AUD

Question 1

Which of the following is not true about the relationship between quality control standards and professional standards such as GAAS?

Answer 1

A firm’s failure to establish or comply with an appropriate system of quality control implies that the firm has also failed to follow professional standards on individual engagements.

Question 2

The nature and extent of a CPA firm’s quality control policies and procedures depend on:

The CPA Firm’s size
The nature of the CPA Firm’s practice
cost-benefit considerations

Answer 2

The CPA Firm’s size - yes
The nature of the CPA Firm’s practice - yes
cost-benefit considerations - yes

Question 3

Would the following factors ordinarily be considered in planning an audit engagement’s personnel requirements?

Opportunities for on the job training
Continuity and periodic rotation of personnel

Answer 3

Opportunities for on the job training - yes

Continuity and periodic rotation of personnel - yes

Question 4

Which of the following is an element of a CPA firm’s quality control policies and procedures applicable to the firm’s accounting and auditing practice?

Answer 4

Engagement performance.

Question 5

Which of the following is not true about quality control standards?

Answer 5

Risk assessment is one of the six interrelated elements of quality control.

Question 6

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by:

Answer 6

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

Question 7

An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the financial statements taken as a whole provided the:

Answer 7

Report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements.

Question 8

Financial information is presented in a printed form that prescribes the wording of the independent auditor’s report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the auditor’s responsibility. Under these circumstances, the auditor most likely would:

Answer 8

Reword the form or attach a separate report.

Question 9

Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field’s profit participation in Gold’s net income. Hardy may accept this engagement only if:

Answer 9

Hardy also audits Gold’s income statement and balance sheet.

Question 10

An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except:

Answer 10

A statement that the cash receipts and disbursements basis of accounting is not a comprehensive basis of accounting.

Question 11

Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is:

Answer 11

Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion.

Question 12

When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should:

Answer 12

State that the basis of presentation is a comprehensive basis of accounting other than GAAP.

Question 13

An auditor may report on summary financial statements that are derived from complete financial statements if the:

Answer 13

Auditor indicates whether the information in the summary financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.

Question 14

An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:

Answer 14

Be limited to data derived from the audited financial statements.

Question 15

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis. Green should issue a:

Answer 15

Single unmodified opinion on the special purpose financial statements.

Question 16

When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:

Answer 16

State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.

Question 17

Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis?

Answer 17

Statement of revenues collected and expenses paid.

Question 18

Which of the following would be an appropriate title for a statement of revenue and expenses prepared using an other comprehensive basis of accounting (OCBOA)?

Answer 18

Statement of income-regulatory basis.

Question 19

Which of the following items should be included in an auditor’s report for financial statements prepared in conformity with another comprehensive basis of accounting (OCBOA)?

Answer 19

A title that includes the word “independent.”

Question 20

An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor:

Answer 20

Indicates whether the information is consistent in all material respects with the complete financial statements.

Question 21

An auditor has been asked to report on the balance sheet of Kane Company but not on the other basic financial statements. Which of the following is not required of the auditor?

Answer 21

When auditing a single financial statement, the auditor should determine materiality for the complete set of financial statements rather than for the single financial statement.

Question 22

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters?

Inability to assess the risk of material misstatement due to fraud

Discovery of significant deficiencies in the design of the entity’s internal control

Answer 22

Inability to assess the risk of material misstatement due to fraud = No

Discovery of significant deficiencies in the design of the entity’s internal control = No

Question 23

An accountant compiles unaudited financial statements that are not expected to be used by a third party. The accountant may decline to issue a compilation report provided:
I.
Each page of the financial statements is clearly marked to restrict its use.
II.
A written engagement letter is used to document the understanding with the client.
III.
A written representation letter is obtained from the client’s management.

Answer 23

I: = yes
II: = Yes
III = No

Question 24

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. 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 capitalize the leases. Under these circumstances, the accountant should:

Answer 24

Disclose the departure from GAAP in a separate paragraph of the accountant’s report.

Question 25

Kell engaged March, CPA, to submit to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement's sole purpose is to assist Kell in developing a personal financial plan. For March to be exempt from complying with the requirements of SSARS on compilation and review of financial statements, Kell is required to agree that the:

Answer 25

Financial statements will not be used to obtain credit.

Question 26

Compiled financial statements should be accompanied by an accountant's report stating that:

Answer 26

The accountant conducted the compilation in accordance with Statements on Standards for Accounting and Review Services.

Question 27

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover's statements of income, retained earnings, and cash flows. Moore may issue the review report provided the:

Answer 27

Scope of the inquiry and analytical procedures has not been restricted.

Question 28

Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker uncovered a complex scheme involving client illegal acts and fraud that materially affect Hall's financial statements. If Baker believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements, Baker should:

Answer 28

Withdraw from the engagement.

Question 29

Statements on Standards for Accounting and Review Services (SSARS) require an accountant to report when the accountant has:

Answer 29

Prepared, through the use of computer software, financial statements that are in conformity with a comprehensive basis of accounting other than GAAP, and which are expected to be used by a third party.

Question 30

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?

Answer 30

Observing the safeguards over access to and use of assets and records.

Question 31

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?

Answer 31

Obtaining a client representation letter from members of management.

Question 32

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant's review report should include reference to the: Scope limitation that caused the changed engagement Original engagement that was agreed to

Answer 32

Scope limitation that caused the changed engagement = No Original engagement that was agreed to = No

Question 33

Which of the following statements should be included in an accountant's standard report based on the compilation of a nonissuer's financial statements?

Answer 33

The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

Question 34

Which of the following procedures most likely would not be included in a review engagement of a nonissuer?

Answer 34

Assessing control risk

Question 35

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

Answer 35

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

Question 36

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of a material departure from GAAP. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should:

Answer 36

Disclose the departure from GAAP in a separate paragraph of the report.

Question 37

Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer's financial statements?

Answer 37

Inquiries concerning the entity's procedures for recording and summarizing transactions.

Question 38

The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:

Answer 38

Accounting and Review Services Committee.

Question 39

When an accountant performs more than one level of service (for example, a compilation and a review, or a compilation and an audit) concerning the financial statements of a nonissuer, the accountant generally should issue the report that is appropriate for:

Answer 39

The highest level of service rendered.

Question 40

Under which of the following circumstances would an accountant most likely conclude that it is necessary to withdraw from an engagement to review a nonissuer's financial statements?

Answer 40

The entity declines to provide the accountant with a signed representation letter.

Question 41

Which of the following is not true about documentation requirements related to a review of a nonissuer's financial statements?

Answer 41

The auditor must document evidence obtained about the operating effectiveness of controls.

Question 42

Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?

Answer 42

In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.

Question 43

The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that:

Answer 43

A review includes primarily applying analytical procedures to management's financial data and making inquiries of company management.

Question 44

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should: I. Refer to the scope limitation that caused the change. II. Describe the auditing procedures that have already been applied.

Answer 44

While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client's request is reasonable, the CPA's review report should: I. Refer to the scope limitation that caused the change. II. Describe the auditing procedures that have already been applied.

Question 45

An accountant agrees to the client's request to change an engagement from a review to a compilation of financial statements. The compilation report should include:

Answer 45

No reference to the original engagement.

Question 46

Independence is not required on which of the following types of engagements?

Answer 46

Compilation.

Question 47

Which of the following statements is true regarding analytical procedures in a review engagement?

Answer 47

Analytical procedures involve the use of both financial and nonfinancial data.

Question 48

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard review report for which of the following matters? Inability to assess the risk of material misstatement due to fraud Discovery of significant deficiencies in the design of the entity's internal control

Answer 48

Inability to assess the risk of material misstatement due to fraud = No Discovery of significant deficiencies in the design of the entity's internal control = No

Question 49

Which of the following actions should an accountant take when engaged to compile a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 49

Perform the engagement even though independence is compromised.

Question 50

Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer?

Answer 50

Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.

Question 51

Which of the following statements is correct regarding a compilation report on financial statements issued in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 51

The date on the report should be the date of completion of the compilation.

Question 52

Which of the following statements would be appropriate in an accountant's report on compiled financial statements of a nonissuer prepared in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 52

he objective of a compilation is to assist management in presenting financial information in the form of financial statements.

Question 53

Which of the following statements should not be included in an accountant's standard report based on the compilation of an entity's financial statements?

Answer 53

A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.

Question 54

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 54

Compare the financial statements with budgets or forecasts.

Question 55

An accountant compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). If the accountant has an ownership interest in the entity, which of the following statements is correct?

Answer 55

The accountant should include the statement "I am not independent with respect to the entity" in the compilation report.

Question 56

Which of the following situations would preclude an accountant from issuing a review report on a company's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 56

The owner of a company is the accountant's father.

Question 57

During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. 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 capitalize the leases. Under these circumstances, the accountant should:

Answer 57

Disclose the departure from GAAP in a separate paragraph of the accountant's report.

Question 58

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review:

Answer 58

Is substantially less than in scope than an audit.

Question 59

Financial statements of a nonissuer compiled without audit or review by an accountant, which are expected to be used by a third party, should be accompanied by a report stating that:

Answer 59

The accountant has not audited or reviewed the financial statements.

Question 60

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?

Answer 60

Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.

Question 61

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?

Answer 61

Observing the safeguards over access to and use of assets and records.

Question 62

Lawrence, CPA, is compiling the unaudited financial statements of DML Products, a nonissuer. These financial statements are not expected to be used by third parties. Which procedure is Lawrence least likely to perform as part of this engagement?

Answer 62

Evaluate the relationships of DML's financial statement elements that would be expected to conform to a predictable pattern.

Question 63

An accountant's report on a review of the unaudited financial statements of a nonissuer:

Answer 63

Should provide limited assurance on the financial statements.

Question 64

An auditor who is conducting a review of the unaudited financial statements of a nonissuer would be required to:

Answer 64

Obtain a management representation letter.

Question 65

In an accountant's review of interim financial information, the accountant typically performs each of the following, except:

Answer 65

Obtaining corroborating external evidence.

Question 66

An accountant has been engaged to compile pro forma financial statements. During the accountant's acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to the compilation?

Answer 66

The accountant should disclose the lack of independence in the accountant's compilation report.

Question 67

General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the:

Answer 67

Omission is not undertaken with the intention of misleading the users of General's financial statements.

Question 68

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?

Answer 68

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

Question 69

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

Answer 69

A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?

Question 70

An accountant was asked by a potential client to perform a compilation of its financial statements. The accountant is not familiar with the industry in which the client operates. In this situation, which of the following actions is the accountant most likely to take?

Answer 70

Accept the engagement and obtain an adequate level of knowledge about the industry.

Question 71

To compile financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, an accountant should:

Answer 71

Obtain a general understanding of the client's business transactions.

Question 72

Which of the following activities is an accountant not responsible for in review engagements performed in accordance with Statements on Standards for Accounting and Review Services?

Answer 72

Developing an understanding of internal control.

Question 73

Which of the following procedures would be generally performed when evaluating the accounts receivable balance in an engagement to review financial statements in accordance with Statements on Standards for Accounting and Review Services?

Answer 73

Perform a reasonableness test of the balance by computing days' sales in receivables.

Question 74

A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client's management questions the extent of procedures and objects to the confirmation of certain contracts. The client asks the accountant to change the scope of the engagement from an audit to a review. Under these circumstances, the accountant should do each of the following, except:

Answer 74

Issue an accountant's review report with a separate paragraph discussing the change in engagement scope.

Question 75

Gole, CPA, is engaged to review the Year 2 financial statements of North Co., a nonissuer. Previously, Gole audited North's Year 1 financial statements and expressed an unmodified opinion. Gole decides to include a separate paragraph in the Year 2 review report because North plans to present comparative financial statements for Year 2 and Year 1. This separate paragraph should indicate that:

Answer 75

No auditing procedures were performed after the date of the Year 1 auditor's report.

Question 76

When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and: I. The report on the unaudited financial statements should be reissued. II. The report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.

Answer 76

Either I or II.

Question 77

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, Year 1. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, Year 2, and to include all GAAP disclosures for the Year 2 statements only, but otherwise present both years' financial statements in comparative form. What is Clark's responsibility concerning the proposed engagement?

Answer 77

Clark may not report on the comparative financial statements because the Year 1 statements are not comparable to the Year 2 statements that include the GAAP disclsures.

Question 78

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:

Answer 78

Compare the prior year's financial statements with those of the current year.

Question 79

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior-year's financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior-year's audited financial statements. This separate paragraph should indicate:

Answer 79

The type of opinion expressed previously.

Question 80

Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:

Answer 80

Compare the prior year's financial statements with those of the current year.

Question 81

Hart, CPA, is engaged to review the year 2 financial statements of Kell Co., a nonissuer. Previously, Hart audited Kell's year 1 financial statements and expressed a qualified opinion due to a scope limitation. Hart decides to include a separate paragraph in the year 2 review report because comparative financial statements are being presented for year 2 and year 1. This separate paragraph should indicate the:

Answer 81

Substantive reasons for the prior-year's qualified opinion.

Question 82

Silver, CPA, has been hired by Andrews Co., a publicly held company, to conduct a review of its interim financial information. While performing review procedures, Silver becomes aware of a significant change in the control activities at one of Andrew's branch locations. Which of the following might Silver consider performing in response to this situation? I. Making additional inquiries, such as whether management has monitored the changes and considered whether they were operating as intended. II. Employing analytical procedures with a less precise expectation.

Answer 82

I only.

Question 83

Davidson, CPA, is performing a review under auditing standards of Gold's interim financial information. As part of planning, Davidson reads the audit documentation from the preceding year's annual audit. Which of the following is least likely to affect Davidson's review?

Answer 83

Scope limitations that were overcome through acceptable alternative procedures.

Question 84

The annual financial statements of a publicly held company have been audited, and its interim financial statements have been reviewed. Which of the following is true about the application of professional standards to this review?

Answer 84

PCAOB standards apply.

Question 85

Which of the following is not a required procedure in an engagement to review the interim financial information of a publicly held entity?

Answer 85

Obtaining corroborating evidence about the entity's ability to continue as a going concern.

Question 86

In which case would the accountant be least likely to perform a review of interim financial information under PCAOB standards?

Answer 86

Quarterly financial data is included in the financial statements of a nonissuer.

Question 87

The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether:

Answer 87

Material modifications should be made to conform with generally accepted accounting principles.

Question 88

An independent accountant's report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:

Answer 88

Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933.

Question 89

The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether:

Answer 89

Material modifications should be made to conform with generally accepted accounting principles.

Question 90

Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim financial information of a publicly held entity?

Answer 90

Read the minutes of the board of directors' meetings.

Question 91

Green, CPA, is aware that Green's name is to be included in the annual report of National Company, a publicly-held entity, because Green has audited the annual financial statements included therein. National's quarterly financial statements are also contained in the annual report. Green has not audited but has reviewed these interim financial statements. Green should request that: I. Green's name not be included in the annual report. II. The interim financial statements be marked as unaudited.

Answer 91

II only.

Question 92

Which of the following is not a difference between a review of a public entity's interim financial information and a review of the unaudited financial statements of a nonissuer?

Answer 92

The former requires inquiry of the client's attorney regarding litigation, claims, and assessments, while the latter does not.

Question 93

Which of the following is not true about an auditor's report on a review of interim financial information of a publicly held company?

Answer 93

It is similar to an audit report in that both provide an opinion regarding whether the financial statements are in conformity with generally accepted accounting principles.

Question 94

When planning a review of an audit client's interim financial statements, which of the following procedures should the accountant perform to update the accountant's knowledge about the entity's business and its internal control?

Answer 94

Consider the results of audit procedures performed with respect to the current-year's financial statements.

Question 95

The quarterly data required by SEC Regulation S-K have been omitted. Which of the following statements must be included in the auditor's report?

Answer 95

The company has not presented the selected quarterly financial data.

Question 96

Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters?

Answer 96

Letters for underwriters typically give negative assurance on unaudited interim financial information.

Question 97

Which of the following matters is covered in a typical comfort letter?

Answer 97

An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.

Question 98

Comfort letters ordinarily are signed by the client's:

Answer 98

Independent auditor.

Question 99

When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive:

Answer 99

Negative assurance on capsule information.

Question 100

Comfort letters ordinarily are: Addressed to the client's Signed by the client's

Answer 100

Addressed to the client's Underwriter of securities Signed by the client's Independent auditor

Question 101

When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may provide negative assurance concerning:

Answer 101

The conformity of the entity's unaudited condensed interim financial information with generally accepted accounting principles (GAAP).

Question 102

When a CPA examines a client's projected financial statements, the CPA's report should:

Answer 102

State that the CPA performed procedures to evaluate management's assumptions.

Question 103

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to:

Answer 103

Review management's discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

Question 104

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when: Testifying as an expert witness in accounting and auditing matters given stipulated facts. Compiling a client's financial projection that presents a hypothetical course of action

Answer 104

Testifying as an expert witness in accounting and auditing matters given stipulated facts. = No Compiling a client's financial projection that presents a hypothetical course of action = Yes

Question 105

Mill, CPA, was engaged by a group of royalty recipients to apply agreed-upon procedures to financial data supplied by Modern Co. regarding Modern's written assertion about its compliance with contractual requirements to pay royalties. Mill's report on these agreed-upon procedures should contain a (an):

Answer 105

List of the procedures performed (or reference thereto) and Mill's findings.

Question 106

In an attest engagement, use of the accountant's report should be restricted to specified parties in all of the following situations, except:

Answer 106

When reporting on an assertion about the subject matter instead of reporting directly on the subject matter.

Question 107

Which of the following is a term for an attest engagement in which a CPA assesses a client's commercial Internet site for predefined criteria that are designed to measure transaction integrity, information protection, and disclosure of business practices?

Answer 107

WebTrust.

Question 108

An entity engaged a CPA to determine whether the client's web sites meet defined criteria for standard business practices and controls over transaction integrity and information protection. In performing this engagement, the CPA should comply with the provisions of:

Answer 108

Statements on Standards for Attestation Engagements.

Question 109

A CPA's report on agreed-upon procedures related to management's assertion about an entity's compliance with specified requirements should contain:

Answer 109

A statement of limitations on the use of the report.

Question 110

An examination of a financial forecast is a professional service that involves:

Answer 110

Evaluating the preparation of a financial forecast and the support underlying management's assumptions.

Question 111

An accountant's compilation report on a financial forecast should include a statement that:

Answer 111

There will usually be differences between the forecasted and actual results.

Question 112

Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?

Answer 112

. | The attestation standards provide a framework for the attest function beyond historical financial statements.

Question 113

Accepting an engagement to examine an entity's financial projection most likely would be appropriate if the projection were to be distributed to:

Answer 113

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

Question 114

An accountant's report on a review of pro forma financial information should include a:

Answer 114

Reference to the financial statements from which the historical financial information is derived.

Question 115

An accountant's standard report on a compilation of a projection should not include a:

Answer 115

Statement that the accountant expresses only limited assurance that the results may be achieved.

Question 116

Which of the following is not an attestation standard?

Answer 116

A sufficient understanding of internal control shall be obtained to plan the engagement.

Question 117

An accountant's compilation report on a financial forecast should include a statement that the:

Answer 117

Compilation does not include evaluation of the support of the assumptions underlying the forecast.

Question 118

Which of the following professional services would be considered an attest engagement covered by the Statements on Standards for Attestation Engagements (SSAEs)?

Answer 118

An engagement to report on management's discussion and analysis (MD&A).

Question 119

Negative assurance may be expressed when an accountant is requested to report on the:

Answer 119

Results of performing a review of management's assertion.

Question 120

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue a (an):

Answer 120

Adverse opinion.

Question 121

Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a:

Answer 121

Partial presentation.

Question 122

An accountant has been engaged to examine pro forma adjustments that show the effects on previously audited historical financial statements due to a proposed disposition of a significant portion of an entity's business. Other than the procedures previously applied to the historical financial statements, the accountant is required to: Reevaluate the entity's internal control over financial reporting Determine that the computations of the pro forma adjustments are mathematically correct

Answer 122

Reevaluate the entity's internal control over financial reporting = Yes Determine that the computations of the pro forma adjustments are mathematically correct= No

Question 123

Which of the following activities would most likely be considered an attestation engagement?

Answer 123

Issuing a report about a firm's compliance with laws and regulations.

Question 124

Which of the following professional services would be considered an attestation engagement?

Answer 124

Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions.

Question 125

When an accountant compiles a financial forecast, the accountant's report should include a(an):

Answer 125

Caveat that the prospective results of the financial forecast may not be achieved.

Question 126

Which of the following is a professional engagement that a CPA may perform to provide assurance on a system's reliability?

Answer 126

CPA SysTrust

Question 127

An accountant's standard report on a compilation of a projection should not include a statement that:

Answer 127

The hypothetical assumptions used in the projection are reasonable in the circumstances.

Question 128

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

Answer 128

Describes the limitations on the projection's usefulness.

Question 129

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:

Answer 129

Distribution (use) of the report is restricted to the specified users.

Question 130

A CPA is engaged to examine an entity's financial forecast. The CPA believes that several significant assumptions do not provide a reasonable basis for the forecast. Under these circumstances, the CPA should issue a(an):

Answer 130

Adverse opinion.

Question 131

Which of the following prospective financial statements is(are) appropriate for general use? Financial Forecasts Financial Projection

Answer 131

Financial Forecasts = Yes Financial Projection = No

Question 132

Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?

Answer 132

The requirement that the CPA be independent in mental attitude is included in both sets of standards.

Question 133

Accepting an engagement to compile an entity's financial projections most likely would be inappropriate if the projections are to be included in a(an):

Answer 133

Offering statement of the entity's initial public offering of common stock.

Question 134

A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to perform the engagement?

Answer 134

The practitioner and specified parties agree upon the procedures to be performed by the practitioner.

Question 135

An accountant's compilation report on a financial forecast should include a statement that:

Answer 135

There will usually be differences between the forecasted and actual results.

Question 136

Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?

Answer 136

Make inquiries about the accounting principles used in the preparation of the prospective financial statements.

Question 137

Which of the following components is appropriate in a practitioner's report on the results of applying agreed-upon procedures?

Answer 137

A list of the procedures performed, as agreed to by the specified parties identified in the report.

Question 138

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

Answer 138

Potential stockholders in an offering statement.

Question 139

Which of the following is least likely to be included in an examination report related to a financial projection?

Answer 139

An indication that had the accountants performed additional procedures, other matters might have come to their attention that would have been reported.

Question 140

An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the:

Answer 140

Engagement does not include an evaluation of the support for the assumptions underlying the projection.

Question 141

Which of the following items should be included in prospective financial statements issued in an attestation engagement performed in accordance with Statements on Standards for Attestation Engagements?

Answer 141

All significant assumptions used to prepare the financial statements.

Question 142

According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed-upon procedures engagements?

Answer 142

The practitioner is independent from the client and other specified parties.

Question 143

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

Answer 143

Describes the limitations on the projection's usefulness.

Question 144

A CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:

Answer 144

Reviewing audit documentation and engagement reports.

Question 145

Which of the following are elements of a CPA firm's quality control that should be considered in establishing its quality control policies and procedures? Engagement Performance Relevant Ethical Requirements Monitoring

Answer 145

Engagement Performance = Yes Relevant Ethical Requirements = Yes Monitoring = Yes

Question 146

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

Answer 146

All stockholders of record as of the report date.

Question 147

A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:

Answer 147

Having an appropriate system of quality control.

Question 148

One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through:

Answer 148

A system of quality control

Question 149

Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?

Answer 149

Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.

Question 150

Which of the following accounting bases may be used to prepare financial statements in conformity with a comprehensive basis of accounting other than generally accepted accounting principles? I. Basis of accounting used by an entity to file its income tax return. II. Cash receipts and disbursements basis of accounting.

Answer 150

Both I and II.

Question 151

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when: Proposing correcting journal entries to the financial statements Preparing standard monthly journal entries

Answer 151

Proposing correcting journal entries to the financial statements = No Preparing standard monthly journal entries = No

Question 152

An auditor's special report on financial statements prepared in conformity with the cash basis of accounting should include an emphasis-of-matter paragraph after the opinion paragraph that:

Answer 152

Refers to the note to the financial statements that describes the basis of accounting.

Question 153

The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that:

Answer 153

The accountant is not aware of any material modifications that should be made to the financial statements.

Question 154

Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?

Answer 154

Communicating any material weaknesses discovered during the consideration of internal control.

Question 155

When reporting on financial statements prepared on the same basis of accounting used for income tax purposes, the auditor should include in the report a paragraph that:

Answer 155

States that the income tax basis of accounting is a comprehensive basis of accounting other than generally accepted accounting principles.

Question 156

The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:

Answer 156

Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.

Question 157

How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer's financial statements? The financial have NOT been audited The accountant has compiled the financial statements

Answer 157

The financial have NOT been audited = Explicitly The accountant has compiled the financial statements = Explicity

Question 158

The financial have NOT been audited The accountant has compiled the financial statements

Answer 158

Review report on comparative financial statements for a nonissuer in its second year of operations.

Question 159

An auditor's report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except:

Answer 159

An opinion as to whether the basis of accounting used is appropriate under the circumstances.

Question 160

When an independent accountant's report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the accountant's involvement. This statement should clarify that the:

Answer 160

Accountant's review report is not a "part" of the registration statement within the meaning of the Securities Act of 1933.

Question 161

Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should:

Answer 161

Read the financial statements to consider whether the financial statements are free from obvious material errors.

Question 162

During a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should:

Answer 162

Disclose this departure from generally accepted accounting principles in a separate paragraph of the report.

Question 163

Unaudited financial statements for the prior year presented in comparative form with audited financial statements for the current year should be clearly marked to indicate their status and I. The report on the prior period should be reissued to accompany the current period report. II. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the prior period's financial statements.

Answer 163

Either I or II.

Question 164

Comfort letters ordinarily are addressed to:

Answer 164

Underwriters of securities.

Question 165

When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that:

Answer 165

Describes the limitations on the usefulness of the presentation.

Question 166

An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that:

Answer 166

Use of the report is restricted to the specified parties.

Question 167

In performing an attest engagement, a CPA typically:

Answer 167

Issues a report on subject matter (or on an assertion about subject matter) that is the responsibility of another party.

Question 168

An attest engagement is one in which a CPA is engaged to:

Answer 168

Issue an examination, a review, or an agreed-upon procedures report on subject matter, or on an assertion about the subject matter, that is the responsibility of another party.

Question 169

Which of the following statements concerning prospective financial statements is correct?

Answer 169

Any type of prospective financial statements would normally be appropriate for limited use.

Question 170

A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:

Answer 170

A statement of restrictions on the use of the report.

Question 171

A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:

Answer 171

Statements on Standards for Attestation Engagements (SSAE).

Question 172

An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). The financial statements are expected to be used by a third party. Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant? Printed on the accountant's letterhead Manually signed by the accountant

Answer 172

Printed on the accountant's letterhead = No Manually signed by the accountant = No

Question 173

When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with generally accepted accounting principles, the accountant should:

Answer 173

Understand the accounting principles of the industry in which the entity operates.

Question 174

Each page of a nonissuer's financial statements reviewed by an accountant should include the following reference:

Answer 174

See Independent Accountant's Review Report.

Question 175

An accountant has been engaged to review a nonissuer's financial statements that contain several departures from GAAP. If the financial statements are not revised and modification of the standard review report is not adequate to indicate the deficiencies, the accountant should:

Answer 175

Withdraw from the engagement and provide no further services concerning these financial statements.

Question 176

North Co., a privately-held entity, asked its tax accountant, King, a CPA in public practice, to prepare North's interim financial statements on King's microcomputer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of:

Answer 176

Statements on Standards for Accounting and Review Services.

Question 177

Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the: Additional audit effort necessary to complete the audit Reason given for Tech's request

Answer 177

Additional audit effort necessary to complete the audit = Yes Reason given for Tech's request = Yes

Question 178

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if:

Answer 178

The scope of Smith's inquiry and analytical procedures is not restricted.

Question 179

An accountant should perform analytical procedures during an engagement to: Compile a Nonissuer's Financial statements Review a Nonissuer's Financial statements

Answer 179

Compile a Nonissuer's Financial statements = No Review a Nonissuer's Financial statements = Yes

Question 180

Compiled financial statements should be accompanied by a report stating that:

Answer 180

The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

Question 181

An accountant has been asked to issue a review report on the balance sheet of a nonissuer but not to report on the other basic financial statements. The accountant may not do so:

Answer 181

If the scope of the inquiry and analytical procedures has been restricted.

Question 182

Which of the following accounting services may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services? I. Preparing a working trial balance. II. Preparing standard monthly journal entries.

Answer 182

Both I and II.

Question 183

When compiling the financial statements of a nonissuer, an accountant should:

Answer 183

Understand the accounting principles and practices of the entity's industry.

Question 184

Jones Retailing, a nonissuer, has asked Winters, CPA, to compile financial statements that omit substantially all disclosures required by generally accepted accounting principles. Winters may compile such financial statements provided the:

Answer 184

Omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant's report.

Question 185

Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?

Answer 185

Compiling an individual's personal financial statement to be used to obtain a mortgage.

Question 186

When compiling a nonissuer's financial statements, an accountant would be least likely to:

Answer 186

Perform analytical procedures designed to identify relationships that appear to be unusual.

Question 187

Before performing a review of a nonissuer's financial statements, an accountant should:

Answer 187

Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.

Question 188

An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if:

Answer 188

The scope of the accountant's inquiry and analytical procedures has not been restricted.

Question 189

Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?

Answer 189

Obtain a general understanding of the entity's organization, its operating characteristics, and its products or services.

Question 190

An accountant's standard report issued after compiling the financial statements of a nonissuer should state that:

Answer 190

The objective of a compilation is to assist management in presenting financial information in the form of financial statements.

Question 191

Which of the following statements is true regarding an accountant's consideration of fraud/illegal acts in compilation and review engagements?

Answer 191

The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts.

Question 192

An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity's request to change the engagement to a compilation?

Answer 192

The entity's principal creditors no longer require the entity to furnish audited financial statements.

Question 193

Which of the following inquiry procedures does a CPA normally perform first in a review engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 193

Inquiry regarding the client's accounting principles and practices and the method of applying them.

Question 194

An accountant has been engaged to compile the financial statements of a nonpublic entity. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should:

Answer 194

Withdraw from the engagement and provide no further service concerning these financial statements.

Question 195

Which of the following procedures is an accountant required to perform when reviewing the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 195

Obtain a management representation letter.

Question 196

Which of the following statements is correct regarding a review of a nonpublic entity's financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 196

The accountant must be independent to issue the review report.

Question 197

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when: I. Reproducing client-prepared financial statements, without modification, as an accommodation to a client. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses.

Answer 197

Neither I nor II.

Question 198

Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?

Answer 198

Inquire of management about related party transactions.

Question 199

Which of the following procedures would a CPA most likely perform when reviewing the financial statements of a nonissuer?

Answer 199

Make inquiries about actions taken at the board of directors meetings.

Question 200

When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with GAAP, the accountant should:

Answer 200

Understand the accounting principles of the industry in which the entity operates.

Question 201

An accountant is required to comply with the provisions of the Statements on Standards for Accounting and Review Services when performing which of the following tasks?

Answer 201

Generating financial statements of a nonissuer.

Question 202

An accountant has been engaged to review a nonissuer's financial statements that contain several departures from GAAP. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is inadequate to communicate the deficiencies. Under these circumstances, the accountant should:

Answer 202

Withdraw from the engagement and provide no further services concerning these financial statements.

Question 203

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services (SSARS) when: Compiling financial statements generated through the use of computer software reproducing client-prepared financial statements, without modification, for the client

Answer 203

Compiling financial statements generated through the use of computer software = yes reproducing client-prepared financial statements, without modification, for the client = no

Question 204

Which of the following services, if any, may an accountant who is not independent provide?

Answer 204

Compilations, but not reviews.

Question 205

A successor auditor ordinarily should request to review the predecessor's audit documentation relating to: Contingencies Internal Control

Answer 205

Contingencies = yes Internal Control = yes

Question 206

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

Answer 206

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

Question 207

Which of the following factors most likely would cause a CPA to not accept a new audit engagement?

Answer 207

The prospective client is unwilling to make all financial records available to the CPA.

Question 208

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?

Answer 208

It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

Question 209

A scope limitation sufficient to preclude an unmodified opinion always will result when management:

Answer 209

Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.

Question 210

Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Answer 210

Management's disregard of its responsibility to maintain an adequate internal control environment.

Question 211

Which of the following matters generally is included in an auditor's engagement letter?

Answer 211

Management’s responsibility for the fair presentation of the financial statements.

Question 212

Before accepting an engagement to audit a new client, a CPA is required to obtain:

Answer 212

The prospective client's consent to make inquiries of the predecessor auditor

Question 213

A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:

Answer 213

Disagreements with management as to auditing procedures.

Question 214

Which of the following statements would least likely appear in an auditor's engagement letter?

Answer 214

After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

Question 215

In auditing the financial statements of Star Corp., Land discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substantial revisions. Under these circumstances, Land should:

Answer 215

Request Star to arrange a meeting among the three parties to resolve the matter.

Question 216

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?

Answer 216

Hill, the successor auditor.

Question 217

An auditor's engagement letter most likely would include a statement regarding:

Answer 217

Management's responsibility to provide certain written representations to the auditor.

Question 218

A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's:

Answer 218

Understanding of the reasons for the change in auditors.

Question 219

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?

Answer 219

It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.

Question 220

Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time?

Answer 220

The schedules and analyses that the client's staff should prepare.

Question 221

A successor auditor is required to attempt communication with the predecessor auditor prior to:

Answer 221

Accepting the engagement.

Question 222

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

Answer 222

The adequacy of the accounting records.

Question 223

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

Answer 223

The integrity of the entity's management is suspect.

Question 224

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time?

Answer 224

The coordination of the assistance of the client's personnel in data preparation.

Question 225

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:

Answer 225

The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor's attention.

Question 226

Which of the following statements most likely would be included in an engagement letter from an auditor to a client?

Answer 226

The CPA firm will involve information technology specialists in the performance of the audit.

Question 227

A successor auditor's inquiries of the predecessor auditor should include questions regarding:

Answer 227

The predecessor's understanding as to the reasons for the change in auditors.

Question 228

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?

Answer 228

Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

Question 229

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's: Engagement Letter Working Papers

Answer 229

Engagement Letter = No Working Papers = Yes

Question 230

Which of the following is not a required part of the understanding between the client and the auditor?

Answer 230

Management's responsibility to correct deficiencies in internal control identified by the auditor.

Question 231

Which of the following is required before accepting a new audit engagement? I. Making inquiries of the predecessor auditor regarding management integrity. II. Making inquiries of the predecessor auditor regarding matters that may affect the conduct of the audit. III. Understanding the prospective client's business and the industry in which it operates.

Answer 231

I only.

Question 232

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?

Answer 232

There will be a client-imposed scope limitation.

Question 233

An auditor's engagement letter most likely would include a statement that:

Answer 233

Limits the auditor's responsibility to detect errors and fraud.

Question 234

Before accepting an engagement to audit a new client, a CPA is required to obtain:

Answer 234

The prospective client's consent to make inquiries of the predecessor.

Question 235

The understanding with the client regarding a financial statement audit generally includes which of the following matters?

Answer 235

The responsibilities of the auditor.

Question 236

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests.

Answer 236

Both I and II.

Question 237

In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the:

Answer 237

Internal auditing standards developed by The Institute of Internal Auditors.

Question 238

A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA most likely consult for this information?

Answer 238

AICPA Accounting Trends and Techniques.

Question 239

The work of internal auditors may affect the independent auditor's: I. Procedures performed in obtaining an understanding of internal control. II. Procedures performed in assessing the risk of material misstatement. III. Substantive procedures performed in gathering direct evidence.

Answer 239

I, II, and III.

Question 240

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

Answer 240

The work of a management specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

Question 241

The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:

Answer 241

How the results of various auditing procedures performed by the assistants should be evaluated.

Question 242

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

Answer 242

The entity's annualized interim financial statements.

Question 243

An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:

Answer 243

Existence of fixed asset additions.

Question 244

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the:

Answer 244

Timing of inventory observation procedures to be performed.

Question 245

During an audit an internal auditor may provide direct assistance to an independent CPA in: Obtaining an understanding of internal control Performing tests of controls Performing sensitive tests

Answer 245

Obtaining an understanding of internal control = Yes Performing tests of controls = Yes Performing sensitive tests = Yes

Question 246

In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:

Answer 246

Becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern.

Question 247

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?

Answer 247

Determining the extent of involvement of the client's internal auditors.

Question 248

The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:

Answer 248

Give guidance to the staff regarding both technical and personnel aspects of the audit.

Question 249

To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would:

Answer 249

Review prior-year audit documentation and the permanent file for the client.

Question 250

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

Answer 250

Influence the design of internal control.

Question 251

Which of the following statements is not correct about materiality?

Answer 251

An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

Question 252

Which of the following statements is correct about the auditor's use of the work of a specialist?

Answer 252

The auditor should obtain an understanding of the methods and assumptions used by the specialist.

Question 253

In assessing the competence and objectivity of an entity's internal auditor, an independent auditor would least likely consider information obtained from:

Answer 253

The results of analytical procedures.

Question 254

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Assessment of Inherent Risk Assessment of Control Risk

Answer 254

Assessment of Inherent Risk = No Assessment of Control Risk = No

Question 255

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:

Answer 255

Results are consistent with the conclusions to be presented in the auditor's report.

Question 256

An auditor obtains knowledge about a new client's business and its industry to:

Answer 256

Understand the events and transactions that may have an effect on the client's financial statements.

Question 257

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

Answer 257

An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives

Question 258

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to:

Answer 258

Document the details of the disagreement with the conclusion reached.

Question 259

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:

Answer 259

$10,000

Question 260

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Materiality of misstatements Evaluation of accounting estimates

Answer 260

Materiality of misstatements = No Evaluation of accounting estimates = No

Question 261

Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

Answer 261

Selecting a sample of vendors' invoices for comparison to receiving reports.

Question 262

When assessing an internal auditor's competence, a CPA ordinarily obtains information about all of the following, except:

Answer 262

Access to information about related parties.

Question 263

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

Answer 263

Understanding the client's operations and business.

Question 264

An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

Answer 264

To assist the auditor in accurately interpreting information obtained during an audit.

Question 265

A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:

Answer 265

Perform tests several times during the year, rather than only at year-end.

Question 266

Samples to test internal control are intended to provide a basis for an auditor to conclude whether:

Answer 266

The control activities are operating effectively.

Question 267

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:

Answer 267

Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

Question 268

In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:

Answer 268

Internal auditor's compliance with professional internal auditing standards.

Question 269

Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality?

Answer 269

The entity's financial statements of the prior year.

Question 270

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to:

Answer 270

Perform the planned auditing procedures closer to the balance sheet date.

Question 271

When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the:

Answer 271

Estimate of the total misstatement is less than a material amount.

Question 272

Which of the following procedures would an auditor most likely include in the planning phase of a financial statement audit?

Answer 272

Obtain an understanding of the entity's risk assessment process.

Question 273

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:

Answer 273

Financial statement assertions.

Question 274

Which of the following is not a type of financial statement assertion?

Answer 274

Fairness and accuracy

Question 275

In developing an overall audit strategy, an auditor should consider:

Answer 275

Preliminary evaluations of materiality, audit risk, and internal control.

Question 276

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:

Answer 276

Perform tests several times during the year, rather than only at year-end.

Question 277

Which of the following statements is correct concerning materiality in a financial statement audit?

Answer 277

Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Question 278

Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:

Answer 278

Assess the difficulty in controlling the incremental audit risk.

Question 279

An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the:

Answer 279

Auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset.

Question 280

Which of the following statements is correct concerning an auditor's use of the work of an actuary in assessing a client's pension obligations?

Answer 280

The auditor is required to understand the objectives and scope of the actuary's work.

Question 281

Which of the following factors most likely would assist an independent auditor in assessing the objectivity of the internal auditor?

Answer 281

The organizational status of the director of internal audit.

Question 282

In using the work of a specialist, an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor:

Answer 282

Adds an explanatory paragraph to the auditor's modified opinion to emphasize an unusually important subsequent event in the audit report.

Question 283

In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the:

Answer 283

Quality of the internal auditors' working paper documentation.

Question 284

During the initial planning phase of an audit, the auditor most likely would:

Answer 284

Discuss the timing of the audit procedures with the client's management.

Question 285

Which one of the below factors is not included in the PCAOB auditing standards as one that should influence the nature and extent of necessary planning activities?

Answer 285

The size of the auditing firm and the number of auditors assigned to the audit.

Question 286

Under PCAOB standards, which one of the following factors would indicate that a company has less complex operations?

Answer 286

A centralized accounting function.

Question 287

Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff?

Answer 287

The fee to be paid by the client.

Question 288

Which one of the below statements best describes the concept of materiality?

Answer 288

Information that is likely to be viewed by a reasonable investor as altering the mix of available information.

Question 289

According to PCAOB standards, when would a company be least likely to reevaluate established materiality levels or tolerable misstatements?

Answer 289

The client has stated that it will not be able to respond to the auditor’s request for evidence within the prescribed timeframe.

Question 290

When assessing internal auditors' objectivity, an independent auditor should:

Answer 290

Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

Question 291

During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing: Test of controls Substantive tests

Answer 291

Test of controls = Yes Substantive tests = Yes

Question 292

The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:

Answer 292

Allow the internal auditor to perform tests of internal controls.

Question 293

Which of the following is true about the auditor's use of an internal auditor and a specialist?

Answer 293

The auditor must assess the competency of both the internal auditor and the specialist.

Question 294

Proper supervision of assistants is required for all of the following reasons, except:

Answer 294

To ensure that the work performed by assistants provides the professional development they will need to advance within the firm.

Question 295

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Answer 295

Make a preliminary judgment about materiality

Question 296

Which of the following risks may be assessed in nonquantitative terms? Control risk Detection risk Inherent risk

Answer 296

Control risk = Yes Detection risk = Yes Inherent risk = Yes

Question 297

The existence of audit risk is recognized by the statement in the auditor's standard report that the:

Answer 297

Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

Question 298

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:

Answer 298

Extent of tests of details.

Question 299

An auditor assesses control risk because it:

Answer 299

Affects the level of detection risk that the auditor may accept.

Question 300

As the acceptable level of detection risk decreases, an auditor may:

Answer 300

Postpone the planned timing of substantive tests from interim dates to the year-end.

Question 301

Control risk should be assessed in terms of:

Answer 301

Financial statement assertions.

Question 302

The acceptable level of detection risk is inversely related to the:

Answer 302

Assurance provided by substantive tests.

Question 303

As the acceptable level of detection risk increases, an auditor may change the:

Answer 303

Timing of substantive tests from year-end to an interim date.

Question 304

Regardless of the assessed level of control risk, an auditor would perform some:

Answer 304

Substantive tests to restrict detection risk for significant transaction classes.

Question 305

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Answer 305

Extent of tests of details.

Question 306

An auditor uses the assessed level of control risk to:

Answer 306

Determine the acceptable level of detection risk for financial statement assertions.

Question 307

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor:

Answer 307

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

Question 308

As the acceptable level of detection risk decreases, the assurance directly provided from:

Answer 308

Substantive tests should increase.

Question 309

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk, and therefore the risk of material misstatement, from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Answer 309

Decrease detection risk.

Question 310

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

Answer 310

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

Question 311

Detection risk differs from both control risk and inherent risk in that detection risk:

Answer 311

Can be changed at the auditor's discretion.

Question 312

Inherent risk and control risk differ from detection risk in that they:

Answer 312

Exist independently of the financial statement audit.

Question 313

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

Answer 313

Decrease detection risk.

Question 314

Which of the following is a definition of control risk?

Answer 314

The risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls.

Question 315

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

Answer 315

When the combined assessed level of inherent and control risk over the sale is high.

Question 316

Each of the following is a type of known misstatement, except:

Answer 316

Differences between management and the auditor's judgment regarding estimates.

Question 317

Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?

Answer 317

Select more effective substantive tests.

Question 318

Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud?

Answer 318

Audit documentation must include a description of the discussion.

Question 319

Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?

Answer 319

The fraud risk factors should be discussed by engagement personnel during planning.

Question 320

Which of the following is not an inquiry the auditor should make to identify the risks of material misstatement due to fraud?

Answer 320

Whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud.

Question 321

Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls?

Answer 321

A journal entry made to record recurring periodic accounting estimates.

Question 322

Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud?

Answer 322

Analysis of sales commissions over the most recent five-year period.

Question 323

An auditor has identified a risk of material misstatement due to fraud related to the inventory function. Which is least likely to be an appropriate response?

Answer 323

Requesting that management more closely monitor the inventory function.

Question 324

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Answer 324

An overly complex organizational structure involving unusual lines of authority.

Question 325

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?

Answer 325

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.

Question 326

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Answer 326

Management is dominated by one individual who is also a shareholder.

Question 327

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?

Answer 327

The entity's industry is experiencing declining customer demand.

Question 328

Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?

Answer 328

An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Question 329

During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the:

Answer 329

Management representation letter.

Question 330

Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect acts of noncompliance with laws and regulations that are material to XYZ's financial statements, and acts of noncompliance that have a material, but indirect effect on the financial statements will be detected? Direct effect non-compliance indirect effect non-compliance

Answer 330

Direct effect non-compliance = Reasonable indirect effect non-compliance = None

Question 331

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Answer 331

Inability to generate cash flows from operations while reporting substantial earnings growth.

Question 332

Which of the following statements is correct concerning an auditor's responsibility to report fraud?

Answer 332

The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility.

Question 333

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

Answer 333

Supporting accounting records and files that should be readily available are not produced promptly when requested.

Question 334

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

Answer 334

Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices.

Question 335

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

Answer 335

Management had frequent disputes with the auditor on accounting matters.

Question 336

Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance with laws and regulations by clients?

Answer 336

If specific information concerning an act of noncompliance with laws and regulations comes to the auditor's attention, the auditor should apply audit procedures specifically directed to ascertaining whether such an act has occurred.

Question 337

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?

Answer 337

A lack of independent checks.

Question 338

Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?

Answer 338

An illegal payment to a foreign official that was not recorded.

Question 339

Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?

Answer 339

Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.

Question 340

Which of the following statements best describes an auditor's responsibility to detect errors and fraud?

Answer 340

An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.

Question 341

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

Answer 341

Reevaluate the risk of fraud, and design alternate tests for the related transactions.

Question 342

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of this act of noncompliance with laws and regulations, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should:

Answer 342

Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

Question 343

Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?

Answer 343

They usually use financial and nonfinancial data aggregated at a high level.

Question 344

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?

Answer 344

Questioning.

Question 345

An auditor prepares an unmodified opinion on financial statements that are materially misstated due to fraud. Which of the following is true?

Answer 345

The auditor will be considered to have met his or her responsibility provided the audit was planned and performed appropriately, including a specific assessment of the risk of material misstatement due to fraud.

Question 346

Which of the following is true?

Answer 346

If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk.

Question 347

Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets?

Answer 347

A large number of bearer bonds on hand.

Question 348

An auditor concludes that client management has been involved in noncompliance with a certain law and that this fact has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the:

Answer 348

Client refuses to accept the auditor's report as modified for the noncompliance.

Question 349

An auditor who discovers that client employees have committed an act of noncompliance with laws and regulations that has a material effect on the client's financial statements most likely would withdraw from the engagement if:

Answer 349

The client does not take the remedial action that the auditor considers necessary.

Question 350

Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?

Answer 350

Reviewing an internal control questionnaire.

Question 351

Which of the following information that comes to an auditor's attention most likely would raise a question about the occurrence of noncompliance with laws and regulations?

Answer 351

The discovery of unexplained payments made to government employees.

Question 352

The audit plan usually cannot be finalized until the:

Answer 352

Consideration of the entity's internal control has been completed.

Question 353

The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with:

Answer 353

Knowledge necessary for risk assessment and audit planning.

Question 354

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

Answer 354

Comparing the financial statements to anticipated results.

Question 355

Analytical procedures used in planning an audit should focus on:

Answer 355

Enhancing the auditor's understanding of the client's business.

Question 356

The objective of performing analytical procedures in planning an audit is to identify the existence of:

Answer 356

Unusual transactions and events.

Question 357

Analytical procedures used in planning an audit should focus on:

Answer 357

Evaluating the adequacy of evidence gathered concerning unusual balances.

Question 358

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Answer 358

Comparing the current-year account balances for conformity with predictable patterns.

Question 359

Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?

Answer 359

Compare recorded financial information with anticipated results from budgets and forecasts.

Question 360

When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?

Answer 360

Unaudited information from internal quarterly reports.

Question 361

Analytical procedures used in the planning phase of an audit should focus on:

Answer 361

Enhancing the auditor's understanding of the transactions and events that have occurred since the last audit.

Question 362

Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?

Answer 362

Comparing current-year balances to budgeted balances.

Question 363

Of the following nonfinancial information, what would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?

Answer 363

Square footage of selling space.

Question 364

Under PCAOB standards, which one of the following would not be considered by the auditor when determining the procedures to perform to obtain an understanding of the nature of the company?

Answer 364

Become an investor of the company in order to get access to the same information that other investors would have.

Question 365

Which of the following analytical procedures most likely would be used during the planning stage of an audit?

Answer 365

Comparing current-year to prior-year sales volumes.

Question 366

Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?

Answer 366

Compare financial information with nonfinancial operating data.

Question 367

When the auditor's risk assessment is based on the effective operation of controls, the audit will most likely involve:

Answer 367

Identifying specific internal controls relevant to specific assertions.

Question 368

An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?

Answer 368

Document the auditor's understanding of internal controls.

Question 369

Which of the following procedures most likely would provide an auditor with evidence about whether an entity's internal control activities are suitably designed to prevent or detect material misstatements?

Answer 369

Observing the entity's personnel applying the activities.

Question 370

Management philosophy and operating style most likely would have a significant influence on an entity's control environment when:

Answer 370

Management is dominated by one individual.

Question 371

The overall attitude and awareness of those charged with governance (i.e., an entity's board of directors) concerning the importance of internal control usually is reflected in its:

Answer 371

Control environment.

Question 372

In an audit of financial statements, an auditor's primary consideration regarding internal control is whether the control:

Answer 372

Affects management's financial statement assertions.

Question 373

When obtaining an understanding of an entity's internal controls, an auditor should concentrate on the substance of the controls rather than their form because:

Answer 373

Management may establish appropriate procedures but not enforce compliance with them.

Question 374

When an auditor is to conduct an audit of a service organization, what considerations should the auditor make in the planning stages regarding internal controls of the organization?

Answer 374

The auditor should obtain an understanding of the effect of the user organization upon the service organization.

Question 375

Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:

Answer 375

Record and conceal fraudulent transactions in the normal course of assigned tasks.

Question 376

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Answer 376

A significant portion of management compensation is represented by stock options.

Question 377

Which of the following components (elements) of an entity's internal control includes the development of personnel manuals documenting employee promotion and training policies?

Answer 377

Control environment.

Question 378

Which of the following statements about internal control is correct?

Answer 378

The cost-benefit relationship is a primary criterion that should be considered in designing internal control.

Question 379

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 379

Substantive tests

Question 380

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the:

Answer 380

Risk that material misstatements exist in the financial statements.

Question 381

In obtaining an understanding of an entity's internal control, an auditor is required to obtain knowledge about the: Operating effectivness of controls Design of controls

Answer 381

Operating effectivness of controls = No Design of controls = Yes

Question 382

Internal control includes which of the following components: Control environment Monitoring Information & Communication systems Risk Assessment

Answer 382

Internal control includes which of the following components: = Yes Control environment = Yes Monitoring = Yes Information & Communication systems = Yes Risk Assessment = Yes

Question 383

The responsibility to establish, maintain and monitor internal controls is that of the entity's:

Answer 383

Management.

Question 384

``` Internal control is relevant to: I. An entire entity. II. An entity's operating units. III. An entity's business functions. ```

Answer 384

I, II, and III.

Question 385

Which of the following is necessary in a financial statement audit?

Answer 385

An understanding of internal control relevant to an entity's financial reporting objective.

Question 386

Which of the following controls is least likely to be relevant to a financial statement audit?

Answer 386

Procedures that prevent the excess use of materials in production.

Question 387

An auditor's primary consideration in evaluating controls is whether specific controls:

Answer 387

Affect financial statement assertions.

Question 388

If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:

Answer 388

The control has been implemented but is not operating effectively.

Question 389

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:

Answer 389

Review the entity's descriptions of inventory controls.

Question 390

Which of the following services performed by another entity would not be considered to be part of the client's information system?

Answer 390

Sale (specifically authorized by the client) of investment securities by an external broker.

Question 391

Which of the following is an inherent limitation in internal control?

Answer 391

Faulty human judgment.

Question 392

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:

Answer 392

Material misstatements may exist in the financial statements.

Question 393

Which of the following represents an inherent limitation of internal controls?

Answer 393

The CEO can request a check with no purchase order.

Question 394

Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk?

Answer 394

The suitability of the client's lines of reporting.

Question 395

An auditor is auditing a mutual fund company that uses a transfer agent to handle accounting for shareholders. Which of the following actions by the auditor would be most efficient for obtaining information about the transfer agent's internal controls?

Answer 395

Review reports on internal control placed in operation and its operating effectiveness produced by the agent's own auditor.

Question 396

Which of the following is an inherent limitation of internal controls?

Answer 396

Collusion.

Question 397

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:

Answer 397

Process used to prepare significant accounting estimates.

Question 398

In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the

Answer 398

Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

Question 399

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the:

Answer 399

Process used to prepare significant accounting estimates.

Question 400

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?

Answer 400

Client records documenting the use of EDP programs.

Question 401

Which of the following are considered control environment factors? Detection Risk Human Resource policis and practices

Answer 401

Detection Risk = No Human Resource policis and practices = Yes

Question 402

In planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to

Answer 402

Identify the types of potential misstatements that could occur.

Question 403

An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:

Answer 403

Provide a visual depiction of client's activities.

Question 404

Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls?

Answer 404

The degree to which information technology is used in the accounting function.

Question 405

Green, CPA, is auditing the financial statements of Ajax Co. Ajax uses the DP Service Center to process its payroll. DP's financial statements are audited by Blue, CPA, who recently issued a report on DP's policies and procedures regarding the processing of other entity's transactions. In considering whether Blue's report is satisfactory for Green's purposes, Green should:

Answer 405

Make inquiries concerning Blue's professional reputation.

Question 406

Which of the following procedures is considered a test of controls?

Answer 406

An auditor interviews and observes appropriate personnel to determine segregation of duties.

Question 407

An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor's concern?

Answer 407

Verifying that approved spending limits are not exceeded.

Question 408

In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement?

Answer 408

When transactions are high-volume and recurring.

Question 409

An auditor has identified the controller's review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation is properly prepared by the accountant and reviewed by the controller as evidenced by their respective sign-offs. Which of the following types of audit procedures do these actions illustrate?

Answer 409

Inquiry and inspection of records.

Question 410

Which of the following is not a component of internal control?

Answer 410

Inherent risk.

Question 411

Each of the following types of controls is considered to be an entity-level control, except those:

Answer 411

Regarding the company's annual stockholder meeting.

Question 412

When a service organization provides services that affect the initiation, execution, processing, or reporting of a user company's transactions, those services are:

Answer 412

Considered to be part of the user company's information system.

Question 413

An auditor determines that there is a high level of control risk surrounding the revenue cycle. Which situation is most likely to have given rise to this assessment?

Answer 413

The sales manager does not enforce the client's stated policies regarding authorization and approval of sales transactions.

Question 414

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

Answer 414

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

Question 415

Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:

Answer 415

Implemented.

Question 416

Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

Answer 416

Allowing for greater management oversight of incompatible activities.

Question 417

Which of the following statements is correct concerning an auditor's assessment of control risk?

Answer 417

Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.

Question 418

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

Answer 418

Tests of controls and limited tests of current year property and equipment transactions.

Question 419

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

Answer 419

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

Question 420

To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:

Answer 420

Inquiry.

Question 421

The objective of tests of details of transactions performed as tests of controls is to:

Answer 421

Evaluate whether internal controls operated effectively.

Question 422

Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?

Answer 422

Preparation of system flowcharts.

Question 423

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:

Answer 423

Perform tests of controls to support a lower level of assessed control risk.

Question 424

Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls?

Answer 424

The amount of time budgeted to complete the engagement.

Question 425

Which of the following statements about performing tests of controls to support a lower level of control risk is not true?

Answer 425

Inquiry alone generally will support a conclusion for a lower assessed level of control risk.

Question 426

To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:

Answer 426

Reperformance.

Question 427

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the control activities leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Answer 427

Observation and inquiry.

Question 428

After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:

Answer 428

It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.

Question 429

As part of understanding internal control, an auditor is not required to:

Answer 429

Obtain knowledge about the operating effectiveness of internal control.

Question 430

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?

Answer 430

Client records documenting the use of EDP programs.

Question 431

Which of the following statements concerning control risk is correct?

Answer 431

Assessing control risk and obtaining an understanding of an entity's internal control may be performed concurrently.

Question 432

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

Answer 432

Observation of client personnel.

Question 433

Which of the following is not part of obtaining an understanding of internal control?

Answer 433

Determining whether internal controls are operating effectively.

Question 434

Audit evidence concerning segregation of duties ordinarily is best obtained by:

Answer 434

Observing the employees as they apply control procedures.

Question 435

After testing a client's internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client's internal controls. Under these circumstances the auditor most likely would:

Answer 435

Increase the assessment of control risk and increase the extent of substantive tests.

Question 436

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

Answer 436

Internal controls during the remaining period are effective.

Question 437

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Answer 437

Perform only substantive tests on inventory.

Question 438

Which of the following could be difficult to determine because electronic evidence may not be retrievable after a specific period?

Answer 438

The timing of control and substantive tests.

Question 439

Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by:

Answer 439

Observing the employees who are performing the control activities.

Question 440

A client maintains a large data center where access is limited to authorized employees. How may an auditor best determine the effectiveness of this control activity?

Answer 440

Observe whether the data center is monitored.

Question 441

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

Answer 441

The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.

Question 442

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

Answer 442

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

Question 443

An auditor's risk assessment is based on the assumption that controls are operating effectively. Which of the following was not a step in making this assessment?

Answer 443

Perform tests of details of transactions to detect material misstatements in the financial statements

Question 444

When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?

Answer 444

Test the operating effectiveness of such controls in the current audit.

Question 445

Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?

Answer 445

Analytical procedures have revealed no unusual or unexpected results.

Question 446

Which of the following is always necessary in a financial statement audit? I. Tests of the operating effectiveness of controls. II. Analytical procedures. III. Risk assessment procedures.

Answer 446

II and III.

Question 447

An audit client sells 15 to 20 units of a product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

Answer 447

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

Question 448

Which of the following should an auditor do when control risk is assessed at the maximum level?

Answer 448

Document the assessment.

Question 449

Under which circumstance would an auditor be most likely to perform substantive tests before the balance sheet date?

Answer 449

The account in question has very little activity from year to year.

Question 450

Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?

Answer 450

Testing the operating effectiveness of the relevant controls would not be efficient.

Question 451

Which of the following items does not pertain to the control environment?

Answer 451

The accounting records.

Question 452

Which of the following factors are included in an entity's control environment? Participation of those charged with governance Management philosophy Organizational structure

Answer 452

Participation of those charged with governance = Yes Management philosophy = Yes Organizational structure =Yes

Question 453

Which of the following are considered control environment factors? Assignment of authority and responsibility Detection risk Integrity and ethical values

Answer 453

Assignment of authority and responsibility = Yes Detection risk = No Integrity and ethical values = Yes

Question 454

Which of the following circumstances would most likely cause an auditor to suspect that material misstatements arising from fraud exist in a client's financial statements?

Answer 454

Significantly fewer responses to confirmation requests are received than expected.

Question 455

Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?

Answer 455

The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

Question 456

Disclosure of fraud to parties other than a client's senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist? To the SEC when the client reports an auditor change To the successor audito when the successor makes appropriate inquiries To a government funding agency from which th client receives financial assistance

Answer 456

To the SEC when the client reports an auditor change = Yes To the successor audito when the successor makes appropriate inquiries =Yes To a government funding agency from which th client receives financial assistance = Yes

Question 457

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

Answer 457

Supporting records that should be readily available are frequently not produced when requested.

Question 458

The most likely explanation why the auditor's examination cannot reasonably be expected to bring all acts of noncompliance with laws and regulations by the client to the auditor's attention is that:

Answer 458

Acts of noncompliance with laws and regulations by clients often relate to operating aspects rather than accounting aspects.

Question 459

An auditor of a manufacturer would most likely question whether that client has committed acts of noncompliance with laws and regulations if the client has:

Answer 459

Been forced to discontinue operations in a foreign country.

Question 460

If specific information comes to an auditor's attention that implies the existence of possible acts of noncompliance with laws and regulations that could have a material, but indirect effect on the financial statements, the auditor should next:

Answer 460

Apply audit procedures specifically directed to ascertaining whether an act of noncompliance with laws and regulations has occurred.

Question 461

When an auditor becomes aware of a possible noncompliance with laws and regulations by a client, the auditor should obtain an understanding of the nature of the noncompliance to:

Answer 461

Evaluate the effect on the financial statements.

Question 462

The auditor should obtain sufficient knowledge of the client's information and communication system relevant to financial reporting to understand all of the following, except:

Answer 462

Control activities related to each account balance, transaction class, and disclosure component in the financial statements or to every assertion relevant to them.

Question 463

Which of the following information discovered during an audit most likely would raise a question concerning possible noncompliance with laws and regulations?

Answer 463

The entity prepared several large checks payable to cash during the year.

Question 464

Which of the following is not a control environment factor?

Answer 464

Proper segregation of duties.

Question 465

An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the:

Answer 465

Employees' actions affect the auditor's ability to rely on management's representations.

Question 466

Which of the following statements is true regarding the risk assessment component of internal control?

Answer 466

An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting.

Question 467

Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:

Answer 467

Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.

Question 468

Which of the following is not true with respect to the control activities of an entity?

Answer 468

Control activities are the policies and procedures that help ensure that the financial statements are fairly presented in conformity with generally accepted accounting principles.

Question 469

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

Answer 469

The difficulty in controlling the incremental audit risk.

Question 470

Which of the following statements best describes how a detailed audit plan of a CPA who is engaged to audit the financial statements of a large publicly held company compares with the audit client's comprehensive internal audit program?

Answer 470

The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.

Question 471

When assessing an internal auditor's objectivity, an independent auditor should:

Answer 471

Consider the organizational level to which the internal auditor reports.

Question 472

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:

Answer 472

Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.

Question 473

Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor's audit documentation relating to: Contingencies Balance sheet accounts

Answer 473

Contingencies = Yes Balance sheet accounts = Yes

Question 474

The understanding with a client of an auditor's contractual obligation ordinarily is set forth in the:

Answer 474

Engagement letter.

Question 475

An auditor should obtain knowledge of a client's information and communication system in order to understand each of the following, except

Answer 475

The means used by an entity to ensure that management directives are carried out.

Question 476

The monitoring component of internal control excludes:

Answer 476

Eliminating controls that are not operating effectively.

Question 477

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:

Answer 477

Influence the design of internal control.

Question 478

Dunn, CPA, is auditing the financial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers' payroll transactions. Dunn expects to consider the effects of Price's report on the Taft engagement. Price's report should contain a (an):

Answer 478

Description of the scope and nature of Price's procedures.

Question 479

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC's internal controls placed in operation as of a specific date. These controls are relevant to the retailer's internal control, so Cook's report may be useful in providing the retailer's independent auditor with information necessary to plan a financial statement audit. Cook's report should:

Answer 479

Contain a disclaimer of opinion on the operating effectiveness of PDC's controls.

Question 480

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC's internal controls placed in operation as of a specific date. These internal controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's Type I report expressing an opinion on CSC's internal controls placed in operation as of a specific date should contain:

Answer 480

Management's description of the service organization's system.

Question 481

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's: Engagement letter Audit documentation

Answer 481

Engagement letter = No Audit documentation = Yes

Question 482

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP's financial statements are audited by Cope, CPA, who recently issued a report on EDP's internal control structure. Lake is considering Cope's report on EDP's internal control structure in assessing control risk on the Gill engagement. What is Lake's responsibility concerning making reference to Cope as a basis, in part, for Lake's own opinion?

Answer 482

Lake may not refer to Cope under the circumstances above.

Question 483

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:

Answer 483

Extent of tests of details.

Question 484

An auditor is required to document the auditor's understanding of the: I. Entity's control activities that help ensure management directives are carried out. II. Entity's control environment factors that help the auditor plan the engagement.

Answer 484

Both I and II.

Question 485

Quick Service Center processes the payroll for a variety of clients, including James Industries. Adams, CPA, is Quick's auditor, while Robinson, CPA, is the auditor for James Industries. Which of the following is not required of Adams?

Answer 485

Making inquiries regarding the professional reputation of Robinson, CPA.

Question 486

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?

Answer 486

Establishing budgets and forecasts to identify variances from expectations.

Question 487

In obtaining an understanding of a manufacturing entity's internal control concerning inventory balances, an auditor most likely would:

Answer 487

Review the entity's descriptions of controls over inventory.

Question 488

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both:

Answer 488

Perpetrate and conceal errors and fraud

Question 489

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:

Answer 489

Material misstatements may exist in the financial statements.

Question 490

An auditor's flowchart of a client's information system relevant to financial reporting is a diagrammatic representation that depicts the auditor's:

Answer 490

Understanding of the system.

Question 491

Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:

Answer 491

Management is dominated by one individual who is also a shareholder.

Question 492

In planning the audit, the auditor obtains a sufficient understanding of the existing internal control. Which one of the following is not among the auditor's primary objectives for obtaining such knowledge?

Answer 492

Make constructive suggestions to the client for improvement.

Question 493

An auditor would most likely be concerned with internal controls that provide reasonable assurance about the:

Answer 493

Entity's ability to process and summarize financial data.

Question 494

An auditor's primary consideration regarding an entity's internal control is whether the controls:

Answer 494

Affect the financial statement assertions.

Question 495

Which of the following statements about internal control is correct?

Answer 495

Internal control is relevant to the entire entity, or to any of its operating units or business functions.

Question 496

Objectives of an entity include: Information and communication systems Reliale financial reportng Effective and efficient operations

Answer 496

Information and communication systems = No Reliale financial reportng = Yes Effective and efficient operations = Yes

Question 497

Internal control over safeguarding of assets may include controls relating to: Financial reporting objectives Operations objectives Compliance objectives

Answer 497

Financial reporting objectives = Yes Operations objectives = Yes Compliance objectives = No

Question 498

Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?

Answer 498

Human judgment in the decision making process.

Question 499

In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to:

Answer 499

Document the auditor's understanding of the entity's internal control.

Question 500

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:

Answer 500

Reperformance and observation.

Question 501

An auditor wishes to perform tests of controls on a client's cash disbursements procedures. If the controls leave no audit trail of documentary evidence, the auditor most likely will test the procedures by:

Answer 501

Observation and inquiry.

Question 502

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of internal control?

Answer 502

Observation of client personnel.

Question 503

Audit evidence concerning proper segregation of duties ordinarily is best obtained by:

Answer 503

Direct personal observation of the employees who apply control activities.

Question 504

An auditor may decide not to test controls related to certain assertions because the auditor believes:

Answer 504

Evaluating the effectiveness of controls is inefficient.

Question 505

For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the controls by:

Answer 505

Observation and inquiry.

Question 506

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 506

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

Question 507

An auditor generally tests the segregation of duties related to inventory by:

Answer 507

Personal inquiry and observation.

Question 508

An auditor's engagement letter most likely would include:

Answer 508

Management's acknowledgment of its responsibility for maintaining effective internal control.

Question 509

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

Answer 509

The integrity of the entity's management is suspect.

Question 510

Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?

Answer 510

The adequacy of the accounting records.

Question 511

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:

Answer 511

Understanding as to the reasons for the change of auditors.

Question 512

Which of the following factors most likely would cause an auditor not to accept a new audit engagement?

Answer 512

Concluding that the entity's management probably lacks integrity.

Question 513

Before accepting an engagement to audit a new client, an auditor is required to

Answer 513

Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

Question 514

A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential." The above passage is most likely from a(an):

Answer 514

Engagement letter.

Question 515

In assessing the objectivity of internal auditors, an independent auditor should:

Answer 515

Determine the organizational level to which the internal auditors report.

Question 516

An auditor should design the written audit plan so that

Answer 516

The audit procedures selected will achieve specific audit objectives.

Question 517

Which of the following statements is correct concerning an auditor's use of the work of a specialist?

Answer 517

The work of a specialist who is related to the client may be acceptable under certain circumstances.

Question 518

When assessing the internal auditors' competence, the independent CPA should obtain information about the:

Answer 518

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

Question 519

In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:

Answer 519

Auditor, as a result of the specialist's findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.

Question 520

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor:

Answer 520

Should assess the risk that the actuary's objectivity might be impaired.

Question 521

When assessing the competence of the internal auditors, an independent CPA should obtain information about the:

Answer 521

Quality of the internal auditors' working paper documentation.

Question 522

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if:

Answer 522

Management fails to take the appropriate remedial action.

Question 523

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

Answer 523

Management places substantial emphasis on meeting earnings projections.

Question 524

Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements?

Answer 524

Transactions selected for testing are not supported by proper documentation.

Question 525

Which of the following is a true statement regarding documentation requirements for analytical procedures?

Answer 525

When an analytical procedure is used as the principal substantive test of a significant financial statement assertion, the auditor is required to document both the auditor's expectation and the factors considered in developing that expectation.

Question 526

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

Answer 526

The current year's payroll expense with the prior year's payroll expense.

Question 527

An auditor may achieve audit objectives related to particular assertions by:

Answer 527

Performing analytical procedures.

Question 528

An auditor's analytical procedures most likely would be facilitated if the entity:

Answer 528

Uses a standard cost system that produces variance reports.

Question 529

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial statement assertion of:

Answer 529

Valuation and allocation.

Question 530

Which of the following would not be considered an analytical procedure?

Answer 530

Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.

Question 531

Which of the following types of audit evidence generally is the most reliable?

Answer 531

Confirmation of account information.

Question 532

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Answer 532

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

Question 533

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?

Answer 533

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

Question 534

Which of the following procedures would yield the most reliable evidence?

Answer 534

A recalculation of bad debt expense.

Question 535

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

Answer 535

Examination of evidence.

Question 536

Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?

Answer 536

Whether the data were developed under a system with adequate controls.

Question 537

An auditor's decision whether to apply analytical procedures as substantive tests usually is determined by the:

Answer 537

Precision and reliability of the data used to develop expectations.

Question 538

Auditors try to identify predictable relationships when applying analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Answer 538

Interest expense.

Question 539

Which of the following documents are examples of audit evidence generated by the client?

Answer 539

Shipping documents and receiving reports.

Question 540

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Answer 540

Interest expense.

Question 541

In determining whether transactions have been recorded, the direction of the audit testing should be from the:

Answer 541

Original source documents.

Question 542

Which of the following pairs of accounts would be analyzed together in the audit documentation?

Answer 542

Notes receivable and interest income.

Question 543

The objective of tests of details of transactions performed as substantive tests is to:

Answer 543

Detect material misstatements in the financial statements.

Question 544

Which of the following types of audit evidence is the most persuasive?

Answer 544

Bank statements obtained from the client.

Question 545

Analytical procedures are most appropriate when testing which of the following types of transactions?

Answer 545

Operating expense transactions.

Question 546

Which of the following procedures would an auditor most likely perform when auditing the statement of cash flows?

Answer 546

Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

Question 547

At the conclusion of an audit, an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take?

Answer 547

Obtain additional evidence regarding the valuation of inventory.

Question 548

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

Answer 548

Identifying reasonable explanations for unexpected differences before talking to client management.

Question 549

Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements?

Answer 549

The results of an analytical procedure disclose unexpected differences.

Question 550

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?

Answer 550

Reconcile the amounts included in the statement of cash flows to the other financial statements' balances and amounts.

Question 551

PCAOB standards state that the relevance of audit evidences depends on all but which of the following?

Answer 551

The auditor's risk assessment.

Question 552

Which of the following best explains why an analytical procedure might be used as a substantive test?

Answer 552

To achieve audit objectives in the most effective and efficient manner possible.

Question 553

An auditor suspects that a client is fraudulently overstating revenue by recording fictitious sales. Which of the following audit procedures would most likely be used to identify this situation?

Answer 553

Select a sample of sales invoices and trace to the related shipping documents.

Question 554

Which of the following would provide an auditor with the most reliable evidence regarding the existence of accounts receivable?

Answer 554

An accounts receivable confirmation received by the auditor from the client's customer.

Question 555

Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?

Answer 555

Comparing the current year's financial statements with those of the prior year.

Question 556

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?

Answer 556

Investigate changes in capital stock recorded after year end.

Question 557

What type of evidence would provide the highest level of assurance in an attestation engagement?

Answer 557

Evidence obtained from independent sources.

Question 558

Which of the following would not be considered an analytical procedure?

Answer 558

Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.

Question 559

An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of:

Answer 559

Valuation and allocation.

Question 560

n auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of: Understand-ability and classification Rights and obligations

Answer 560

Understand-ability and classification = No Rights and obligations = Yes

Question 561

On receiving a client's bank cutoff statement, an auditor most likely would trace:

Answer 561

Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.

Question 562

Which of the following characteristics most likely would be indicative of check kiting?

Answer 562

Low average balance compared to high level of deposits.

Question 563

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Answer 563

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

Question 564

In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:

Answer 564

Is responsible for mailing the checks.

Question 565

Which of the following sets of information does an auditor usually confirm on one form?

Answer 565

Cash in bank and collateral for loans.

Question 566

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:

Answer 566

Be unaware of all the financial relationships that the bank has with the client.

Question 567

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

Answer 567

Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.

Question 568

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to:

Answer 568

Determine that purchases were properly recorded.

Question 569

Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:

Answer 569

Prepare a duplicate listing of checks received.

Question 570

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:

Answer 570

Stamped "paid" by the check signer.

Question 571

Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?

Answer 571

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Question 572

Which of the following internal control activities is not usually performed in the vouchers payable department?

Answer 572

Accounting for unused prenumbered purchase orders and receiving reports.

Question 573

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

Answer 573

Examine shipping documents for matching sales invoices.

Question 574

Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

Answer 574

Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Question 575

Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also:

Answer 575

Recompute the calculations on vendors' invoices.

Question 576

The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whether:

Answer 576

The information is presented in conformity with the GAAP rules on segment information.

Question 577

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

Answer 577

Shipping document file.

Question 578

Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?

Answer 578

The chief financial officer waived approvals on all checks to one vendor to expedite payment.

Question 579

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Answer 579

Collection of receivables.

Question 580

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:

Answer 580

Sales billed to customers were actually shipped.

Question 581

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Answer 581

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

Question 582

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of: Understand ability and classification Existence

Answer 582

Understand ability and classification = No Existence = Yes

Question 583

In the Bank Transfer Schedule below, which of the following cash transfers results in a misstatement of cash at December 31, 20X1?

Answer 583

Disbursement date per books 01/04/X2 Disbursement date per bank 01/05/X2 Receipt date per books 12/31/X1 Receipt date per bank 01/04/X2

Question 584

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of: Rights and obligations Allocation and valuation

Answer 584

Rights and obligations = No Allocation and valuation = Yes

Question 585

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:

Answer 585

An invoice is prepared for each shipping document.

Question 586

Which of the following describes a weakness in accounts payable procedures?

Answer 586

The accounts payable manager issues purchase orders.

Question 587

Which of the following situations most likely could lead to an embezzlement scheme?

Answer 587

Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.

Question 588

An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the:

Answer 588

Shipping document file.

Question 589

Which of the following procedures would best detect a liability omission by management?

Answer 589

Review purchase contracts and other legal documents.

Question 590

Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales?

Answer 590

Sales orders are sent to the credit department for approval.

Question 591

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

Answer 591

Cash receipts and accounts receivable.

Question 592

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Answer 592

Allowance for doubtful accounts.

Question 593

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?

Answer 593

The form was mailed by the controller.

Question 594

To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is:

Answer 594

Stamped "paid" by the check signer.

Question 595

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the:

Answer 595

Shipping documents to the sales invoices.

Question 596

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

Answer 596

Identify potential liabilities for unpaid payroll taxes.

Question 597

In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet?

Answer 597

An acknowledgment by a client representative that the securities were returned intact.

Question 598

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

Answer 598

Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.

Question 599

When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:

Answer 599

Tests of controls and limited tests of current year property and equipment transactions.

Question 600

In determining the effectiveness of an entity's internal controls relating to the occurrence assertion for payroll transactions, an auditor most likely would inquire about and:

Answer 600

Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Question 601

A weakness in internal control over recording retirements of equipment may cause an auditor to:

Answer 601

Select certain items of equipment from the accounting records and locate them in the plant.

Question 602

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

Answer 602

Plant assets were retired during the year.

Question 603

Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?

Answer 603

There are significant unexplained variances between standard and actual labor cost.

Question 604

An auditor generally tests the segregation of duties related to inventory by:

Answer 604

Personal inquiry and observation.

Question 605

Tests designed to detect purchases made before the end of the year that have been recorded in the subsequent year most likely would provide assurance about management's assertion regarding:

Answer 605

Cutoff.

Question 606

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would:

Answer 606

Ask the client to contact the customers to request that the confirmations be returned.

Question 607

While observing a client's annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quantities in the client's perpetual records. This situation could be the result of the client's failure to record:

Answer 607

Sales returns.

Question 608

When control risk is assessed as low for assertions related to payroll, substantive tests of payroll balances most likely would be limited to applying analytical procedures and:

Answer 608

Recalculating payroll accruals.

Question 609

Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?

Answer 609

Are procedures in place to monitor and properly restrict access to equipment?

Question 610

In establishing the existence and ownership of a long-term investment in the form of publicly-traded stock, an auditor should inspect the securities or:

Answer 610

Confirm the number of shares owned that are held by an independent custodian.

Question 611

Determining that proper amounts of depreciation are expensed provides assurance about management's assertion of:

Answer 611

Valuation, allocation, and accuracy.

Question 612

In auditing accounts receivable the negative form of confirmation request most likely would be used when:

Answer 612

The combined assessed level of inherent and control risk relative to accounts receivable is low.

Question 613

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be:

Answer 613

Vendors with whom the entity has previously done business.

Question 614

In auditing long-term bonds payable, an auditor most likely would:

Answer 614

Compare interest expense with the bond payable amount for reasonableness.

Question 615

In performing tests concerning the granting of stock options, an auditor should:

Answer 615

Trace the authorization for the transaction to a vote of the board of directors.

Question 616

Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead?

Answer 616

Use of time tickets to record actual labor worked on production orders.

Question 617

When an entity uses a trust company as custodian of its marketable securities, the possibility of concealing fraud most likely would be reduced if the:

Answer 617

Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.

Question 618

An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of:

Answer 618

Understandability and classification, and valuation and accuracy.

Question 619

Which of the following procedures represents a weakness in internal controls for payroll?

Answer 619

The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.

Question 620

In auditing a manufacturing entity, which of the following procedures would an auditor least likely perform to determine whether slow-moving, defective, and obsolete items included in inventory are properly identified?

Answer 620

Test the computation of standard overhead rates.

Question 621

When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:

Answer 621

Number of shares issued and outstanding.

Question 622

When a client engages in transactions involving derivatives, the auditor should:

Answer 622

Develop an understanding of the economic substance of each derivative.

Question 623

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to:

Answer 623

Records produced by investment services.

Question 624

An auditor's inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should:

Answer 624

Examine the contracts for possible risk exposure and the need to recognize losses.

Question 625

An auditor's principal objective in analyzing repairs and maintenance expense accounts is to:

Answer 625

Discover expenditures that were expensed but should have been capitalized.

Question 626

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Answer 626

Repairs and maintenance.

Question 627

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable?

Answer 627

Include a list of items or invoices that constitute the customers' account balances.

Question 628

In establishing the existence and ownership of long-term investments in the form of publicly-traded stock, an auditor most likely would inspect the securities or:

Answer 628

Confirm the number of shares owned that are held by an independent custodian.

Question 629

An auditor is testing the reasonableness of dividend income from investments in publicly-held companies. The auditor most likely would compute the amount that should have been received and recorded by the client by:

Answer 629

Electronically accessing the details of dividend records on the Internet.

Question 630

In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning:

Answer 630

Control and distribution of unclaimed checks.

Question 631

The blank form of accounts receivable confirmations may be less efficient than the positive form because:

Answer 631

More nonresponses to the requests are likely to occur.

Question 632

A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test?

Answer 632

Reasonableness test.

Question 633

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Answer 633

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

Question 634

Which of the following procedures would an auditor least likely perform before the balance sheet date?

Answer 634

Confirmation of accounts payable.

Question 635

The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:

Answer 635

Observe physical counts of the inventory items.

Question 636

As part of the process of observing a client's physical inventories, an auditor should be alert to:

Answer 636

The inclusion of any obsolete or damaged goods.

Question 637

The auditor's inventory observation test counts are traced to the client's inventory listing to test for which of the following financial statement assertions?

Answer 637

Completeness.

Question 638

An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because:

Answer 638

More nonresponses are likely to occur.

Question 639

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:

Answer 639

Employees work the number of hours for which they are paid.

Question 640

To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace:

Answer 640

Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets.

Question 641

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all:

Answer 641

Cash disbursements

Question 642

In performing a search for unrecorded retirements of fixed assets, an auditor most likely would:

Answer 642

Inspect the property ledger and the insurance and tax records, and then tour the client's facilities.

Question 643

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the:

Answer 643

Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Question 644

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the:

Answer 644

Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Question 645

Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?

Answer 645

Require employees to have their direct supervisors approve their time cards.

Question 646

An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:

Answer 646

An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.

Question 647

Under which of the following conditions may an auditor's observation procedure for inventory be performed during or after the end of the period under audit?

Answer 647

When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.

Question 648

Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?

Answer 648

Performing cutoff procedures for shipping and receiving.

Question 649

Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?

Answer 649

Approving a summary of hours each employee worked during the pay period.

Question 650

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should an auditor take?

Answer 650

Accept the confirmation but verify the source and content through a telephone call to the respondent.

Question 651

Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?

Answer 651

Examining vendor statements for amounts not reported as purchases.

Question 652

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management's assertions about:

Answer 652

Valuation and allocation.

Question 653

During an audit of an entity's stockholders' equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify management's assertions related to:

Answer 653

Classification and understandability.

Question 654

An insignificant portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Answer 654

Confirmation

Question 655

The purpose of tracing a sample of inventory tags to a client's computerized listing of inventory items is to determine whether the inventory items:

Answer 655

Represented by tags were included on the listing.

Question 656

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations:

Answer 656

Client-prepared statements of account that show the details of the account balances.

Question 657

Who should be responsible for preparing a purchase order, matching the receiving report and invoice with the purchase order, and paying for the related purchase?

Answer 657

The purchasing department is responsible for preparing the purchase order, the accounts payable department is responsible for matching documents, and the treasurer is responsible for making payment.

Question 658

Which is true about the auditor's observation of physical inventory counts? I. It can provide evidence supporting the existence assertion. II. It can provide evidence supporting the completeness assertion.

Answer 658

Both I and II.

Question 659

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

Answer 659

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

Question 660

Which audit procedure is most likely related to the classification and understandability of the financial statements with respect to inventory?

Answer 660

Confirming inventories pledged under loan agreements.

Question 661

Generally accepted auditing procedures have not been followed in which of the following situations?

Answer 661

The auditor receives several faxed and emailed confirmation responses indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses.

Question 662

An auditor is required to confirm accounts receivable if the accounts receivable balances are:

Answer 662

Material to the financial statements.

Question 663

Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?

Answer 663

The check signer reviews and cancels the voucher packets.

Question 664

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

Answer 664

Individual invoices.

Question 665

A company employs three accounts payable clerks and one treasurer. Their responsibilities are as follows: Employee Responsibility Clerk 1 Reviews vendor invoices for proper signature approval. Clerk 2 Enters vendor invoices into the accounting system and verifies payment terms. Clerk 3 Posts entered vendor invoices to the accounts payable ledger for payment and mails checks. Treasurer Reviews the vendor invoices and signs each check. Which of the following would indicate a weakness in the company's internal control?

Answer 665

Clerk 3 mails the checks and remittances after they have been signed.

Question 666

Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?

Answer 666

Inventory is complete.

Question 667

Which of the following best describes the auditor's responsibility with respect to fair values?

Answer 667

The auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP.

Question 668

Which of the following would an auditor least likely consider with respect to fair values?

Answer 668

The effect on fair value measurement and disclosures of information available subsequent to the audit.

Question 669

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Answer 669

Review the lawyer's letter for information about litigation.

Question 670

In evaluating the reasonableness of an entity's accounting estimates, an auditor normally would be concerned about assumptions that are:

Answer 670

Susceptible to bias.

Question 671

The refusal of a client's attorney to provide information requested in an inquiry letter generally is considered:

Answer 671

A limitation on the scope of the audit.

Question 672

A client's lawyer is unable to form a conclusion about the likelihood of an unfavorable outcome of pending litigation because of inherent uncertainties. If the litigation's effect on the client's financial statements could be material but it is properly disclosed in the financial statements, the auditor most likely would:

Answer 672

Issue an unmodified opinion.

Question 673

When auditing related party transactions, an auditor places primary emphasis on:

Answer 673

Evaluating the disclosure of the related party transactions.

Question 674

Which of the following procedures would an auditor ordinarily perform first in evaluating management's accounting estimates for reasonableness?

Answer 674

Obtain an understanding of how management developed its estimates.

Question 675

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:

Answer 675

Deviations from historical patterns.

Question 676

The primary reason an auditor requests letters of inquiry be sent to a client's attorneys is to provide the auditor with:

Answer 676

Corroboration of the information furnished by management about litigation, claims, and assessments.

Question 677

After determining that a related party transaction has, in fact, occurred, an auditor should:

Answer 677

Obtain an understanding of the business purpose of the transaction.

Question 678

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Answer 678

Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.

Question 679

Which of the following factors most likely would cause a CPA not to accept a new audit engagement?

Answer 679

The prospective client's unwillingness to permit inquiry of its legal counsel.

Question 680

Which of the following procedures most likely could assist an auditor in identifying related party transactions?

Answer 680

Reviewing confirmations of compensating balance arrangements.

Question 681

"In connection with an audit of our financial statements, management has prepared, and furnished to our auditors a description and evaluation of certain contingencies." The foregoing passage most likely is from a(an):

Answer 681

Audit inquiry letter to legal counsel.

Question 682

Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management's accounting estimates?

Answer 682

Obtain an understanding of how management developed its estimates.

Question 683

Which of the following parties should request inquiry of a client's lawyer?

Answer 683

Client management.

Question 684

If a client will not permit inquiry of outside legal counsel, the auditor's report ordinarily will contain a(an):

Answer 684

Disclaimer of opinion.

Question 685

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

Answer 685

"I believe that the plaintiff will have problems establishing any liability."

Question 686

Which of the following events most likely would indicate the existence of related parties?

Answer 686

Selling real estate at a price significantly different from appraised value.

Question 687

Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?

Answer 687

Read the file of correspondence from taxing authorities.

Question 688

Which of the following events least likely would indicate the existence of related party transactions?

Answer 688

Writing off obsolete inventory to net realizable value just before year end.

Question 689

Which of the following procedures would an auditor most likely perform regarding litigation?

Answer 689

Discuss with management its policies and procedures for identifying and evaluating litigation.

Question 690

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in the attorney's response to the auditor's letter of inquiry?

Answer 690

An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.

Question 691

An auditor requests a client to send letters of audit inquiry to attorneys who have been consulted concerning litigation, claims, and assessments. The primary reason for this request is to obtain:

Answer 691

Corroboration of the information furnished by management concerning litigation, claims, and assessments.

Question 692

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?

Answer 692

Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.

Question 693

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

Answer 693

Reviewing confirmations of loans receivable and payable for indications of guarantees.

Question 694

Which of the following is an audit procedure that an auditor would most likely perform concerning litigation, claims, and assessments?

Answer 694

Discuss with management the controls adopted for evaluating and accounting for litigation, claims, and assessments.

Question 695

Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies?

Answer 695

Obtaining a letter of audit inquiry from the client's lawyer.

Question 696

Which of the following steps should an auditor perform first to determine the existence of related parties?

Answer 696

Request a list of related parties from management.

Question 697

Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

Answer 697

"We believe that the action can be settled for less than the damages claimed."

Question 698

In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?

Answer 698

Read the minutes of the board of directors' meetings.

Question 699

An auditor becomes aware that a client has been threatened with litigation. The auditor would likely send an audit inquiry letter to the client's attorney regarding all of the following, except:

Answer 699

The appropriateness of management's financial statement disclosure.

Question 700

Which of the following is not a procedure the auditor would use in evaluating the reasonableness of an accounting estimate?

Answer 700

Confirm via the management representation letter that management has disclosed all significant estimates.

Question 701

In auditing related party transactions, an auditor ordinarily places primary emphasis on:

Answer 701

The adequacy of the disclosure of the related party transactions.

Question 702

Which of the following is true about the term "likely misstatement?"

Answer 702

It refers to misstatements that have not been specifically identified, but which are likely to exist based on the auditor's judgment.

Question 703

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity's financial statements?

Answer 703

Significant differences between the physical inventory count and the accounting records are not investigated.

Question 704

To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by:

Answer 704

A manager or partner who has a comprehensive knowledge of the client's business and industry.

Question 705

Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:

Answer 705

Additional tests of details are required.

Question 706

Analytical procedures used in the overall review stage of an audit generally include:

Answer 706

Considering unusual or unexpected account balances that were not previously identified.

Question 707

Which of the following ratios would an engagement partner most likely calculate when reviewing the balance sheet in the overall review stage of an audit?

Answer 707

Total debt/total assets.

Question 708

Analytical procedures performed in the final review stage of an audit generally would include:

Answer 708

Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.

Question 709

An auditor most likely would apply analytical procedures in the overall review stage of an audit to:

Answer 709

Determine whether additional audit evidence may be needed.

Question 710

Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit?

Answer 710

Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.

Question 711

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor?

Answer 711

The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.

Question 712

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

Answer 712

Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

Question 713

If not already performed during the overall review stage of the audit, the auditor should perform analytical procedures relating to which of the following transaction cycles?

Answer 713

Revenue.

Question 714

According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement?

Answer 714

The dollar amount of the error.

Question 715

According to PCAOB standards, which of the following does not represent an example of management bias?

Answer 715

Management reporting all insurance purchases initially as an expense and then adjusting the unexpired portion into prepaid insurance at the end of the period.

Question 716

Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements?

Answer 716

Differences between reconciliations of control accounts and subsidiary records are not investigated.

Question 717

A primary objective of analytical procedures used in the final review stage of an audit is to:

Answer 717

Assist the auditor in evaluating the overall financial statement presentation.

Question 718

To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:

Answer 718

Cost of goods sold.

Question 719

What effect would the sale of a company's trading securities at their carrying amounts for cash have on each of the following ratios? Current ratio Quick ratio

Answer 719

Current ratio = No effect Quick ratio = No effect

Question 720

``` The following data pertain to Cowl, Inc., for the year ended December 31, Year 4: Net sales $600,000 Net income 150,000 Total assets, January 1, Year 4 2,000,000 Total assets, December 31, Year 4 3,000,000 What was Cowl's rate of return on assets for Year 4? ```

Answer 720

6% $150,000 / [($2,000,000 + $3,000,000) / 2] or [$150,000 / $2,500,000] = 6% rate of return.

Question 721

``` Selected data pertaining to Lore Co. for the calendar Year 4 is as follows: Net cash sales $3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 The accounts receivable turnover for Year 4 was 5.0 times. What were Lore's Year 4 net credit sales? ```

Answer 721

$105,000 The accounts receivable turnover ratio equals net credit sales divided by average accounts receivable. 5.0 = net credit sales / [($20,000 + $22,000) / 2]. Net credit sales equal $105,000.

Question 722

``` Selected data pertaining to Lore Co. for the calendar Year 4 is as follows: Net cash sales $3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 What was the inventory turnover for Year 4? ```

Answer 722

2.0 times. Inventory turnover equals cost of goods sold divided by average inventory. Beginning inventory ($6,000) plus purchases ($24,000) less ending inventory equals cost of goods sold ($18,000). Thus, ending inventory equals $12,000 and inventory turnover = $18,000 / [($6,000 + $12,000) / 2] = 2.0.

Question 723

``` Selected data pertaining to Lore Co. for the calendar Year 4 is as follows: Net cash sales $3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at end of year 22,000 Lore would use which of the following to determine the average days sales in inventory? ``` Numerator? Denominator?

Answer 723

Numerator = 365 Denominator = Inventory turnover

Question 724

In analyzing a company's financial statements, which financial statement would a potential investor primarily use to assess the company's liquidity and financial flexibility?

Answer 724

Balance sheet.

Question 725

At December 30, Year 3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of .5:1. On December 31, Year 3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios?

Answer 725

Current ratio = Increased Quick ratio = Decreased The current ratio equals current assets divided by current liabilities. Since the current assets exceed the current liabilities (as evidenced by a current ratio of 1.5:1), when each is decreased by the same amount, there will be a greater percentage reduction of the current liabilities. Thus, the ratio will increase since the current assets are now proportionately larger than the current liabilities. The quick ratio equals quick assets (including cash) divided by current liabilities. Since the quick assets are less than the current liabilities (as evidenced by a quick ratio of 0.5:1), when each is decreased by the same amount, the percentage decrease of the quick assets will be greater than that of the current liabilities. Thus, the ratio will decrease since the quick assets are now proportionately smaller than the current liabilities.

Question 726

At December 31, Year 2, Curry Co. had the following balances in selected asset accounts: Year 2 Increase over Year 1 Cash $ 300 $ 100 Accounts receivable, net 1,200 400 Inventory 500 200 Prepaid expenses 100 40 Other assets 400 150 Total assets $ 2,500 $ 890 Curry also had current liabilities of $1,000 at December 31, Year 2, and net credit sales of $7,200 for the year then ended. What is Curry's acid-test ratio at December 31, Year 2?

Answer 726

1.5 The acid-test ratio is calculated by taking the current assets excluding inventory and prepaid expenses and dividing by current liabilities. In this case, cash and accounts receivable ($300 + $1,200 = $1,500) are divided by current liabilities ($1,000), resulting in a ratio of $1,500 / $1,000, or 1.5.

Question 727

At December 31, Year 2, Curry Co. had the following balances in selected asset accounts: Year 2 Increase over Year 1 Cash $ 300 $ 100 Accounts receivable, net 1,200 400 Inventory 500 200 Prepaid expenses 100 40 Other assets 400 150 Total assets $ 2,500 $ 890 Curry also had current liabilities of $1,000 at December 31, Year 2, and net credit sales of $7,200 for the year then ended. What was the average number of days to collect Curry's accounts receivable during Year 2?

Answer 727

50.7 The average number of days to collect accounts receivable is calculated by dividing 365 days by the accounts receivable turnover. Accounts receivable turnover is net credit sales divided by the average accounts receivable: Average A/R = (beginning A/R + ending A/R) ÷ 2 = ($1,200 + $800) ÷ 2 = $1,000 A/R turnover = $7,200 ÷ $1,000 = 7.2 Average number of days in A/R = 365 days ÷ 7.2 = 50.7 days.

Question 728

In a comparison of 20X2 to 20X1, Neir Co.'s inventory turnover ratio increased substantially although sales and inventory amounts were essentially unchanged. Which of the following statements explains the increased inventory turnover ratio?

Answer 728

Gross profit percentage decreased.

Question 729

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that:

Answer 729

The company is more aggressively collecting customer accounts.

Question 730

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Answer 730

There was an improper cutoff of sales at the end of the year.

Question 731

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

Answer 731

Cost of goods sold/average inventory.

Question 732

The third standard of fieldwork states that the auditor must obtain sufficient appropriate audit evidence by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The appropriate audit evidence required by this standard may be obtained, in part, through:

Answer 732

Analytical procedures.

Question 733

In testing the existence assertion for an asset, an auditor ordinarily works from the:

Answer 733

Accounting records to the supporting evidence.

Question 734

Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?

Answer 734

Payroll expense.

Question 735

Which of the following statements concerning audit evidence is correct?

Answer 735

A client's accounting data cannot be considered sufficient audit evidence to support the financial statements.

Question 736

An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about:

Answer 736

Understandability and classification.

Question 737

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion regarding:

Answer 737

Cutoff.

Question 738

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management's assertion of:

Answer 738

Valuation.

Question 739

Which of the following statements is generally correct about the reliability of audit evidence?

Answer 739

The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.

Question 740

Which of the following audit procedures probably would provide the most reliable evidence concerning the entity's assertion of rights and obligations related to inventories?

Answer 740

Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.

Question 741

Which of the following procedures would an auditor most likely perform to verify management's assertion of completeness?

Answer 741

Compare a sample of shipping documents to related sales invoices.

Question 742

Which of the following procedures would provide the most reliable audit evidence?

Answer 742

Inspection of bank statements obtained directly from the client's financial institution.

Question 743

In assessing control risk for purchases, an auditor vouches a sample of entries in the voucher register to the supporting documents. Which assertion would this test of controls most likely support?

Answer 743

Occurrence.

Question 744

In a credit sales and cash receipts system flowchart symbol X could represent:

Answer 744

Remittance advices.

Question 745

Which of the following statements concerning audit evidence is correct?

Answer 745

The measure of the sufficiency of audit evidence lies in the auditor's judgment.

Question 746

Which of the following presumptions does not relate to the reliability of audit evidence?

Answer 746

An auditor's opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

Question 747

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusion most likely related to the auditor's objective to obtain evidence about the financial statement assertions regarding inventory, including understandability and classification, and:

Answer 747

Valuation and allocation.

Question 748

An auditor selected items for test counts while observing a client's physical inventory. The auditor then traced the test counts to the client's inventory listing. This procedure most likely obtained evidence concerning management's assertion of:

Answer 748

Completeness.

Question 749

In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of:

Answer 749

Existence.

Question 750

Which of the following evidence provides the greatest assurance of reliability?

Answer 750

Bank statement.

Question 751

Which of the following evidence provides the least assurance of reliability?

Answer 751

Sales invoice.

Question 752

Which of the following is not true about accounting estimates?

Answer 752

Accounting estimates measure the effects of past transactions or events that cannot be determined in a timely cost-effective manner.

Question 753

In evaluating an entity's accounting estimates, one of an auditor's objectives is to determine whether the estimates are:

Answer 753

Reasonable under the circumstances.

Question 754

Which of the following is true about an auditor's responsibility with respect to accounting estimates?

Answer 754

The auditor is responsible for evaluating the reasonableness of accounting estimates.

Question 755

Which of the following is not a reason justifying the use of accounting estimates?

Answer 755

Data about future events cannot be accumulated in a cost-effective manner.

Question 756

An auditor would be most likely to identify a contingent liability by obtaining a (an):

Answer 756

Standard bank confirmation.

Question 757

In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches?

Answer 757

Review the minutes of board of directors and shareholder meetings for discussion of the estimate.

Question 758

The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):

Answer 758

Payroll register entry.

Question 759

Which of the following procedures most likely would be considered a weakness in an entity's internal controls over payroll?

Answer 759

The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.

Question 760

An auditor most likely would perform substantive tests of details on payroll transactions and balances when:

Answer 760

Analytical procedures indicate unusual fluctuations in recurring payroll entries.

Question 761

The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:

Answer 761

Authorization of transactions from the custody of related assets.

Question 762

An auditor most likely would extend substantive tests of payroll when:

Answer 762

Overpayments are discovered in performing tests of details.

Question 763

An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:

Answer 763

Employees work the number of hours for which they are paid.

Question 764

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:

Answer 764

Existence.

Question 765

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:

Answer 765

The auditor cannot infer that all nonrespondents have verified their account information.

Question 766

Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:

Answer 766

There is likely to be other reliable external evidence available to support the balances.

Question 767

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

Answer 767

Rights and obligations and existence.

Question 768

The negative request form of accounts receivable confirmation is useful particularly when the: Assessed level of control risk relating to receivables is Number of small balances is Consideration by the recipient is

Answer 768

Assessed level of control risk relating to receivables is = Low Number of small balances is = many Consideration by the recipient is = likely

Question 769

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Answer 769

Inspect the shipping records documenting the merchandise sold to the debtors.

Question 770

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

Answer 770

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Question 771

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:

Answer 771

Verify the sources and contents of the faxes in telephone calls to the senders.

Question 772

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?

Answer 772

The recipients are likely to sign the confirmations without devoting proper attention to them.

Question 773

To establish the existence and ownership of a long-term investment in the common stock of a publicly-traded company, an auditor ordinarily performs a security count or:

Answer 773

Confirms the number of shares owned that are held by an independent custodian.

Question 774

An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the:

Answer 774

Completeness of recorded investment income.

Question 775

An auditor would most likely verify the interest earned on bond investments by:

Answer 775

Recomputing the interest earned on the basis of face amount, interest rate, and period held.

Question 776

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

Answer 776

The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

Question 777

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:

Answer 777

Examine the audited financial statements of the investee company.

Question 778

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

Answer 778

An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.

Question 779

Which of the following controls most likely would give the greatest assurance that securities held as investments are safeguarded?

Answer 779

Access to securities requires the signatures and presence of two designated officials.

Question 780

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:

Answer 780

Completeness of recorded investment income.

Question 781

Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Answer 781

The internal auditor compares the securities in the bank safe deposit box with recorded investments.

Question 782

A client has a large and active investment portfolio that is kept in a bank safe deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:

Answer 782

Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.

Question 783

Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for:

Answer 783

Investigation of variances within a formal budgeting system.

Question 784

Which of the following controls is most likely to prevent the improper disposition of equipment?

Answer 784

A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders

Question 785

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of a (an):

Answer 785

Lien on the plant equipment.

Question 786

Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?

Answer 786

Inspecting documents and physically examining assets.

Question 787

Which of the following internal controls most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions?

Answer 787

Periodic physical inspection of plant and equipment by the internal audit staff.

Question 788

Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:

Answer 788

Investigation of variances within a formal budgeting system.

Question 789

In testing for unrecorded retirements of equipment, an auditor most likely would:

Answer 789

Select items of equipment from the accounting records and then locate them during the plant tour.

Question 790

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to:

Answer 790

Seek information about contingent liabilities and security agreements.

Question 791

In an audit of contingent liabilities, which of the following procedures would be least effective?

Answer 791

Examining customer confirmation replies

Question 792

The primary evidence regarding year-end cash balances in the financial statements is documented in the:

Answer 792

Bank reconciliations.

Question 793

An auditor's program to examine long-term debt should include steps that require:

Answer 793

Examining bond trust indentures.

Question 794

The scope of an audit is not restricted when an attorney's response to an auditor as a result of a client's letter of audit inquiry limits the response to:

Answer 794

Matters to which the attorney has given substantive attention in the form of legal representation.

Question 795

An auditor's plan to examine long-term debt most likely would include steps that require:

Answer 795

Correlating interest expense recorded for the period with outstanding debt.

Question 796

Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?

Answer 796

Confirm directly with the client's lawyer that all claims have been recorded in the financial statements.

Question 797

An auditor should request that an audit client send a letter of inquiry to those attorneys who have been consulted concerning litigation, claims, or assessments. The primary reason for this request is to provide:

Answer 797

The corroboration of the information furnished by management concerning litigation, claims, and assessments.

Question 798

The most likely result of ineffective internal control policies and procedures in the revenue cycle is that:

Answer 798

Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.

Question 799

Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?

Answer 799

Are direct borrowings on notes payable authorized by the board of directors?

Question 800

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

Answer 800

Completeness.

Question 801

Which of the following statements extracted from a client's lawyer's letters concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

Answer 801

"I believe that the action can be settled for less than the damages claimed."

Question 802

An auditor should trace corporate stock issuances and treasury stock transactions to the:

Answer 802

Minutes of the board of directors.

Question 803

When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:

Answer 803

The number of shares issued and outstanding.

Question 804

The primary responsibility of a bank acting as registrar of capital stock is to:

Answer 804

Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.

Question 805

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertions with respect to:

Answer 805

Understandability and classification

Question 806

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Answer 806

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Question 807

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:

Answer 807

Canceled checks.

Question 808

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to:

Answer 808

Corroborate information regarding deposit and loan balances.

Question 809

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

Answer 809

Receiving reports.

Question 810

Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?

Answer 810

Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.

Question 811

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Answer 811

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Question 812

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

Answer 812

Treasurer.

Question 813

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:

Answer 813

Daily deposit slip.

Question 814

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:

Answer 814

Accounting records to the source documents

Question 815

Which of the following procedures most likely would not be an internal control procedure designed to reduce the risk of errors in the billing process?

Answer 815

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Question 816

An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:

Answer 816

Cash balances were overstated because of kiting.

Question 817

Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?

Answer 817

Unrecorded sales at year-end.

Question 818

Tracing bills of lading to sales invoices provides evidence that:

Answer 818

Shipments to customers were invoiced.

Question 819

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

Answer 819

Employees involved in the credit-granting function are separated from the sales function.

Question 820

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

Answer 820

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Question 821

An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:

Answer 821

A bank lockbox system

Question 822

Which of the following internal control procedures most likely would deter lapping of collections from customers?

Answer 822

Segregation of duties between receiving cash and posting the accounts receivable ledger.

Question 823

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Answer 823

Shipments to customers were properly invoiced.

Question 824

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?

Answer 824

Observe the consistency of the employees' use of cash registers and tapes.

Question 825

For effective internal accounting control, the accounts payable department should compare the information on each vendor's invoice with the:

Answer 825

Receiving report and the purchase order.

Question 826

Which of the following is the most effective control activity to detect vouchers that were prepared for the payment of goods that were not received?

Answer 826

Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable department.

Question 827

For effective internal control purposes, the vouchers payable department generally should:

Answer 827

Establish the agreement of the vendor's invoice with the receiving report and purchase order.

Question 828

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all:

Answer 828

Receiving reports.

Question 829

Which of the following control activities is not usually performed in the vouchers payable department?

Answer 829

Controlling the mailing of the check and remittance advice.

Question 830

Which of the following internal control procedures most likely addresses the completeness assertion for inventory?

Answer 830

Receiving reports are prenumbered and periodically reconciled.

Question 831

Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?

Answer 831

Purchase orders, receiving reports, and vendor's invoices are independently matched in preparing vouchers.

Question 832

Mailing disbursement checks and remittance advices should be controlled by the employee who:

Answer 832

Signs the checks last.

Question 833

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?

Answer 833

Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Question 834

When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:

Answer 834

Debit memo.

Question 835

The authority to accept incoming goods in receiving should be based on a (an):

Answer 835

Approved purchase order.

Question 836

In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:

Answer 836

Negotiate terms with vendors.

Question 837

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

Answer 837

Valuation and allocation.

Question 838

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of:

Answer 838

Completeness.

Question 839

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

Answer 839

Valuation and allocation.

Question 840

Sales Transaction - Cash Receipts and G/L Transaction file are all application programs (Symbol A) Symbol A most likely represents:

Answer 840

Accounts receivable master file.

Question 841

Remittance from customers - enter data, Symbol B most likely represents:

Answer 841

Sales invoices.

Question 842

To obtain assurance that all inventory items in a client's inventory listing are valid, an auditor most likely would trace:

Answer 842

Items in the inventory listing to inventory tags and the auditor's recorded count sheets.

Question 843

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Answer 843

Shipments to customers were properly invoiced.

Question 844

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Answer 844

Fictitious credit sales have been recorded during the year.

Question 845

Which of the follo wing strategies most likely could improve the response rate of the confirmation of accounts receivable?

Answer 845

Including a list of items or invoices that constitute the account balance.

Question 846

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would:

Answer 846

Request the senders to mail the original forms to the auditor.

Question 847

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equipment. This procedure is designed to obtain evidence concerning management's assertions of: Existence Understandability and classification

Answer 847

Existence = Yes Understandability and classification = No

Question 848

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

Answer 848

The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

Question 849

An auditor usually tests the reasonableness of dividend income from investments in publicly-held companies by computing the amounts that should have been received by referring to:

Answer 849

Dividend record books produced by investment advisory services.

Question 850

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

Answer 850

Customers may not be inclined to report understatement errors in their accounts.

Question 851

``` An auditor most likely would inspect loan agreements under which an entity's inventories are pledged to support management's financial statement assertion of completeness with respect to: I. Presentation and disclosure. II. Transactions and events. III. Account balances. ```

Answer 851

I only.

Question 852

An auditor most likely would make inquiries of production and sales personnel concerning possible obsolete or slow-moving inventory to support management's financial statement assertion of:

Answer 852

Valuation and allocation.

Question 853

In confirming with an outside agent, such as a financial institution, that the agent is holding investment securities in the client's name, an auditor most likely gathers evidence in support of management's financial statement assertions of existence and:

Answer 853

Rights and obligations.

Question 854

Which of the following statements is correct concerning the use of negative confirmation requests?

Answer 854

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Question 855

In confirming a client's accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

Answer 855

Individual invoices.

Question 856

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

Answer 856

Testing the entity's computation of standard overhead rates.

Question 857

A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably:

Answer 857

Request the client to schedule the physical inventory count at the end of the year.

Question 858

In auditing payroll, an auditor most likely would:

Answer 858

Verify that checks representing unclaimed wages are mailed.

Question 859

An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all:

Answer 859

Expenditures for property and equipment have not been charged to expense.

Question 860

Which of the following internal controls most likely would be used to maintain accurate inventory records?

Answer 860

Periodic inventory counts are used to adjust the perpetual inventory records.

Question 861

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

Answer 861

Accounts receivable confirmation requests yield significantly fewer responses than expected.

Question 862

Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity's employees?

Answer 862

A bank lockbox system.

Question 863

For effective internal control, the accounts payable department generally should:

Answer 863

Establish the agreement of the vendor's invoice with the receiving report and purchase order.

Question 864

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

Answer 864

Treasurer.

Question 865

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

Answer 865

Valuation and allocation.

Question 866

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions?

Answer 866

Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

Question 867

Which of the following procedures would an auditor most likely perform to obtain assurance that slow-moving and obsolete items included in inventories are properly identified?

Answer 867

Examining an analysis of inventory turnover.

Question 868

Which of the following presumptions is correct about the reliability of audit evidence?

Answer 868

An effective internal control structure provides more assurance about the reliability of audit evidence.

Question 869

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent: As a Substantive test In the final review stage

Answer 869

As a Substantive test = No In the final review stage = Yes

Question 870

An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?

Answer 870

Analytical procedures.

Question 871

In evaluating an entity's accounting estimates, one of the auditor's objectives is to determine whether the estimates are:

Answer 871

Reasonable in the circumstances.

Question 872

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?

Answer 872

Management is unwilling to permit inquiry of its legal counsel.

Question 873

Which of the following statements is correct regarding accounting estimates?

Answer 873

The auditor's objective is to evaluate whether accounting estimates are reasonable in the circumstances.

Question 874

In evaluating the reasonableness of an entity's accounting estimates, an auditor most likely concentrates on key factors and assumptions that are

Answer 874

Deviations from historical patterns.

Question 875

What is an auditor's primary method to corroborate information on litigation, claims, and assessments?

Answer 875

Reviewing the response from the client's lawyer to a letter of audit inquiry.

Question 876

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence supporting the effective operation of controls?

Answer 876

Observing an entity's employee prepare the schedule of past due accounts receivable.

Question 877

In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:

Answer 877

$2,000 The sample error of $1,000 ($5,000 - $4,000) is projected to the entire interval through use of a "tainting factor" of 20% ($1,000/$5,000). If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be 20% of $10,000, or $2,000.

Question 878

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that:

Answer 878

There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement.

Question 879

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider: The average dollar value of the check requests The allowable risk of assessing control risk too low

Answer 879

The average dollar value of the check requests = No The allowable risk of assessing control risk too low = Yes

Question 880

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the: Variability in the dollar amounts of inventory items Risk of incorrect acceptance

Answer 880

Variability in the dollar amounts of inventory items = Yes Risk of incorrect acceptance = Yes

Question 881

For which of the following audit tests would an auditor most likely use attribute sampling?

Answer 881

Inspecting employee time cards for proper approval by supervisors.

Question 882

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

Answer 882

Effectiveness of the audit.

Question 883

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the:

Answer 883

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Question 884

In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was:

Answer 884

Initially concealed by a forged document.

Question 885

Which of the following factors is (are) considered in determining the sample size for a test of controls? Expected deviation rate Tolerable deviation rate

Answer 885

Expected deviation rate - yes Tolerable deviation rate - yes

Question 886

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in intolerable misstatement Increase in assessed level of control risk

Answer 886

Increase in intolerable misstatement = decrease in sample size Increase in assessed level of control risk = increase in sample size

Question 887

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:

Answer 887

Measure the sufficiency of the audit evidence obtained.

Question 888

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was:

Answer 888

More than the deviation rate in the auditor's sample.

Question 889

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the:

Answer 889

Tolerable deviation rate.

Question 890

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:

Answer 890

Provide an objective basis for quantitatively evaluating sample risk.

Question 891

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:

Answer 891

The population has highly variable recorded amounts.

Question 892

The use of the ratio estimation sampling technique is most effective when:

Answer 892

The calculated audit amounts are approximately proportional to the client's book amounts.

Question 893

Which of the following statements is correct concerning statistical sampling in tests of controls?

Answer 893

Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.

Question 894

The likelihood of assessing control risk too high is the risk that the sample selected to test controls:

Answer 894

Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

Question 895

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Answer 895

Variables sampling.

Question 896

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements?

Answer 896

Stratify the cash disbursements population so that the unusually large disbursements are selected.

Question 897

Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected amount of misstatements Measure of tolerable misstatement

Answer 897

Expected amount of misstatements = Yes Measure of tolerable misstatement = Yes

Question 898

For which of the following audit tests would an auditor most likely use attribute sampling?

Answer 898

Inspecting employee time cards for proper approval by supervisors.

Question 899

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of:

Answer 899

Incorrect rejection.

Question 900

The sample size of a test of controls varies inversely with: Expected population deviation rate Tolerable rate

Answer 900

Expected population deviation rate = No Tolerable rate = Yes

Question 901

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 that:

Answer 901

The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

Question 902

In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?

Answer 902

Attributes.

Question 903

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Answer 903

Inclusion of zero and negative balances generally does not require special design considerations.

Question 904

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the:

Answer 904

Tolerable rate (7%) was less than the upper deviation rate (8%).

Question 905

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the upper deviation rate to be 8%. The allowance for sampling risk was:

Answer 905

4.5% The allowance for sampling risk is the excess of the 8% upper deviation rate over the 3.5% (= 7 ÷ 200) sample deviation rate, or 4.5%.

Question 906

What is an auditor's evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?

Answer 906

Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

Question 907

An auditor is selecting vouchers for testing an entity's internal control activities related to the proper approval of vouchers before checks are prepared. The auditor is matching random numbers with voucher numbers to determine which vouchers to inspect. If a random number matches a voided voucher, that voucher ordinarily would be replaced by another voucher in the random sample if the voided voucher:

Answer 907

Has been properly voided.

Question 908

An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:

Answer 908

Estimate whether the dollar amount of inventory is reasonable.

Question 909

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:

Answer 909

Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

Question 910

As a result of sampling procedures applied as tests of controls, an auditor incorrectly assesses control risk higher than appropriate. The most likely explanation for this situation is that:

Answer 910

The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

Question 911

Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Answer 911

The selection of negative balances requires no special design considerations.

Question 912

Which of the following is the primary objective of probability proportional to sample size?

Answer 912

To identify overstatement errors.

Question 913

In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?

Answer 913

Number of items in the population.

Question 914

For which of the following audit tests would a CPA most likely use attribute sampling?

Answer 914

Identifying entries posted to incorrect accounts.

Question 915

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

Answer 915

The auditor's allowable risk of assessing control risk too low.

Question 916

Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?

Answer 916

The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.

Question 917

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?

Answer 917

Preliminary judgments about materiality levels.

Question 918

Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?

Answer 918

The population size has little effect on the sample size.

Question 919

An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?

Answer 919

Incorrect acceptance.

Question 920

An auditor uses an attribute sampling plan to determine whether large expenditures are being properly approved. The auditor is willing to accept a 2% risk of assessing control risk too low, and has a tolerable rate of 5%. A sample of 100 invoices is selected, and only one is found to be lacking appropriate approval. One invoice selected by the auditor cannot be located. Which statement is true?

Answer 920

There is not enough information given to determine whether the auditor should rely on this control.

Question 921

Stratified sampling would best be used in a situation where:

Answer 921

There is a lot of variation among items in the population.

Question 922

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:

Answer 922

Sample size.

Question 923

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:

Answer 923

Be related to preliminary judgments about materiality levels.

Question 924

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

Answer 924

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

Question 925

To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:

Answer 925

Expected deviation rate.

Question 926

Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?

Answer 926

The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.

Question 927

When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:

Answer 927

Precision.

Question 928

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?

Answer 928

Sampling for variables.

Question 929

Which of the following statements is correct concerning statistical sampling in tests of controls?

Answer 929

There is an inverse relationship between the sample size and the tolerable rate.

Question 930

An auditor may decide to decrease the acceptable level of risk when:

Answer 930

The cost and effort of selecting additional sample items is low.

Question 931

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the: I. Likely rate of deviations. II. Allowable risk of assessing control risk too high.

Answer 931

I only.

Question 932

For which of the following audit tests would an auditor most likely use attribute sampling?

Answer 932

Inspecting purchase orders for proper approval by supervisors.

Question 933

Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?

Answer 933

The population size has little or no effect on the sample size.

Question 934

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency? I. The likelihood that a control will fail to prevent or detect a misstatement. II. The magnitude of the misstatement that could result from the deficiency.

Answer 934

Both I and II.

Question 935

Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?

Answer 935

An auditor may communicate significant deficiencies during an audit or after the audit's completion.

Question 936

Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?

Answer 936

Evidence of a lack of objectivity by those responsible for accounting decisions.

Question 937

An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should:

Answer 937

Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control.

Question 938

In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:

Answer 938

Inherent limitations of any internal control.

Question 939

Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?

Answer 939

Management presents its written assertion about the effectiveness of internal control.

Question 940

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer?

Answer 940

An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

Question 941

Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:

Answer 941

Because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.

Question 942

Which of the following best describes a CPA's engagement to report on a nonissuer's internal control over financial reporting?

Answer 942

An attestation engagement to examine and report on management's written assertion about the effectiveness of its internal control.

Question 943

When communicating internal control related matters noted in an audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that:

Answer 943

The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Question 944

A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:

Answer 944

Restriction on the use of the report.

Question 945

Rachel, CPA, is conducting an audit of Eaton Enterprises, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?

Answer 945

Only the scope paragraph should be modified.

Question 946

Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two clients, McCormick Surf Shop and Kleinpeter Technologies, are both nonissuers, while the third client, Bender Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of Bender Industries. She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?

Answer 946

Hannah must express an opinion on the effectiveness of internal control in the Bender engagement, but is not required to express such an opinion in the Kleinpeter and McCormick engagements.

Question 947

Which of the following is true regarding significant deficiencies in internal control?

Answer 947

Auditors must communicate them to management and to those charged with governance.

Question 948

Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?

Answer 948

Eva's management must provide a written report to accompany Henna and Company's report.

Question 949

A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum: Likelihood Magnitude

Answer 949

Likelihood = Reasonable Magnitude = Material

Question 950

In an audit of an issuer: I. Management must assess and report on internal control. II. The auditor must assess and report on internal control.

Answer 950

Both I and II.

Question 951

In an audit of an issuer, the auditor must provide an opinion on which of the following? I. The financial statements. II. The audit committee's oversight of financial reporting and internal control. III. The effectiveness of internal control.

Answer 951

I and III only.

Question 952

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?

Answer 952

The auditor must communicate both significant deficiencies and material weaknesses.

Question 953

Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer? Must be communicated to management and the audit committee Results in an adverse opinion of the effectiveness of internal control

Answer 953

Must be communicated to management and the audit committee = Both significant deficiencies and material weaknesses Results in an adverse opinion of the effectiveness of internal control = Material weaknesses but not significant deficiencies

Question 954

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

Answer 954

The auditor must communicate both significant deficiencies and material weaknesses.

Question 955

In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

Answer 955

In writing, during the current audit.

Question 956

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer?

Answer 956

The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

Question 957

Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?

Answer 957

Jackson is required to audit and report on Saffer’s internal control.

Question 958

Which of the following best describes an auditor’s responsibility with respect to communicating internal control deficiencies of issuers?

Answer 958

The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

Question 959

In which case might an auditor of an issuer render a qualified opinion on internal control? I. When there is a scope limitation. II. When there is a material weakness in internal control.

Answer 959

Neither I nor II.

Question 960

Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?

Answer 960

A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.

Question 961

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?

Answer 961

Make inquiries to understand the potential consequence of the deviation.

Question 962

Which of the following statements is correct regarding internal control?

Answer 962

An inherent limitation to internal control is the fact that controls can be circumvented by management override.

Question 963

During consideration of internal control in a financial statement audit, an auditor is not obligated to:

Answer 963

Search for all significant deficiencies in the operation of internal control.

Question 964

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

Answer 964

Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Question 965

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:

Answer 965

Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Question 966

When engaged to express an opinion on a nonissuer's internal control, an accountant should:

Answer 966

Obtain management's written assertions regarding whether the company has maintained effective internal control.

Question 967

Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?

Answer 967

All material weaknesses are significant deficiencies.

Question 968

The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:

Answer 968

Disclaim an opinion as to management's cost-benefit statement.

Question 969

An auditor's communication of internal control related matters noted in an audit usually should be addressed to:

Answer 969

Management and those charged with governance.

Question 970

When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a:

Answer 970

Restriction on the use of the report.

Question 971

An engagement to express an opinion on the internal control of a nonissuer will generally:

Answer 971

Be more extensive in scope than the assessment of control risk made during a financial statement audit.

Question 972

Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?

Answer 972

The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

Question 973

Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?

Answer 973

Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.

Question 974

Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?

Answer 974

There are no significant deficiencies in the design or operation of internal control.

Question 975

How do the scope, procedures, and purpose of tests of controls in an examination of the internal control of a nonissuer compare to those for obtaining an understanding of internal control and assessing control risk as part of a financial statement audit of a nonissuer? Scope Procedures Purpose

Answer 975

Scope = Similar Procedures = Different Purpose = Similar

Question 976

An auditor has been hired to report on a nonissuer's internal control over financial reporting. Which of the following best describes a reporting option in this scenario?

Answer 976

When a material weakness exists, the auditor should issue an adverse opinion.

Question 977

Which is true regarding PCAOB standards surrounding internal control?

Answer 977

PCAOB standards surrounding internal control apply only to audits of issuers.

Question 978

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:

Answer 978

Search for significant deficiencies in the operation of internal control.

Question 979

Which of the following is not true about significant deficiencies in internal control?

Answer 979

The auditor is required to search for significant deficiencies in internal control.

Question 980

According to the ethical standards of the profession, which of the following acts by a CPA is generally prohibited?

Answer 980

Accepting a commission for recommending a product to an audit client.

Question 981

According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?

Answer 981

Employment of the CPA's spouse as a client's internal auditor.

Question 982

Under the ethical standards of the profession in the United States, which of the following circumstances would impair independence in the audit of an issuer but would not impair independence in the audit of a nonissuer?

Answer 982

The lead partner has worked on the audit engagement of a client for ten years.

Question 983

Which of the following actions by a CPA most likely violates the profession's ethical standards?

Answer 983

Retaining client records after the client has demanded their return.

Question 984

Jackson & Company, CPAs, plan to audit the financial statements of Perigee Technologies, an issuer as defined under the Sarbanes-Oxley Act of 2002. Which of the following situations would impair Jackson's independence?

Answer 984

Preparation of Perigee's routine annual tax return, where Jackson's fee will be calculated as a percentage of the tax refund obtained.

Question 985

The concept of materiality would be least important to an auditor when considering the:

Answer 985

Effects of a direct financial interest in the client on the CPA's independence.

Question 986

Which of the following statements is incorrect regarding the SEC's partner rotation rules?

Answer 986

All audit partners must rotate off the audit engagement after five years.

Question 987

Which of the following services do not need to be pre-approved by the audit committee of an issuer?

Answer 987

Non-audit services that are less than five percent of total revenues from the audit client.

Question 988

The auditor of an issuer may provide which of the following tax services?

Answer 988

Tax planning services.

Question 989

Which of the following will impair independence under the U.S. Department of Labor's independence rules for audits of employee benefit plans?

Answer 989

The auditor also serves as an investment advisor to the employee benefit plan.

Question 990

Which of the following items impairs independence under U.S. ethics standards, but does not necessarily impair independence under the IFAC Code of Ethics for Professional Accountants?

Answer 990

The auditor also provides internal audit outsourcing services.

Question 991

Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation?

Answer 991

A CPA may advertise in any manner that is not false, misleading, or deceptive.

Question 992

Under the ethical standards of the profession, which of the following situations involving nondependent members of an auditor's family is most likely to impair the auditor's independence?

Answer 992

A spouse's employment with a client.

Question 993

Under the ethical standards of the profession, which of the following investments in a client is not considered to be a direct financial interest?

Answer 993

An investment held through a nonclient regulated mutual fund.

Question 994

Burrow & Co., CPAs, have provided annual audit and tax compliance services to Mare Corp. for several years. Mare has been unable to pay Burrow in full for services Burrow rendered 19 months ago. Burrow is ready to begin fieldwork for the current year's audit. Under the ethical standards of the profession, which of the following arrangements will permit Burrow to begin the fieldwork on Mare's audit?

Answer 994

Mare commits to pay the past due fee in full before the audit report is issued.

Question 995

According to the ethical standards of the profession, which of the following acts is generally prohibited?

Answer 995

Retaining client records after an engagement is terminated prior to completion and the client has demanded their return.

Question 996

According to the standards of the profession, which of the following activities may be required in exercising due care? Consulting with experts Obtaining specialty accreditation

Answer 996

Consulting with experts = Yes Obtaining specialty accreditation = No

Question 997

According to the profession's ethical standards, which of the following events may justify a departure from GAAP? New Legislation Evolution of a new form of business transaction

Answer 997

New Legislation = Yes Evolution of a new form of business transaction = Yes

Question 998

To exercise due professional care an auditor should:

Answer 998

Critically review the judgment exercised by those assisting in the audit.

Question 999

Must a CPA in public practice be independent of mind and in appearance when providing the following services? Compilation of personal financial statements Preparation of a tax return Compiliation of a financial forecast

Answer 999

Compilation of personal financial statements = No Preparation of a tax return = No Compilation of a financial forecast = No

Question 1000

Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?

Answer 1000

A distinguishing mark of a profession is its acceptance of responsibility to the public.

Question 1001

Which of the following reports may be issued only by an accountant who is independent of a client?

Answer 1001

Standard report on an examination of a financial forecast.

Question 1002

According to the profession's ethical standards, an auditor would be considered independent in which of the following instances?

Answer 1002

The auditor's checking account that is fully insured by a federal agency, is held at a client financial institution.

Question 1003

According to the profession's ethical standards, a CPA would be considered independent in which of the following instances?

Answer 1003

The CPA belongs to a country club client in which membership requires the acquisition of a pro rata share of equity

Question 1004

According to the ethical standards of the profession, which of the following acts generally is prohibited?

Answer 1004

Retaining client records after the client has demanded their return.

Question 1005

Management of Hill Company has decided not to account for a material transaction in accordance with the provisions of GAAP. In setting forth its reasons in a note to the financial statements, management has clearly demonstrated that due to unusual circumstances the financial statements presented in accordance with the GAAP would be misleading. The auditor's report should include an emphasis-of-matter paragraph and contain a(an):

Answer 1005

Unmodified opinion.

Question 1006

An auditor's independence is considered impaired if the auditor has:

Answer 1006

A joint, closely-held business investment with the client that is material to the auditor's net worth.

Question 1007

Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?

Answer 1007

A policy-making position in the client's finance division.

Question 1008

A CPA who is not in public practice is obligated to follow which of the following rules of conduct?

Answer 1008

Integrity and objectivity.

Question 1009

Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor's independence?

Answer 1009

Advisor to a client's board of trustees.

Question 1010

Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?

Answer 1010

If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings.

Question 1011

According to the ethical standards of the profession, a CPA's independence would most likely be impaired if the CPA:

Answer 1011

Contracted with a client to supervise the client's office personnel.

Question 1012

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence?

Answer 1012

Only direct and material indirect financial interests.

Question 1013

Which of the following areas of professional responsibility should be observed by a CPA not in public practice? Objectivity Independence

Answer 1013

Objectivity = Yes Independence = No

Question 1014

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?

Answer 1014

An investment held through a regulated mutual fund.

Question 1015

Under the Code of Professional Conduct of the AICPA, which of the following is required to be independent in fact and appearance when discharging professional responsibilities?

Answer 1015

A CPA in public practice providing auditing and other attestation services.

Question 1016

Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?

Answer 1016

Releasing financial information to a local bank with the approval of the client's mail clerk.

Question 1017

Under the provisions of the Sarbanes-Oxley Act of 2002, the lead audit or coordinating partner and the reviewing partner must rotate off the audit:

Answer 1017

Every five years.

Question 1018

Under the provisions of the Sarbanes-Oxley Act of 2002, registered public accounting firms are required to prepare and maintain audit work papers and other information related to any audit report for a period of:

Answer 1018

Seven years.

Question 1019

Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted?

Answer 1019

One.

Question 1020

The Code of Professional Conduct, Rule 101, regarding independence does not consider which of the following circumstances to be a lack of independence:

Answer 1020

The auditor's brother-in-law's father is the controller of the client being audited.

Question 1021

Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances impairs Kar's independence?

Answer 1021

Kar's sibling is an internal auditor employed part-time by Fort.

Question 1022

On June 1, Year 1, a CPA obtained a $100,000 personal loan from a financial institution client for whom the CPA provided compilation services. The loan was fully secured and considered material to the CPA's net worth. The CPA paid the loan in full on December 31, Year 1. On April 3, Year 2, the client asked the CPA to audit the client's financial statements for the year ended December 31, Year 2. Is the CPA considered independent with respect to the audit of the client's December 31, Year 2, financial statements?

Answer 1022

Yes, because the CPA was not required to be independent at the time the loan was granted.

Question 1023

According to the standards of the profession, which of the following activities would most likely not impair a CPA's independence?

Answer 1023

Providing extensive advisory services for a client.

Question 1024

A violation of the profession's ethical standards most likely would have occurred when a CPA:

Answer 1024

Issued an unqualified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid.

Question 1025

Which of the following non-audit services may be provided to an issuer audit client of a firm registered with the PCAOB?

Answer 1025

Tax services.

Question 1026

According to the AICPA Code of Professional Conduct, in which of the following circumstances may a CPA serve on a company's board of directors?

Answer 1026

The CPA does not audit the company and has no other business connection with the company.

Question 1027

How many audits of public companies per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?

Answer 1027

More than 100 audits.

Question 1028

In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?

Answer 1028

A member whose practice is primarily bankruptcy discloses a client's name.

Question 1029

Smith, CPA, is a partner of Johnson Accounting Firm. Johnson audited the books of Hometown Bank. Smith's independence would be impaired under which of the following circumstances?

Answer 1029

Smith is a director of Hometown Bank.

Question 1030

A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client?

Answer 1030

Yes, because the stock would be a direct financial interest and materiality is not a factor.

Question 1031

According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?

Answer 1031

Retaining client records after the client demands their return.

Question 1032

According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?

Answer 1032

The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.

Question 1033

A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA's independence with respect to the client?

Answer 1033

The CPA authorizes client transactions and reports them to management.

Question 1034

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except:

Answer 1034

Serving on at least one other issuer's audit committee or disclosure committee of the board of directors.

Question 1035

An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?

Answer 1035

Staff accountant.

Question 1036

The Sarbanes-Oxley Act of 2002 mandates that a registered public accounting firm is prohibited from providing any non-audit service to an issuer contemporaneously with the audit, except:

Answer 1036

Tax services pre-approved by the audit committee.

Question 1037

The Code of Professional Conduct, Rule 101 regarding independence, does not consider the following circumstances to be a lack of independence:

Answer 1037

The auditor's brother-in-law's father is the controller of the client being audited.

Question 1038

Which of the following is a correct statement about the circumstances under which a CPA firm may or may not disclose the names of its clients without the clients' express permission?

Answer 1038

A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.

Question 1039

Which of the following are true regarding communication requirements an auditor must follow when providing tax services to an audit client who is an issuer under the Sarbanes-Oxley Act of 2002? I. The auditor must communicate to the audit committee, in writing, regarding the proposed tax services and related fees. II. The auditor must communicate to the audit committee, in writing, when the proposed tax services involve contingent fee arrangements. III. The auditor must discuss with the audit committee the potential effects of the proposed tax services on the firm's independence.

Answer 1039

I and III only.

Question 1040

Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?

Answer 1040

Five years.

Question 1041

An accountant can perform, with preapproval of the audit committee of the board of directors, which of the following non-audit services during the audit of an issuer?

Answer 1041

Tax planning services.

Question 1042

The controller of a small utility company has interviewed audit firms proposing to perform the annual audit of their employee benefit plan. According to the guidelines of the Department of Labor (DOL), the selected auditor must be:

Answer 1042

Independent for purposes of examining financial information required to be filed annually with the DOL.

Question 1043

Under the ethical standards of the profession, which of the following is a "permitted loan" regardless of the date it was obtained?

Answer 1043

Secured automobile loan.

Question 1044

According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?

Answer 1044

Seeking a private letter ruling.

Question 1045

In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?

Answer 1045

The member owns municipal utility bonds issued by a client, and the bonds are not material to the member's wealth.

Question 1046

A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position?

Answer 1046

One year.

Question 1047

According to the profession's ethical standards, which of the following events may justify a departure from U.S. GAAP. New legislation Evolution of a new form of business transaction

Answer 1047

New legislation = Yes Evolution of a new form of business transaction = Yes

Question 1048

Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency? I. The likelihood that a control will fail to prevent or detect a misstatement. II. The magnitude of the misstatement that could result from the deficiency.

Answer 1048

Both I and II.

Question 1049

Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?

Answer 1049

An auditor may communicate significant deficiencies during an audit or after the audit's completion.

Question 1050

Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?

Answer 1050

Evidence of a lack of objectivity by those responsible for accounting decisions.

Question 1051

An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should:

Answer 1051

Indicate that the audit's purpose was to report on the financial statements and not to provide an opinion on internal control.

Question 1052

In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:

Answer 1052

Inherent limitations of any internal control.

Question 1053

Which of the following conditions is necessary for a practitioner to accept an attest engagement to examine and report on a nonissuer's internal control over financial reporting?

Answer 1053

Management presents its written assertion about the effectiveness of internal control.

Question 1054

Which of the following statements is correct concerning an auditor's required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer?

Answer 1054

An auditor's report on significant deficiencies should include a restriction on the distribution of the report.

Question 1055

Snow, CPA, was engaged by Master Co., a nonissuer, to examine and report on management's written assertion about the effectiveness of Master's internal control over financial reporting. Snow's report should state that:

Answer 1055

Because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.

Question 1056

Which of the following best describes a CPA's engagement to report on a nonissuer's internal control over financial reporting?

Answer 1056

An attestation engagement to examine and report on management's written assertion about the effectiveness of its internal control.

Question 1057

When communicating internal control related matters noted in an audit of a nonissuer, an auditor's report issued on significant deficiencies should indicate that:

Answer 1057

The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Question 1058

A letter issued on significant deficiencies relating to an entity's internal control observed during an audit of the financial statements of a nonissuer should include a:

Answer 1058

Restriction on the use of the report.

Question 1059

Rachel, CPA, is conducting an audit of Eaton Enterprises, a nonissuer. Rachel has conducted her audit in accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such standards do not require the same level of testing and reporting on internal control as is required for audits of issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?

Answer 1059

Only the scope paragraph should be modified.

Question 1060

Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two clients, McCormick Surf Shop and Kleinpeter Technologies, are both nonissuers, while the third client, Bender Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of Bender Industries. She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of the following best describes the scope of Hannah's work related to internal control in these three engagements?

Answer 1060

Hannah must express an opinion on the effectiveness of internal control in the Bender engagement, but is not required to express such an opinion in the Kleinpeter and McCormick engagements.

Question 1061

Which of the following is true regarding significant deficiencies in internal control?

Answer 1061

Auditors must communicate them to management and to those charged with governance.

Question 1062

Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated a material weakness previously noted in its assessment of internal control, and has hired Henna and Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this engagement?

Answer 1062

Eva's management must provide a written report to accompany Henna and Company's report.

Question 1063

A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum: Likelihood Magnitude

Answer 1063

Likelihood = Reasonable Magnitude = Material

Question 1064

In an audit of an issuer: I. Management must assess and report on internal control. II. The auditor must assess and report on internal control.

Answer 1064

Both I and II.

Question 1065

In an audit of an issuer, the auditor must provide an opinion on which of the following? I. The financial statements. II. The audit committee's oversight of financial reporting and internal control. III. The effectiveness of internal control.

Answer 1065

I and III only.

Question 1066

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?

Answer 1066

The auditor must communicate both significant deficiencies and material weaknesses.

Question 1067

Which of the following best describes the responsibility of the auditor with respect to significant deficiencies and material weaknesses in an audit of an issuer? Must be communicated to management and the audit committee Results in an adverse opinion of the effectiveness of internal control

Answer 1067

Must be communicated to management and the audit committee = Both significant deficiencies and material weaknesses Results in an adverse opinion of the effectiveness of internal control = Material weaknesses but not significant deficiencies

Question 1068

Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an attest engagement to examine the effectiveness of a nonissuer's internal control?

Answer 1068

The auditor must communicate both significant deficiencies and material weaknesses.

Question 1069

In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:

Answer 1069

In writing, during the current audit.

Question 1070

Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control in a financial statement audit of a nonissuer?

Answer 1070

The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.

Question 1071

Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?

Answer 1071

Jackson is required to audit and report on Saffer’s internal control.

Question 1072

Which of the following best describes an auditor’s responsibility with respect to communicating internal control deficiencies of issuers?

Answer 1072

The auditor is required to communicate all deficiencies in internal control to management, and deficiencies that constitute a significant deficiency or a material weakness to management and the audit committee.

Question 1073

In which case might an auditor of an issuer render a qualified opinion on internal control? I. When there is a scope limitation. II. When there is a material weakness in internal control.

Answer 1073

Neither I nor II.

Question 1074

Gail is auditing the financial statements of Hoefener Home Improvements, a publicly held company. Gail notes several deficiencies in internal control, and is trying to determine whether each deficiency constitutes a significant deficiency or a material weakness. Which best describes the framework Gail should use in making this evaluation?

Answer 1074

A significant deficiency exists for weaknesses that are important enough to merit the attention of those responsible for financial reporting, and a material weakness exists when there is a reasonable possibility of material misstatement.

Question 1075

Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?

Answer 1075

Make inquiries to understand the potential consequence of the deviation.

Question 1076

Which of the following statements is correct regarding internal control?

Answer 1076

An inherent limitation to internal control is the fact that controls can be circumvented by management override.

Question 1077

During consideration of internal control in a financial statement audit, an auditor is not obligated to:

Answer 1077

Search for all significant deficiencies in the operation of internal control.

Question 1078

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:

Answer 1078

Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Question 1079

With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:

Answer 1079

Deficiencies in the design or operation of internal control that are important enough to merit attention by those responsible for oversight of the company's financial reporting.

Question 1080

When engaged to express an opinion on a nonissuer's internal control, an accountant should:

Answer 1080

Obtain management's written assertions regarding whether the company has maintained effective internal control.

Question 1081

Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?

Answer 1081

All material weaknesses are significant deficiencies.

Question 1082

The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:

Answer 1082

Disclaim an opinion as to management's cost-benefit statement.

Question 1083

An auditor's communication of internal control related matters noted in an audit usually should be addressed to:

Answer 1083

Management and those charged with governance.

Question 1084

When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a:

Answer 1084

Restriction on the use of the report.

Question 1085

An engagement to express an opinion on the internal control of a nonissuer will generally:

Answer 1085

Be more extensive in scope than the assessment of control risk made during a financial statement audit.

Question 1086

Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?

Answer 1086

The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.

Question 1087

Which of the following statements concerning an auditor's communication of significant deficiencies identified during the audit of a nonissuer is correct?

Answer 1087

Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.

Question 1088

Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?

Answer 1088

There are no significant deficiencies in the design or operation of internal control.

Question 1089

How do the scope, procedures, and purpose of tests of controls in an examination of the internal control of a nonissuer compare to those for obtaining an understanding of internal control and assessing control risk as part of a financial statement audit of a nonissuer? Scope Procedures Purpose

Answer 1089

Scope = Different Procedures = Different Purpose = Different

Question 1090

An auditor has been hired to report on a nonissuer's internal control over financial reporting. Which of the following best describes a reporting option in this scenario?

Answer 1090

When a material weakness exists, the auditor should issue an adverse opinion.

Question 1091

Which is true regarding PCAOB standards surrounding internal control?

Answer 1091

PCAOB standards surrounding internal control apply only to audits of issuers.

Question 1092

In obtaining an understanding of an entity's internal control in a financial statement audit, an auditor is not obligated to:

Answer 1092

Search for significant deficiencies in the operation of internal control.

Question 1093

Which of the following is not true about significant deficiencies in internal control?

Answer 1093

The auditor is required to search for significant deficiencies in internal control.

Question 1094

Which of the following matters would an auditor most likely communicate to those charged with governance?

Answer 1094

The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance

Question 1095

In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:

Answer 1095

It consulted with another CPA firm about accounting matters.

Question 1096

Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity.

Answer 1096

The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.

Question 1097

An auditor would least likely initiate a discussion with those charged with governance concerning:

Answer 1097

The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

Question 1098

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

Answer 1098

This communication should include management changes in the application of significant accounting policies.

Question 1099

Which of the following matters is an auditor required to communicate to those charged with governance?

Answer 1099

The process used by management in formulating sensitive accounting estimates.

Question 1100

Which of the following matters is an auditor not required to communicate to those charged with governance?

Answer 1100

The degree of reliance the auditor placed on the management representation letter.

Question 1101

An auditor's communication with those charged with governance is required to include the:

Answer 1101

Discussion of disagreements with management about matters that significantly impact the entity's financial statements.

Question 1102

Which of the following matters is an auditor required to communicate to those charged with governance?

Answer 1102

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process.

Question 1103

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Answer 1103

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

Question 1104

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

Answer 1104

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Question 1105

Which of the following matters is an auditor required to communicate to those charged with governance? Significant audit adjustments Changes in significant accounting policies

Answer 1105

Significant audit adjustments = Yes Changes in significant accounting policies = Yes

Question 1106

Should an auditor communicate the following matters to those charged with governance of a public entity? Significant audit adjustments recorded by entity Managements consultation with other accountants about significant accounting matters

Answer 1106

Significant audit adjustments recorded by entity = Yes Managements consultation with other accountants about significant accounting matters = Yes

Question 1107

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

Answer 1107

This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

Question 1108

An auditor must inform those charged with governance about: I. Disagreements with management. II. Disagreements among the audit staff. III. Difficulties encountered in performing the audit.

Answer 1108

I and III only.

Question 1109

Which of the following is true about the auditor's communication with those charged with governance?

Answer 1109

The communication should be two-way: those charged with governance should also communicate relevant matters to the auditor.

Question 1110

Which of the following should be included as a written representation from management?

Answer 1110

The belief that misstatements identified by the auditor and not corrected are immaterial.

Question 1111

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage is most likely from a:

Answer 1111

Management representation letter.

Question 1112

Which of the following matters would an auditor most likely include in a management representation letter?

Answer 1112

The reasonableness of significant assumptions used in making accounting estimates.

Question 1113

To which of the following matters would materiality limits not apply in obtaining written management representations?

Answer 1113

The availability of minutes of stockholders' and directors' meetings.

Question 1114

The date of the management representation letter should coincide with the date of the:

Answer 1114

Auditor's report.

Question 1115

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage most likely is from a (an):

Answer 1115

Management representation letter.

Question 1116

Which of the following statements might be included among additional written client representations obtained by the auditor?

Answer 1116

Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.

Question 1117

Which of the following factors most likely would cause an auditor to question the integrity of management?

Answer 1117

Audit tests detect material fraud that was known to management, but not disclosed to the auditor.

Question 1118

Which of the following expressions most likely would be included in a management representation letter?

Answer 1118

No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.

Question 1119

Which of the following matters most likely would be included in a management representation letter?

Answer 1119

A statement that the effects of all known or possible litigation and claims have been accounted for and disclosed.

Question 1120

Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?

Answer 1120

"Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion."

Question 1121

To which of the following matters would materiality limits not apply when obtaining written client representations?

Answer 1121

Instances of fraud involving management.

Question 1122

Which of the following management roles would typically be acknowledged in a management representation letter?

Answer 1122

Management has the responsibility for the design of controls to detect fraud.

Question 1123

A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to:

Answer 1123

Discontinue a line of business.

Question 1124

A limitation on the scope of an auditor's examination sufficient to preclude an unmodified opinion will always result when management:

Answer 1124

Refuses to furnish a management representation letter to the auditor.

Question 1125

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?

Answer 1125

Fraud involving employees with significant roles in the internal control structure.

Question 1126

"We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements." The foregoing passage is most likely from a:

Answer 1126

Management representation letter.

Question 1127

To which of the following matters would materiality limits not apply when obtaining written client representations?

Answer 1127

Fraud involving management.

Question 1128

A purpose of a management representation letter is to reduce:

Answer 1128

The possibility of a misunderstanding concerning management's responsibility for the financial statements.

Question 1129

Management representations should be obtained about all of the following, except:

Answer 1129

Management's consultation with other accountants.

Question 1130

Which of the following matters is most likely to be included in a management representation letter as a specific representation?

Answer 1130

Information concerning fraud by the CFO.