AUD 1 Flashcards
Which of the following statements is correct regarding evidence needed to support an audit opinion?
A. Evidence supporting management’s assertions should be conclusive instead of merely persuasive.
B. An effective internal control structure contributes little to the reliability of the evidence created within the entity.
C. The cost of obtaining evidence cannot be an important consideration to an auditor in deciding what evidence should be obtained.
D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
An auditor must obtain sufficient appropriate audit evidence on which to base an opinion on the client’s F/S. A client’s accounting data (eg, invoices) alone is not considered sufficient evidence; the auditor must also gather evidence that corroborates the data (eg, customer A/R confirmations).
Which of the following system and organization controls (SOC) reports would a service organization most likely provide to its customers to offer assurance on the design and operating effectiveness of the service organization’s controls over the availability of data?
A. SOC 1 Type 1.
B. SOC 1 Type 2.
C. SOC 2 Type 1.
D. SOC 2 Type 2.
D. SOC 2 Type 2.
System and organization controls (SOC) 2 reports provide assurance on a service organization’s controls over security, availability, processing, confidentiality, and privacy of the user entity’s data. A Type 1 report addresses only the accuracy of management’s description of controls and their design; a Type 2 report also provides assurance about the operating effectiveness of controls.
In parallel simulation, actual client data are reprocessed using an auditor software program. An advantage of using parallel simulation, instead of performing tests of controls without a computer, is that
A. The test includes all types of transaction errors and exceptions that may be encountered.
B. The client’s computer personnel do not know when the data are being tested.
C. There is no risk of creating potentially material errors in the client’s data.
D. The size of the sample can be greatly expanded at relatively little additional cost.
D. The size of the sample can be greatly expanded at relatively little additional cost.
Computer assisted auditing techniques (CAATs) allow auditors to quickly and efficiently perform tests of edits. Edits are embedded controls in systems that help ensure only appropriate data are processed. Parallel simulation is a CAAT consisting of programs that allow auditors to test these embedded controls.
In a parallel simulation, the auditor controls the computer program in use (ie, an audit payroll program), inputs client data (ie, actual payroll data), and compares audit program results with actual client results to ensure controls are functioning as intended. This allows the auditor to test a larger sample of transactions at little added cost.
Which of the following matters most likely would be included in a management representation letter?
A. An assessment of the risk factors concerning the misappropriation of assets.
B. An evaluation of the litigation that has been filed against the entity.
C. A confirmation that the entity has complied with contractual agreements.
D. A statement that all material internal control weaknesses have been corrected.
C. A confirmation that the entity has complied with contractual agreements.
During an audit, management provides verbal and written information in response to auditor questions. The auditor is required to obtain written representations (eg, management representations) reaffirming that the auditor had access to needed and accurate information. Management also affirms that the financial statements are prepared according to the applicable financial reporting framework. These representations are part of the evidence supporting the auditor’s opinion.
The client firm may have contractual obligations that should be disclosed during the audit. In this situation, the management representation letter should confirm disclosure of and compliance with all contract terms. Even with this confirmation, the auditor will still perform procedures to test such compliance.
To be considered sufficient audit documentation, the audit working papers should include
A. A statement indicating auditor compliance with the Code of Professional Conduct.
B. Copies of current licenses or certifications held by the auditor.
C. Definitions of tick marks (eg, symbols) used.
D. Evidence that the client has received copies of the working papers.
C. Definitions of tick marks (eg, symbols) used.
Multiple regression differs from simple regression in that it
A. Provides an estimated constant term.
B. Has more dependent variables.
C. Allows the computation of the coefficient of determination.
D. Has more independent variables.
D. Has more independent variables.
This answer is correct. If only one independent variable exists, the analysis is known as simple regression. Multiple regression consists of a functional relationship with multiple independent variables.
During an engagement to review the financial statements of a nonpublic entity, an accountant becomes aware that several finance leases were incorrectly accounted for as operating leases. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not make the required adjustments. Under these circumstances, the accountant should
A. Issue an adverse opinion because of the departure from GAAP.
B. Express no assurance of any kind on the entity’s financial statements.
C. Emphasize that the financial statements are for limited use only.
D. Disclose the departure from GAAP in a separate paragraph of the accountant’s report.
D. Disclose the departure from GAAP in a separate paragraph of the accountant’s report.
In an engagement to review financial statements (F/S), an accountant provides limited assurance that no material modifications are necessary for the F/S to conform with GAAP (or the applicable financial reporting framework) (Choice B).
Because a review does not involve the in-depth procedures of an audit, accountants do not express an opinion in the review report on whether the F/S are fairly stated (Choice A). Instead, the report expresses a conclusion that nothing came to their attention that requires modification of the F/S.
By definition, if there are departures from GAAP, the effect on the F/S is considered material and pervasive. Therefore, an adverse conclusion should be issued. A separate section of the conclusion, titled “Accountant’s Conclusion” will state that “due to the significance of the matter described in the basis for an adverse conclusion paragraph, the financial statements are not in accordance with.…”
According to GAAS quality control standards, the following items of information should be included in the documentation of a firm’s engagement quality review, except
A. Evidence that the firm’s required engagement quality control review procedures have been performed.
B. Indication of no unresolved matters leading to inappropriate judgment or conclusions by the engagement team.
C. Evidence of the date that the engagement quality control review was completed
D. Indication that working papers have been reviewed and properly referenced according to the firm’s procedures.
D. Indication that working papers have been reviewed and properly referenced according to the firm’s procedures.
GAAS requires CPA firms to establish engagement quality control review procedures. To document compliance with GAAS, the engagement quality control review documentation must reflect the date of the review. This documentation must also provide evidence that the firm’s review procedures were followed and no unresolved matters gave rise to inappropriate engagement team judgments or conclusions.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
A. Verify inventory pledged under loan agreements by confirming the details with financial institutions.
B. Inquire about the current status of transactions that were recorded on the basis of preliminary data.
C. Compare the financial statements being reported with those of the prior year.
D. Trace information from shipping documents to sales invoices and sales journal transactions.
B. Inquire about the current status of transactions that were recorded on the basis of preliminary data.
An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding the property’s depreciable base?
A. Deed.
B. Bank confirmation of mortgage loan.
C. Closing statement.
D. Flood insurance policy.
C. Closing statement.
Which of the following matters most likely would be included in a management representation letter?
A. An assessment of the risk factors concerning the misappropriation of assets.
B. An evaluation of the litigation that has been filed against the entity.
C. A confirmation that the entity has complied with contractual agreements.
D. A statement that all material internal control weaknesses have been corrected.
C. A confirmation that the entity has complied with contractual agreements.
Comparative financial statements include the prior year’s statements that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was unmodified, the successor should
A. Add an explanatory paragraph that expresses only limited assurance concerning the fair presentation of the prior year’s financial statements.
B. Express an opinion only on the current year’s financial statements and make no reference to the prior year’s financial statements.
C. Indicate in the auditor’s report that the predecessor auditor expressed an unmodified opinion on the prior year’s financial statements.
D. Obtain a letter of representation from the predecessor auditor concerning any matters that might affect the successor’s opinion.
C. Indicate in the auditor’s report that the predecessor auditor expressed an unmodified opinion on the prior year’s financial statements.
Which of the following should a practitioner include in an agreed-upon procedures report?
A. Negative assurance about whether the subject matter is fairly stated based on the criteria.
B. All findings from application of the agreed-upon procedures.
C. The statement that “Nothing came to my attention that caused me to believe that the subject matter is not presented based on the criteria.”
D. Positive assurance about whether the subject matter is fairly stated based on the criteria.
B. All findings from application of the agreed-upon procedures.
A material change in an accounting estimate
A. Requires a consistency modification in the auditor’s report and disclosure in the financial statements.
B. Requires a consistency modification in the auditor’s report but does not require disclosure in the financial statements.
C. Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency modification in the auditor’s report.
D. Involves the acceptability of the generally acceptable accounting principles used.
C. Affects comparability and may require disclosure in a note to the financial statements but does not require a consistency modification in the auditor’s report.
An accountant’s compilation report on a financial forecast should include a statement that the
A. Compilation does not include evaluation of the support of the assumptions underlying the forecast.
B. Hypothetical assumptions used in the forecast are reasonable.
C. Range of assumptions selected is one in which one end of the range is less likely to occur than the other.
D. Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant’s representation.
A. Compilation does not include evaluation of the support of the assumptions underlying the forecast.
