AUD

Question 1

HELP ME Pneumonic for Quality Control

Answer 1

1. Human Resources
2. Engagement/Client Acceptance & Continuance
3. Leadership Responsibilities
4. Performance of the engagement
5. Monitoring
6. Ethical Requirements

Question 2

Audit Documentation assembly time for issuers/nonissuers

Answer 2

45 days for issuers
60 days for nonissuers

Question 3

Three categories of entity objectives

Answer 3

1. Reliability of financial reporting
2. Effectiveness and efficiency of operations
3. Compliance with laws and regulations

Question 4

Financial Statement Assertions

Answer 4

1. Completeness
2. Valuation, Allocation & Accuracy
3. Existence and Occurrence
4. Rights and Obligations
5. Understandability of Presentation and Classification

Question 5

Components of Internal Control

Answer 5

1. Control Environment
2. Risk Assessment
3. Information and Communication
4. Monitoring
5. Control Activities

Question 6

What is competence?

Answer 6

Competence is reflected by education, personal certification, experience, performance evaluations, the audit plan, audit procedures and the quality of audit documentation.

Question 7

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the :

Answer 7

Effectiveness of the audit

Question 8

The risk of incorrect rejection and the risk of assessing control risk too high relates to the :

Answer 8

Efficiency of the audit

Question 9

An increase in detection risk

Answer 9

Decrease in sample size

Question 10

Relevant assertions tested for a clients transactions and events

Answer 10

COVEUP
Completeness
cut OFF
Valuation
Existence
Understandability
Presentation

Question 11

AICPA Code of Professional Conduct General Standards cover:

Answer 11

1. Professional Competence
2. Due Professional Care
3. Planning and Supervision
4. Sufficient Relative Data

Question 12

Effectiveness and Efficiency of Financial Reporting

Answer 12

Management- Effectiveness
External Auditor- Efficiency

Question 13

Self Interest Threat

Answer 13

Threat that a financial or other interest will inappropriately influence an auditor

Question 14

Management Participation Threat

Answer 14

Management participation threat is the threat that results from an auditor’s taking on the role of management or otherwise performing management functions on behalf of the entity undergoing an audit.

Question 15

Variable Sampling

Answer 15

Numerical Sampling

Question 16

An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of the:

Answer 16

Substantive Tests

An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of the substantive tests to be performed.

Question 17

The auditor of a nonissuer would most appropriately use reperformance to obtain audit evidence for which of the following purposes?

Answer 17

To test the operating effectiveness of a bank reconciliation control.

Reperformance occurs when an auditor independently performs procedures or controls to ensure that they were performed appropriately. This would be an effective procedure in testing the operating effectiveness of controls over bank reconciliations to ensure that the auditor reaches the same results and conclusions when reperforming the process.

Question 18

After obtaining an understanding of internal control and performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely concluded that the:

Answer 18

Additional evidence to support a reduction in control risk was not cost-beneficial to obtain.

When an auditor decides not to perform tests of controls, the auditor most likely concluded that the additional evidence to support a reduction in control risk was not cost-beneficial to obtain. In other words, the additional costs that would be incurred to support a lower assessed level of control risk would not be offset by the anticipated cost savings resulting from a lower level of substantive tests.

Question 19

All of the following may be an indication of a related party transaction with the exception of:

A. Consignment sale.

B. A loan guarantee.

C. Compensating balance arrangements.

D. Nonrecurring transaction near year-end.

Answer 19

Consignment Sale

A consignment sale is effectively a “trial sale” where the customer has a stipulated amount of days to return the product without making payment to the company. Although not a typical transaction for many companies, it is used as a sales vehicle depending on the nature of the product sold (i.e., magazines). Since it is considered an arms-length transaction, it would not be indicative of a related party transaction.

Question 20

Which of the following is a sampling risk that is associated with the efficiency of an audit?

A. Inherent risk.

B. Detection risk.

C. Risk of assessing control risk too high.

D. Risk of incorrect acceptance.

Answer 20

Risk of assessing control risk to high

Choice “C” is correct. The risk of assessing control risk too high is a sampling risk related to the efficiency of an audit.

Question 21

The auditor would not be required to use analytical procedures for which of the following purposes?

A. In obtaining corroborating evidence when the evidence gathered by the auditor is circumstantial.

B. In performing the final review of the overall reasonableness of account balances.

C. In gaining an understanding of the client and their environment.

D. In applying risk measurement procedures to alert the auditor to problem areas requiring more attention.

Answer 21

Choice “A” is correct. The use of analytical procedures is required during an audit for the planning and final review phases. Analytical procedures may be performed in conjunction with other substantive procedures but it is not required. If the evidence gathered during the audit is circumstantial, additional corroborating evidence may be obtained through analytical procedures or other substantive procedures such as observation, inquiry, inspection, etc.

Question 22

If an auditor’s risk assessment is based on the effective operation of controls, the auditor will likely:

A. Perform tests of details of transactions and account balances to identify potential errors and fraud.

B. Identify specific controls that are likely to detect or prevent material misstatements.

C. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls.

D. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing.

Answer 22

Choice “B” is correct. Assessing risk based on the effective operation of controls involves (1) identifying specific controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions, and (2) performing tests of such controls to evaluate their effectiveness.

Question 23

Which of the following statements about audit sampling risks is correct for a nonissuer?

A. Nonsampling risk can arise because an auditor failed to recognize misstatements.

B. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.

C. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.

D. Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.

Answer 23

Nonsampling risk can arise because an auditor failed to recognize misstatements.

Choice “A” is correct. Nonsampling risk includes all aspects of audit risk that are not due to sampling. It is always present and cannot be measured; the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices. Nonsampling risk can arise because an auditor failed to recognize misstatements in documents examined.

Question 24

After obtaining an understanding of the entity and its environment, including its system of internal control, an auditor decided to perform tests of controls. This is likely because:

A. There were many internal control weaknesses that could allow errors to enter the accounting system.

B. An increase in the assessed level of control risk is justified for certain financial statement assertions.

C. Evidence to support a reduction in control risk is not available.

D. The auditor’s risk assessment is based on the effective operation of controls.

Answer 24

The auditor’s risk assessment is based on the effective operation of controls.

Choice “D” is correct. After obtaining an understanding of the entity and its environment, including its system of internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor performs tests of controls to obtain evidence supporting this assessment.

Question 25

An entity’s internal control requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and a prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all:

A. Canceled checks.

B. Approved vouchers.

C. Purchase orders.

D. Receiving reports.

Answer 25

Canceled checks.

Choice “A” is correct. To determine whether checks are being issued for unauthorized expenditures, the auditor is most likely to select from the population of canceled checks. For each check, the auditor would then look for evidence supporting the payment, such as a purchase order, a receiving report, and an approved invoice.

Question 26

An accountant’s standard report on a review of the financial statements of a nonissuer should state that the accountant:

A. Does not express an opinion or any form of limited assurance on the financial statements.

B. Is not aware of any material modifications that should be made to the financial statements in order for them to be in accordance with GAAP.

C. Obtained reasonable assurance about whether the financial statements are free of material misstatement.

D. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.

Answer 26

Is not aware of any material modifications that should be made to the financial statements in order for them to be in accordance with GAAP.

Choice “B” is correct. The accountant’s report on a review engagement should state that the accountant is not aware of any material modifications that should be made to the financial statements in order for them to be in accordance with GAAP.

Question 27

In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to:

A. Issue a separate report that describes the expected benefits and related costs of the auditor’s suggested changes to the entity’s internal control.

B. Assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements.

C. Render an opinion concerning the entity’s continued eligibility for the governmental financial assistance.

D. Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting errors and fraud.

Answer 27

Assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements.

Choice “B” is correct. The auditor must assess whether management has identified laws and regulations that have a direct and material effect on the determination of amounts in an entity’s financial statements and obtain an understanding of the possible effects on the financial statements of such laws and regulations.

Question 28

After obtaining an understanding of the entity and its environment, including its system of internal control, an auditor decided to perform tests of controls. This is likely because:

A. There were many internal control weaknesses that could allow errors to enter the accounting system.

B. The auditor’s risk assessment is based on the effective operation of controls.

C. Evidence to support a reduction in control risk is not available.

D. An increase in the assessed level of control risk is justified for certain financial statement assertions.

Answer 28

The auditor’s risk assessment is based on the effective operation of controls.

Choice “B” is correct. After obtaining an understanding of the entity and its environment, including its system of internal control, the auditor may make a risk assessment that assumes controls are operating effectively. In such cases, the auditor performs tests of controls to obtain evidence supporting this assessment.

Question 29

Hannah, CPA, has been engaged to compile the financial statements of Skippity Industries, a nonpublic company, for the Year 4. Hannah reviewed Skippity’s Year 3 financial statements. Skippity has decided to present comparative financial statements including both the Year 3 and Year 4 financials. Which of the following are acceptable reporting options for Hannah?

I. Issue a compilation report with an extra paragraph describing the responsibility assumed for the prior period statements and including a statement that no review procedures were performed after the date of the review report.

II. Issue two separate reports, a compilation report for the current year and a review report for the prior year.

III. Issue a combined report, including both full reports and a statement that no review procedures were performed after the date of the review report.

A. Only option II is acceptable.

B. Only options I and III are acceptable.

C. All of the options are acceptable.

D. None of the options are acceptable. The accountant should not report on the comparative financial statements at all, because reviewed financial statements are not comparable to compiled financial statements.

Answer 29

C. All of the options are acceptable.

Question 30

As part of the current audit, the auditor performs a preliminary review of a large client’s internal controls over accounts receivable. Which of the items below would the auditor flag as an internal control weakness over accounts receivable?

A. An independent person performs a periodic reconciliation of the subsidiary and general ledger accounts.

B. An aging schedule is prepared and all accounts ninety days or more are written off with prior authorization of the controller.

C. When payments are made by the customer, the receivable is promptly eliminated on the subsidiary and general ledgers.

D. Any goods returned by the client are examined and must have an appropriate reason on a return document before the return is approved and the corresponding receivable is eliminated.

Answer 30

Choice “B” is correct. There is a weakness in internal control because the head of the recordkeeping function, the controller, is also the only person required to approve the accounts receivable write-off. The write-off should also be reviewed and approved by the Treasurer.

Question 31

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:

A. Produces an estimate having a desired level of precision with a smaller sample size.

B. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.

C. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

D. May be applied to populations where many monetary errors are expected to occur.

Answer 31

Choice “A” is correct. A stratified sample generally is more efficient than an unstratified sample since the population is classified in a manner that emphasizes the higher dollar value items. The result is an estimate having a desired level of precision with a smaller sample size.

Question 32

Which of the following is not a reason an auditor may apply audit data analytics (ADAs) when concluding an audit?

A. To verify the assertions of accuracy and occurrence for all material transactions.

B. The auditor will have a deeper knowledge of the entity being audited and may reperform tests done in the risk assessment process.

C. To update existing analytics with numbers that were revised during the audit.

D. To gain comfort that no material misstatements went unidentified during the audit.

Answer 32

Choice “A” is correct. These assertions are tested as part of substantive procedures.

Question 33

Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?

A. Internal control activities requiring segregation of duties are rarely monitored by management.

B. There is a substantial risk of intentional misapplication of accounting principles.

C. Management is dominated by one person who is also the majority stockholder.

D. Management fails to modify prescribed internal controls for changes in information technology.

Answer 33

Choice “B” is correct. Intentional misapplication of accounting principles would indicate that management lacks integrity and as a result, the auditor might conclude that a financial statement audit cannot be performed.

Question 34

Accepting an engagement to compile a financial projection for a nonissuer most likely would be inappropriate if the projection were to be distributed to:

A. A labor union with which the entity is negotiating a contract.

B. A bank with which the entity is negotiating for a loan.

C. The principal stockholder, to the exclusion of the other stockholders.

D. All stockholders of record as of the report date.

Answer 34

Choice “D” is correct. Accepting an engagement to compile a financial projection for a nonissuer most likely would be inappropriate if the projection were to be distributed to all stockholders of record as of the report date (general use). Only a financial forecast is suitable for general use.

Question 35

Which of the following procedures would be most effective in reducing attestation risk?

A. Inquiries of senior management.

B. Discussion with responsible individuals.

C. Analytical procedures.

D. Examination of evidence.

Answer 35

Choice “D” is correct. Evidence obtained directly by the accountant (e.g., through physical examination) provides more persuasive evidence than evidence obtained through inquiry, discussion, or analytical procedures, and therefore reduces attestation risk.

Question 36

For a public company’s annual report under Title IV of the Sarbanes-Oxley Act (SOX), disclosures related to the conformance of pro forma financial statements require all of the following, except:

A. No material information has been omitted.

B. Reconciliation with GAAP basis financial statements.

C. Estimates must be reconciled to actual data within three months after year-end.

D. No statements contained in the pro forma financials are untrue.

Answer 36

Choice “C” is correct. There is no requirement regarding disclosures on pro forma financial statements that estimates have to be reconciled to actual data within three months after year-end.

Question 37

An auditor is in the process of performing substantive procedures over a client’s presentation and disclosure of cash. While testing the completion assertion, the auditor should ensure that certain required disclosures related to cash have been included in the footnotes to the financial statements. Which of the following is not one of these required disclosures?

A. The client’s policy in defining cash and cash equivalents.

B. Specific restrictions on cash including sinking fund requirements.

C. A balance breakdown between petty cash and short-term cash investments.

D. Compensating balance requirements.

Answer 37

Choice “C” is correct. The client is not required to disclose a specific breakdown between pure (petty) cash on hand and investments in short-term cash equivalents (securities). The auditor instead should ensure that the footnotes to the financial statements disclose any specific restrictions on cash and any compensating balance requirements, as well as the fact that a policy exists that defines the client’s cash and cash equivalents account/transactions.

Question 38

In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:

A. Understandability of presentation and classification.

B. Existence.

C. Valuation and allocation.

D. Completeness.

Answer 38

Choice “D” is correct. When testing liabilities, an auditor generally is concerned about understatement (as opposed to overstatement, for assets). Therefore, in auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of completeness (if accounts payable is not complete it would be understated)

Question 39

Which of the following does not demonstrate an inappropriate segregation of duties?

A. An accounting clerk receives customer payments and records the resulting reduction in accounts receivable.

B. The cashier performs the monthly bank reconciliation.

C. A billing clerk prepares invoices and records the resulting increase in accounts receivable.

D. The purchasing manager approves vendor invoices for payment.

Answer 39

Choice “C” is correct. Preparing invoices and recording the related receivables are both recordkeeping functions that would not be inconsistent with each other.

Question 40

Under which of the following circumstances would an auditor of a non-issuer issue an unmodified opinion and have the option of including an emphasis-of-matter paragraph related to substantial doubt about the entity’s ability to continue as a going concern?

A. The going concern basis of accounting is appropriate, substantial doubt about the entity’s ability to continue as a going concern has been alleviated, but related disclosures are inadequate.

B. The going concern basis of accounting is appropriate, substantial doubt about the entity’s ability to continue as a going concern has been alleviated, and related disclosures are adequate.

C. The going concern basis of accounting is appropriate, substantial doubt about the entity’s ability to continue as a going concern remains, and related disclosures are adequate.

D. The going concern basis of accounting is appropriate, substantial doubt about the entity’s ability to continue as a going concern remains, but related disclosures are inadequate.

Answer 40

Choice “B” is correct. If management’s plans have alleviated the substantial doubt about the entity’s ability to continue as a going concern and the related disclosures are adequate, the auditor has the option of including an emphasis-of-matter paragraph in the auditor’s report.

Choices “A” and “D” are incorrect. Inadequate disclosure is a GAAP

Question 41

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. The entity’s financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor’s report is required to include a separate report section with the heading “Substantial Doubt About the Entity’s Ability to Continue as a Going Concern” that specifically uses the phrase(s):

1. “Except for the effects 2. “Possible discontinuance
   of such adjustments” of the entity’s operations”

A. No Yes

B. No No

C. Yes Yes

D. Yes No

Answer 41

Choice “B” is correct. The wording of the separate section must include the terms “substantial doubt” and “going concern.” The phrases in the above question are not required to be used.

Question 42

Which of the following is not an example of a deficiency in the design of internal controls that may be a significant deficiency or material weakness?

A. Inadequate documentation of the components of internal control.

B. An observed deviation rate that exceeds the auditor’s expected rate.

C. Insufficient control consciousness.

D. Lack of appropriate qualifications or training of client personnel.

Answer 42

Choice “B” is correct. An observed deviation rate that exceeds the auditor’s expected rate is an example of a deficiency in the operation of controls, not in the design of controls.

Question 43

An auditor reviews a client’s accounting policies and procedures when considering which of the following planning matters?

A. Method of sampling to be used.

B. Nature of reports to be rendered.

C. Understanding the client’s operations and business.

D. Preliminary judgments about materiality levels.

Answer 43

Choice “C” is correct. An auditor would review the client’s accounting policies and procedures as part of obtaining an understanding of the client’s operations and business. This understanding is important because it affects the design of internal control, which in turn impacts planned auditing procedures.

Question 44

In order to obtain a reasonable basis for an audit opinion regarding the fairness of the client’s financial statements, the auditor should usually obtain and rely on evidence that is:

A. Cost appropriate.

B. Conclusive.

C. Assured beyond a reasonable doubt.

D. Persuasive.

Answer 44

Choice “D” is correct. Because it is usually not possible or practical to obtain assurance beyond all doubt (100% of accounting data tested), the auditor should usually rely on audit evidence that is persuasive. Persuasiveness is a subjective concept, and is unique to each audit.

Question 45

An independent auditor asked a client’s internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure?

A. The form was prepared by the internal auditor.

B. The internal auditor did not sign the form.

C. The account was closed, so the balance was zero.

D. The form was mailed by the controller.

Answer 45

Choice “D” is correct. The auditor should control the mailing of independent confirmations.

Question 46

Which of the following is not a possible reason why a properly designed system of internal control may fail to prevent or detect fraud?

A. Management may override controls through its attitude and actions.

B. Inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity.

C. Human error may result in an inappropriate application of controls.

D. Collusion by two or more individuals may be used to circumvent controls.

Answer 46

Choice “B” is correct. Inadequate segregation of duties implies that the system of internal control was not properly designed.

Question 47

Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:

A. Materiality for the accounts tested as insignificant.

B. Inherent risk at a high level.

C. Control risk at a low level.

D. The difficulty in controlling the incremental audit risk.

Answer 47

Choice “D” is correct. Before performing substantive tests at an interim date, the auditor must assess the difficulty in controlling the incremental audit risk from the interim date (on which the substantive procedures are performed) to the year-end date (on which an opinion is rendered).