opinion.
Analytical procedures are required for which of the following?
A. Tests of balances. B. Client retention decision. C. Audit planning. D. Internal control evaluation.
Choice “C” is correct. Analytical procedures are required during an audit’s planning and final review.
Choice “A” is incorrect. Analytical procedures may be used to test the balance of accounts, but are not required to be utilized as a substantive procedure.
Choice “B” is incorrect. Analytical procedures are not required to be performed when deciding whether to retain a client.
Choice “D” is incorrect. Analytical procedures are not utilized to perform the evaluation of internal control. Procedures performed to evaluate internal control may include inquiry of appropriate personnel, observation of the entity’s operation, and/or inspection of relevant documentation.
In testing the existence assertion for an asset, an auditor ordinarily works from the:
A. Financial statements to the potentially unrecorded items. B. Potentially unrecorded items to the financial statements. C. Accounting records to the supporting evidence. D. Supporting evidence to the accounting records.
Choice “C” is correct. In testing the existence assertion for an asset, an auditor ordinarily works from the accounting records to the supporting evidence.
Choice “A” is incorrect. If the auditor works from the financial statements, all items selected will have been recorded (i.e., because they are included in the financial statements). Therefore, starting with the financial statements will not lead to any unrecorded items.
Choice “B” is incorrect. Tracing potentially unrecorded items to the financial statements tests for completeness, not existence.
Choice “D” is incorrect. Tracing from supporting evidence to the accounting records tests for completeness, not existence.
Which of the following best describes the auditor’s responsibility with respect to fair values?
A. The auditor should assess the risk of material misstatement of fair value measurements. B. The auditor should obtain sufficient competent audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP. C. The auditor should determine whether management has the intent and ability to carry out courses of action that may affect fair values. D. The auditor should make fair value measurements and disclosures in accordance with GAAP and should identify and support any significant assumptions used.
Choice “B” is correct. The auditor’s overall responsibility is to obtain sufficient competent audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP.
Choice “A” is incorrect because while it is true that the auditor should assess the risk of material misstatement of fair value measurements, this is done to determine the nature, timing, and extent of audit procedures. It is not the best representation of the auditor’s overall responsibility.
Choice “C” is incorrect because while it is true that the auditor should determine whether management has the intent and ability to carry out courses of action that may affect fair values, this is just one part of evaluating fair value measurements and not the best description of the auditor’s overall responsibility.
Choice “D” is incorrect because management (and not the auditor) should make fair value measurements and disclosures in accordance with GAAP and should identify and support any significant assumptions used.
