AUD Flashcards
Which of the following is not true about the relationship between quality control standards and professional standards such as GAAS?
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.
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
The CPA Firm’s size - yes
The nature of the CPA Firm’s practice - yes
cost-benefit considerations - yes
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
Opportunities for on the job training - yes
Continuity and periodic rotation of personnel - yes
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?
Engagement performance.
Which of the following is not true about quality control standards?
Risk assessment is one of the six interrelated elements of quality control.
A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by:
Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.
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:
Report on accounts receivable is presented separately from the disclaimer of opinion on the financial statements.
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:
Reword the form or attach a separate report.
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:
Hardy also audits Gold’s income statement and balance sheet.
An auditor’s report on financial statements prepared on the cash receipts and disbursements basis of accounting should include all of the following, except:
A statement that the cash receipts and disbursements basis of accounting is not a comprehensive basis of accounting.
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:
Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion.
When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should:
State that the basis of presentation is a comprehensive basis of accounting other than GAAP.
An auditor may report on summary financial statements that are derived from complete financial statements if the:
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.
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:
Be limited to data derived from the audited financial statements.
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:
Single unmodified opinion on the special purpose financial statements.
When a CPA reports on audited financial statements prepared on the cash receipts and disbursements basis of accounting, the report should:
State that the basis of presentation is a comprehensive basis of accounting (OCBOA) other than GAAP.
Which of the following titles would be considered suitable for financial statements that are prepared on a cash basis?
Statement of revenues collected and expenses paid.
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)?
Statement of income-regulatory basis.
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)?
A title that includes the word “independent.”
An auditor may report on summary financial statements that are derived from a complete set of audited financial statements only if the auditor:
Indicates whether the information is consistent in all material respects with the complete financial statements.
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?
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.
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
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
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.
I: = yes II: = Yes III = No
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:
Disclose the departure from GAAP in a separate paragraph of the accountant’s report.
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:
Financial statements will not be used to obtain credit.
Compiled financial statements should be accompanied by an accountant’s report stating that:
The accountant conducted the compilation in accordance with Statements on Standards for Accounting and Review Services.
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:
Scope of the inquiry and analytical procedures has not been restricted.
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:
Withdraw from the engagement.
Statements on Standards for Accounting and Review Services (SSARS) require an accountant to report when the accountant has:
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.
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?
Observing the safeguards over access to and use of assets and records.
Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer?
Obtaining a client representation letter from members of management.
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
Scope limitation that caused the changed engagement = No
Original engagement that was agreed to = No
Which of the following statements should be included in an accountant’s standard report based on the compilation of a nonissuer’s financial statements?
The objective of a compilation is to assist management in presenting financial information in the form of financial statements.
Which of the following procedures most likely would not be included in a review engagement of a nonissuer?
Assessing control risk
An accountant’s standard report on a review of the financial statements of a nonissuer should state that the accountant:
Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP.
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:
Disclose the departure from GAAP in a separate paragraph of the report.
Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer’s financial statements?
Inquiries concerning the entity’s procedures for recording and summarizing transactions.
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:
Accounting and Review Services Committee.
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:
The highest level of service rendered.
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?
The entity declines to provide the accountant with a signed representation letter.
Which of the following is not true about documentation requirements related to a review of a nonissuer’s financial statements?
The auditor must document evidence obtained about the operating effectiveness of controls.
Which of the following describes how the objective of a review of financial statements differs from the objective of a compilation engagement?
In a review engagement, accountants provide limited assurance, but a compilation expresses no assurance.
The standard report issued by an accountant after reviewing the financial statements of a nonissuer should state that:
A review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.
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.
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.
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:
No reference to the original engagement.
Independence is not required on which of the following types of engagements?
Compilation.
Which of the following statements is true regarding analytical procedures in a review engagement?
Analytical procedures involve the use of both financial and nonfinancial data.
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
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
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)?
Perform the engagement even though independence is compromised.
Which of the following procedures is ordinarily performed by an accountant during an engagement to compile the financial statements of a nonissuer?
Consider whether the financial statements are free from obvious material mistakes in the application of accounting principles.
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)?
The date on the report should be the date of completion of the compilation.
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)?
he objective of a compilation is to assist management in presenting financial information in the form of financial statements.
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?
A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements.
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)?
Compare the financial statements with budgets or forecasts.
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?
The accountant should include the statement “I am not independent with respect to the entity” in the compilation report.
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)?
The owner of a company is the accountant’s father.
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:
Disclose the departure from GAAP in a separate paragraph of the accountant’s report.
Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review:
Is substantially less than in scope than an audit.
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:
The accountant has not audited or reviewed the financial statements.
Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer?
Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles.
Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer?
Observing the safeguards over access to and use of assets and records.
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?
Evaluate the relationships of DML’s financial statement elements that would be expected to conform to a predictable pattern.
An accountant’s report on a review of the unaudited financial statements of a nonissuer:
Should provide limited assurance on the financial statements.
An auditor who is conducting a review of the unaudited financial statements of a nonissuer would be required to:
Obtain a management representation letter.
In an accountant’s review of interim financial information, the accountant typically performs each of the following, except:
Obtaining corroborating external evidence.
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?
The accountant should disclose the lack of independence in the accountant’s compilation report.
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:
Omission is not undertaken with the intention of misleading the users of General’s financial statements.
Which of the following statements would not normally be included in a representation letter for a review of interim financial information?
We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.
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?
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?
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?
Accept the engagement and obtain an adequate level of knowledge about the industry.
To compile financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services, an accountant should:
Obtain a general understanding of the client’s business transactions.
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?
Developing an understanding of internal control.
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?
Perform a reasonableness test of the balance by computing days’ sales in receivables.
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:
Issue an accountant’s review report with a separate paragraph discussing the change in engagement scope.
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:
No auditing procedures were performed after the date of the Year 1 auditor’s report.
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.
Either I or II.
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?
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.
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:
Compare the prior year’s financial statements with those of the current year.
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:
The type of opinion expressed previously.
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to:
Compare the prior year’s financial statements with those of the current year.
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:
Substantive reasons for the prior-year’s qualified opinion.
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.
I only.
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?
Scope limitations that were overcome through acceptable alternative procedures.
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?
PCAOB standards apply.
Which of the following is not a required procedure in an engagement to review the interim financial information of a publicly held entity?
Obtaining corroborating evidence about the entity’s ability to continue as a going concern.
In which case would the accountant be least likely to perform a review of interim financial information under PCAOB standards?
Quarterly financial data is included in the financial statements of a nonissuer.
The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether:
Material modifications should be made to conform with generally accepted accounting principles.
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:
Accountant’s review report is not a part of the registration statement within the meaning of the Securities Act of 1933.
The objective of a review of interim financial information of a public entity is to provide an accountant with a basis for reporting whether:
Material modifications should be made to conform with generally accepted accounting principles.
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?
Read the minutes of the board of directors’ meetings.
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.
II only.
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?
The former requires inquiry of the client’s attorney regarding litigation, claims, and assessments, while the latter does not.
Which of the following is not true about an auditor’s report on a review of interim financial information of a publicly held company?
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.
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?
Consider the results of audit procedures performed with respect to the current-year’s financial statements.
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?
The company has not presented the selected quarterly financial data.
Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters?
Letters for underwriters typically give negative assurance on unaudited interim financial information.
Which of the following matters is covered in a typical comfort letter?
An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC.
Comfort letters ordinarily are signed by the client’s:
Independent auditor.
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:
Negative assurance on capsule information.
Comfort letters ordinarily are:
Addressed to the client’s
Signed by the client’s
Addressed to the client’s
Underwriter of securities
Signed by the client’s
Independent auditor
When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may provide negative assurance concerning:
The conformity of the entity’s unaudited condensed interim financial information with generally accepted accounting principles (GAAP).
When a CPA examines a client’s projected financial statements, the CPA’s report should:
State that the CPA performed procedures to evaluate management’s assumptions.
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to:
Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.
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
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
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):
List of the procedures performed (or reference thereto) and Mill’s findings.
In an attest engagement, use of the accountant’s report should be restricted to specified parties in all of the following situations, except:
When reporting on an assertion about the subject matter instead of reporting directly on the subject matter.
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?
WebTrust.
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:
Statements on Standards for Attestation Engagements.
A CPA’s report on agreed-upon procedures related to management’s assertion about an entity’s compliance with specified requirements should contain:
A statement of limitations on the use of the report.
An examination of a financial forecast is a professional service that involves:
Evaluating the preparation of a financial forecast and the support underlying management’s assumptions.
An accountant’s compilation report on a financial forecast should include a statement that:
There will usually be differences between the forecasted and actual results.
Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards?
.
The attestation standards provide a framework for the attest function beyond historical financial statements.
Accepting an engagement to examine an entity’s financial projection most likely would be appropriate if the projection were to be distributed to:
A bank with which the entity is negotiating for a loan.
An accountant’s report on a review of pro forma financial information should include a:
Reference to the financial statements from which the historical financial information is derived.
An accountant’s standard report on a compilation of a projection should not include a:
Statement that the accountant expresses only limited assurance that the results may be achieved.
Which of the following is not an attestation standard?
A sufficient understanding of internal control shall be obtained to plan the engagement.
An accountant’s compilation report on a financial forecast should include a statement that the:
Compilation does not include evaluation of the support of the assumptions underlying the forecast.
Which of the following professional services would be considered an attest engagement covered by the Statements on Standards for Attestation Engagements (SSAEs)?
An engagement to report on management’s discussion and analysis (MD&A).
Negative assurance may be expressed when an accountant is requested to report on the:
Results of performing a review of management’s assertion.
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):
Adverse opinion.
Prospective financial information presented in the format of historical financial statements that omit either gross profit or net income is deemed to be a:
Partial presentation.
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
Reevaluate the entity’s internal control over financial reporting = Yes
Determine that the computations of the pro forma adjustments are mathematically correct= No
Which of the following activities would most likely be considered an attestation engagement?
Issuing a report about a firm’s compliance with laws and regulations.
Which of the following professional services would be considered an attestation engagement?
Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions.
When an accountant compiles a financial forecast, the accountant’s report should include a(an):
Caveat that the prospective results of the financial forecast may not be achieved.
Which of the following is a professional engagement that a CPA may perform to provide assurance on a system’s reliability?
CPA SysTrust
An accountant’s standard report on a compilation of a projection should not include a statement that:
The hypothetical assumptions used in the projection are reasonable in the circumstances.
When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that:
Describes the limitations on the projection’s usefulness.
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:
Distribution (use) of the report is restricted to the specified users.
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):
Adverse opinion.
Which of the following prospective financial statements is(are) appropriate for general use?
Financial Forecasts
Financial Projection
Financial Forecasts = Yes
Financial Projection = No
Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?
The requirement that the CPA be independent in mental attitude is included in both sets of standards.
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):
Offering statement of the entity’s initial public offering of common stock.
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?
The practitioner and specified parties agree upon the procedures to be performed by the practitioner.
An accountant’s compilation report on a financial forecast should include a statement that:
There will usually be differences between the forecasted and actual results.
Which of the following procedures should an accountant perform during an engagement to compile prospective financial statements?
Make inquiries about the accounting principles used in the preparation of the prospective financial statements.
Which of the following components is appropriate in a practitioner’s report on the results of applying agreed-upon procedures?
A list of the procedures performed, as agreed to by the specified parties identified in the report.
Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed to:
Potential stockholders in an offering statement.
Which of the following is least likely to be included in an examination report related to a financial projection?
An indication that had the accountants performed additional procedures, other matters might have come to their attention that would have been reported.
An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the:
Engagement does not include an evaluation of the support for the assumptions underlying the projection.
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?
All significant assumptions used to prepare the financial statements.
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?
The practitioner is independent from the client and other specified parties.
When an accountant compiles projected financial statements, the accountant’s report should include a separate paragraph that:
Describes the limitations on the projection’s usefulness.
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:
Reviewing audit documentation and engagement reports.
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
Engagement Performance = Yes
Relevant Ethical Requirements = Yes
Monitoring = Yes
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:
All stockholders of record as of the report date.
A CPA firm would be reasonably assured of meeting its responsibility to provide services that conform with professional standards by:
Having an appropriate system of quality control.
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:
A system of quality control
Which of the following is not a comprehensive basis of accounting other than generally accepted accounting principles?
Basis of accounting used by an entity to comply with the financial reporting requirements of a lending institution.
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.
Both I and II.
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
Proposing correcting journal entries to the financial statements = No
Preparing standard monthly journal entries = No
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:
Refers to the note to the financial statements that describes the basis of accounting.
The standard report issued by an accountant after reviewing the financial statements of a nonissuer states that:
The accountant is not aware of any material modifications that should be made to the financial statements.
Which of the following procedures is not usually performed by the accountant during a review engagement of a nonissuer?
Communicating any material weaknesses discovered during the consideration of internal control.
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:
States that the income tax basis of accounting is a comprehensive basis of accounting other than generally accepted accounting principles.
The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for:
Reporting whether material modifications should be made for such information to conform with generally accepted accounting principles.
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
The financial have NOT been audited = Explicitly
The accountant has compiled the financial statements = Explicity
The financial have NOT been audited
The accountant has compiled the financial statements
Review report on comparative financial statements for a nonissuer in its second year of operations.
An auditor’s report on financial statements prepared in accordance with an other comprehensive basis of accounting should include all of the following, except:
An opinion as to whether the basis of accounting used is appropriate under the circumstances.
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:
Accountant’s review report is not a “part” of the registration statement within the meaning of the Securities Act of 1933.
Before issuing a report on the compilation of financial statements of a nonissuer, the accountant should:
Read the financial statements to consider whether the financial statements are free from obvious material errors.
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:
Disclose this departure from generally accepted accounting principles in a separate paragraph of the report.
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.
Either I or II.
Comfort letters ordinarily are addressed to:
Underwriters of securities.
When an accountant examines projected financial statements, the accountant’s report should include a separate paragraph that:
Describes the limitations on the usefulness of the presentation.
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that:
Use of the report is restricted to the specified parties.
In performing an attest engagement, a CPA typically:
Issues a report on subject matter (or on an assertion about subject matter) that is the responsibility of another party.
An attest engagement is one in which a CPA is engaged to:
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.
Which of the following statements concerning prospective financial statements is correct?
Any type of prospective financial statements would normally be appropriate for limited use.
A practitioner’s report on agreed-upon procedures that is in the form of procedures and findings should contain:
A statement of restrictions on the use of the report.
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:
Statements on Standards for Attestation Engagements (SSAE).
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
Printed on the accountant’s letterhead = No
Manually signed by the accountant = No
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:
Understand the accounting principles of the industry in which the entity operates.
Each page of a nonissuer’s financial statements reviewed by an accountant should include the following reference:
See Independent Accountant’s Review Report.
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:
Withdraw from the engagement and provide no further services concerning these financial statements.
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:
Statements on Standards for Accounting and Review Services.
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
Additional audit effort necessary to complete the audit = Yes
Reason given for Tech’s request = Yes
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:
The scope of Smith’s inquiry and analytical procedures is not restricted.
An accountant should perform analytical procedures during an engagement to:
Compile a Nonissuer’s Financial statements
Review a Nonissuer’s Financial statements
Compile a Nonissuer’s Financial statements = No
Review a Nonissuer’s Financial statements = Yes
Compiled financial statements should be accompanied by a report stating that:
The objective of a compilation is to assist management in presenting financial information in the form of financial statements.
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:
If the scope of the inquiry and analytical procedures has been restricted.
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.
Both I and II.
When compiling the financial statements of a nonissuer, an accountant should:
Understand the accounting principles and practices of the entity’s industry.
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:
Omission is not undertaken to mislead the users of the financial statements and is properly disclosed in the accountant’s report.
Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements?
Compiling an individual’s personal financial statement to be used to obtain a mortgage.
When compiling a nonissuer’s financial statements, an accountant would be least likely to:
Perform analytical procedures designed to identify relationships that appear to be unusual.
Before performing a review of a nonissuer’s financial statements, an accountant should:
Obtain a sufficient level of knowledge of the accounting principles and practices of the industry in which the entity operates.
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:
The scope of the accountant’s inquiry and analytical procedures has not been restricted.
Which of the following procedures is usually the first step in reviewing the financial statements of a nonissuer?
Obtain a general understanding of the entity’s organization, its operating characteristics, and its products or services.
An accountant’s standard report issued after compiling the financial statements of a nonissuer should state that:
The objective of a compilation is to assist management in presenting financial information in the form of financial statements.
Which of the following statements is true regarding an accountant’s consideration of fraud/illegal acts in compilation and review engagements?
The accountant is not required to perform procedures designed to detect material misstatements due to fraud or illegal acts.
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?
The entity’s principal creditors no longer require the entity to furnish audited financial statements.
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)?
Inquiry regarding the client’s accounting principles and practices and the method of applying them.
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:
Withdraw from the engagement and provide no further service concerning these financial statements.
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)?
Obtain a management representation letter.
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)?
The accountant must be independent to issue the review report.
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.
Neither I nor II.
Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?
Inquire of management about related party transactions.
Which of the following procedures would a CPA most likely perform when reviewing the financial statements of a nonissuer?
Make inquiries about actions taken at the board of directors meetings.
When providing limited assurance that the financial statements of a nonissuer require no material modifications to be in accordance with GAAP, the accountant should:
Understand the accounting principles of the industry in which the entity operates.
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?
Generating financial statements of a nonissuer.
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:
Withdraw from the engagement and provide no further services concerning these financial statements.
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
Compiling financial statements generated through the use of computer software = yes
reproducing client-prepared financial statements, without modification, for the client = no
Which of the following services, if any, may an accountant who is not independent provide?
Compilations, but not reviews.
A successor auditor ordinarily should request to review the predecessor’s audit documentation relating to:
Contingencies
Internal Control
Contingencies = yes
Internal Control = yes
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?
There is a substantial risk of intentional misapplication of accounting principles.
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
The prospective client is unwilling to make all financial records available to the CPA.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
Management’s disregard of its responsibility to maintain an adequate internal control environment.
Which of the following matters generally is included in an auditor’s engagement letter?
Management’s responsibility for the fair presentation of the financial statements.
Before accepting an engagement to audit a new client, a CPA is required to obtain:
The prospective client’s consent to make inquiries of the predecessor auditor
A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
Disagreements with management as to auditing procedures.
Which of the following statements would least likely appear in an auditor’s engagement letter?
After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
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:
Request Star to arrange a meeting among the three parties to resolve the matter.
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?
Hill, the successor auditor.
An auditor’s engagement letter most likely would include a statement regarding:
Management’s responsibility to provide certain written representations to the auditor.
A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor’s:
Understanding of the reasons for the change in auditors.
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.
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?
The schedules and analyses that the client’s staff should prepare.
A successor auditor is required to attempt communication with the predecessor auditor prior to:
Accepting the engagement.
Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
The adequacy of the accounting records.
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?
The integrity of the entity’s management is suspect.
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?
The coordination of the assistance of the client’s personnel in data preparation.
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
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.
Which of the following statements most likely would be included in an engagement letter from an auditor to a client?
The CPA firm will involve information technology specialists in the performance of the audit.
A successor auditor’s inquiries of the predecessor auditor should include questions regarding:
The predecessor’s understanding as to the reasons for the change in auditors.
Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?
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.
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
Engagement Letter = No
Working Papers = Yes
Which of the following is not a required part of the understanding between the client and the auditor?
Management’s responsibility to correct deficiencies in internal control identified by the auditor.
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.
I only.
Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
There will be a client-imposed scope limitation.
An auditor’s engagement letter most likely would include a statement that:
Limits the auditor’s responsibility to detect errors and fraud.
Before accepting an engagement to audit a new client, a CPA is required to obtain:
The prospective client’s consent to make inquiries of the predecessor.
The understanding with the client regarding a financial statement audit generally includes which of the following matters?
The responsibilities of the auditor.
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.
Both I and II.
In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity’s financial statements most likely would consider the:
Internal auditing standards developed by The Institute of Internal Auditors.
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?
AICPA Accounting Trends and Techniques.
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.
I, II, and III.
Which of the following statements is correct concerning an auditor’s use of the work of a specialist?
The work of a management specialist who has a contractual relationship with the client may be acceptable under certain circumstances.
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants:
How the results of various auditing procedures performed by the assistants should be evaluated.
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
The entity’s annualized interim financial statements.
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:
Existence of fixed asset additions.
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:
Timing of inventory observation procedures to be performed.
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
Obtaining an understanding of internal control = Yes
Performing tests of controls = Yes
Performing sensitive tests = Yes
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:
Becomes aware of conditions causing substantial doubt about the entity’s ability to continue as a going concern.
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
Determining the extent of involvement of the client’s internal auditors.
The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:
Give guidance to the staff regarding both technical and personnel aspects of the audit.
To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would:
Review prior-year audit documentation and the permanent file for the client.
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:
Influence the design of internal control.
Which of the following statements is not correct about materiality?
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.
Which of the following statements is correct about the auditor’s use of the work of a specialist?
The auditor should obtain an understanding of the methods and assumptions used by the specialist.
In assessing the competence and objectivity of an entity’s internal auditor, an independent auditor would least likely consider information obtained from:
The results of analytical procedures.
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
Assessment of Inherent Risk = No
Assessment of Control Risk = No
The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:
Results are consistent with the conclusions to be presented in the auditor’s report.
An auditor obtains knowledge about a new client’s business and its industry to:
Understand the events and transactions that may have an effect on the client’s financial statements.
Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
An audit plan setting forth in detail the procedures necessary to accomplish the engagement’s objectives
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:
Document the details of the disagreement with the conclusion reached.
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:
$10,000
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
Materiality of misstatements = No
Evaluation of accounting estimates = No
Which of the following procedures would an auditor least likely perform in planning a financial statement audit?
Selecting a sample of vendors’ invoices for comparison to receiving reports.
When assessing an internal auditor’s competence, a CPA ordinarily obtains information about all of the following, except:
Access to information about related parties.
An auditor reviews a client’s accounting policies and procedures when considering which of the following planning matters?
Understanding the client’s operations and business.
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?
To assist the auditor in accurately interpreting information obtained during an audit.
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:
Perform tests several times during the year, rather than only at year-end.
Samples to test internal control are intended to provide a basis for an auditor to conclude whether:
The control activities are operating effectively.
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:
Potentially increases the risk that errors that exist at the balance sheet date will not be detected.
In assessing the competence of a client’s internal auditor, an independent auditor most likely would consider the:
Internal auditor’s compliance with professional internal auditing standards.
Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
The entity’s financial statements of the prior year.
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:
Perform the planned auditing procedures closer to the balance sheet date.
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the:
Estimate of the total misstatement is less than a material amount.
Which of the following procedures would an auditor most likely include in the planning phase of a financial statement audit?
Obtain an understanding of the entity’s risk assessment process.
In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:
Financial statement assertions.
Which of the following is not a type of financial statement assertion?
Fairness and accuracy
In developing an overall audit strategy, an auditor should consider:
Preliminary evaluations of materiality, audit risk, and internal control.
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:
Perform tests several times during the year, rather than only at year-end.
Which of the following statements is correct concerning materiality in a financial statement audit?
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.
Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should:
Assess the difficulty in controlling the incremental audit risk.
An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the:
Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset.
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?
The auditor is required to understand the objectives and scope of the actuary’s work.
Which of the following factors most likely would assist an independent auditor in assessing the objectivity of the internal auditor?
The organizational status of the director of internal audit.
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:
Adds an explanatory paragraph to the auditor’s modified opinion to emphasize an unusually important subsequent event in the audit report.
In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the:
Quality of the internal auditors’ working paper documentation.
During the initial planning phase of an audit, the auditor most likely would:
Discuss the timing of the audit procedures with the client’s management.
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?
The size of the auditing firm and the number of auditors assigned to the audit.
Under PCAOB standards, which one of the following factors would indicate that a company has less complex operations?
A centralized accounting function.
Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff?
The fee to be paid by the client.
Which one of the below statements best describes the concept of materiality?
Information that is likely to be viewed by a reasonable investor as altering the mix of available information.
According to PCAOB standards, when would a company be least likely to reevaluate established materiality levels or tolerable misstatements?
The client has stated that it will not be able to respond to the auditor’s request for evidence within the prescribed timeframe.
When assessing internal auditors’ objectivity, an independent auditor should:
Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing:
Test of controls
Substantive tests
Test of controls = Yes
Substantive tests = Yes
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:
Allow the internal auditor to perform tests of internal controls.
Which of the following is true about the auditor’s use of an internal auditor and a specialist?
The auditor must assess the competency of both the internal auditor and the specialist.
Proper supervision of assistants is required for all of the following reasons, except:
To ensure that the work performed by assistants provides the professional development they will need to advance within the firm.
Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
Make a preliminary judgment about materiality
Which of the following risks may be assessed in nonquantitative terms?
Control risk
Detection risk
Inherent risk
Control risk = Yes
Detection risk = Yes
Inherent risk = Yes
The existence of audit risk is recognized by the statement in the auditor’s standard report that the:
Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
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:
Extent of tests of details.
An auditor assesses control risk because it:
Affects the level of detection risk that the auditor may accept.
As the acceptable level of detection risk decreases, an auditor may:
Postpone the planned timing of substantive tests from interim dates to the year-end.
Control risk should be assessed in terms of:
Financial statement assertions.
The acceptable level of detection risk is inversely related to the:
Assurance provided by substantive tests.
As the acceptable level of detection risk increases, an auditor may change the:
Timing of substantive tests from year-end to an interim date.
Regardless of the assessed level of control risk, an auditor would perform some:
Substantive tests to restrict detection risk for significant transaction classes.
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:
Extent of tests of details.
An auditor uses the assessed level of control risk to:
Determine the acceptable level of detection risk for financial statement assertions.
The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor:
Obtains reasonable assurance about whether the financial statements are free of material misstatement.
As the acceptable level of detection risk decreases, the assurance directly provided from:
Substantive tests should increase.
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:
Decrease detection risk.
In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.
Detection risk differs from both control risk and inherent risk in that detection risk:
Can be changed at the auditor’s discretion.
Inherent risk and control risk differ from detection risk in that they:
Exist independently of the financial statement audit.
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:
Decrease detection risk.
Which of the following is a definition of control risk?
The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.
Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
When the combined assessed level of inherent and control risk over the sale is high.
Each of the following is a type of known misstatement, except:
Differences between management and the auditor’s judgment regarding estimates.
Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?
Select more effective substantive tests.
Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud?
Audit documentation must include a description of the discussion.
Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?
The fraud risk factors should be discussed by engagement personnel during planning.
Which of the following is not an inquiry the auditor should make to identify the risks of material misstatement due to fraud?
Whether operating personnel have communicated to management regarding internal control and how it functions to prevent, deter, or detect material misstatement due to fraud.
Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls?
A journal entry made to record recurring periodic accounting estimates.
Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud?
Analysis of sales commissions over the most recent five-year period.
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?
Requesting that management more closely monitor the inventory function.
Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?
An overly complex organizational structure involving unusual lines of authority.
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?
Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud.
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:
Management is dominated by one individual who is also a shareholder.
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?
The entity’s industry is experiencing declining customer demand.
Which of the following statements reflects an auditor’s responsibility for detecting errors and fraud?
An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
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:
Management representation letter.
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
Direct effect non-compliance = Reasonable
indirect effect non-compliance = None
Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?
Inability to generate cash flows from operations while reporting substantial earnings growth.
Which of the following statements is correct concerning an auditor’s responsibility to report fraud?
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.
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
Supporting accounting records and files that should be readily available are not produced promptly when requested.
Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatement arising from fraudulent financial reporting?
Management had frequent disputes with the auditor on accounting matters.
Which of the following statements is correct regarding the auditor’s consideration of the possibility of noncompliance with laws and regulations by clients?
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.
Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
A lack of independent checks.
Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?
An illegal payment to a foreign official that was not recorded.
Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?
Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
Which of the following statements best describes an auditor’s responsibility to detect errors and fraud?
An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
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?
Reevaluate the risk of fraud, and design alternate tests for the related transactions.
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:
Consider withdrawing from the audit engagement and disassociating from future relationships with the client.
Which of the following statements is correct concerning analytical procedures used in planning an audit engagement?
They usually use financial and nonfinancial data aggregated at a high level.
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?
Questioning.
An auditor prepares an unmodified opinion on financial statements that are materially misstated due to fraud. Which of the following is true?
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.
Which of the following is true?
If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk.
Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets?
A large number of bearer bonds on hand.
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:
Client refuses to accept the auditor’s report as modified for the noncompliance.
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:
The client does not take the remedial action that the auditor considers necessary.
Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?
Reviewing an internal control questionnaire.
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?
The discovery of unexplained payments made to government employees.
The audit plan usually cannot be finalized until the:
Consideration of the entity’s internal control has been completed.
The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with:
Knowledge necessary for risk assessment and audit planning.
Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
Comparing the financial statements to anticipated results.
Analytical procedures used in planning an audit should focus on:
Enhancing the auditor’s understanding of the client’s business.
The objective of performing analytical procedures in planning an audit is to identify the existence of:
Unusual transactions and events.
Analytical procedures used in planning an audit should focus on:
Evaluating the adequacy of evidence gathered concerning unusual balances.
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?
Comparing the current-year account balances for conformity with predictable patterns.
Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?
Compare recorded financial information with anticipated results from budgets and forecasts.
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?
Unaudited information from internal quarterly reports.
Analytical procedures used in the planning phase of an audit should focus on:
Enhancing the auditor’s understanding of the transactions and events that have occurred since the last audit.
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?
Comparing current-year balances to budgeted balances.
Of the following nonfinancial information, what would an auditor most likely consider in performing analytical procedures during the planning phase of an audit?
Square footage of selling space.
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?
Become an investor of the company in order to get access to the same information that other investors would have.
Which of the following analytical procedures most likely would be used during the planning stage of an audit?
Comparing current-year to prior-year sales volumes.
Which of the following procedures would a CPA most likely perform in the planning phase of a financial statement audit?
Compare financial information with nonfinancial operating data.
When the auditor’s risk assessment is based on the effective operation of controls, the audit will most likely involve:
Identifying specific internal controls relevant to specific assertions.
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?
Document the auditor’s understanding of internal controls.
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?
Observing the entity’s personnel applying the activities.
Management philosophy and operating style most likely would have a significant influence on an entity’s control environment when:
Management is dominated by one individual.
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:
Control environment.
In an audit of financial statements, an auditor’s primary consideration regarding internal control is whether the control:
Affects management’s financial statement assertions.
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:
Management may establish appropriate procedures but not enforce compliance with them.
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?
The auditor should obtain an understanding of the effect of the user organization upon the service organization.
Proper segregation of duties reduces the opportunities to allow any employee to be in a position to both:
Record and conceal fraudulent transactions in the normal course of assigned tasks.
Management’s emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when:
A significant portion of management compensation is represented by stock options.
Which of the following components (elements) of an entity’s internal control includes the development of personnel manuals documenting employee promotion and training policies?
Control environment.
Which of the following statements about internal control is correct?
The cost-benefit relationship is a primary criterion that should be considered in designing internal control.
An auditor uses the knowledge provided by the understanding of internal control and the final assessed risk of material misstatement primarily to determine the nature, timing, and extent of the:
Substantive tests
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the:
Risk that material misstatements exist in the financial statements.
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
Operating effectivness of controls = No
Design of controls = Yes
Internal control includes which of the following components:
Control environment
Monitoring
Information & Communication systems
Risk Assessment
Internal control includes which of the following components: = Yes
Control environment = Yes
Monitoring = Yes
Information & Communication systems = Yes
Risk Assessment = Yes
The responsibility to establish, maintain and monitor internal controls is that of the entity’s:
Management.
Internal control is relevant to: I. An entire entity. II. An entity's operating units. III. An entity's business functions.
I, II, and III.
Which of the following is necessary in a financial statement audit?
An understanding of internal control relevant to an entity’s financial reporting objective.
Which of the following controls is least likely to be relevant to a financial statement audit?
Procedures that prevent the excess use of materials in production.
An auditor’s primary consideration in evaluating controls is whether specific controls:
Affect financial statement assertions.
If a budgetary reporting system provides adequate reports, but the reports are not analyzed and acted upon:
The control has been implemented but is not operating effectively.
In obtaining an understanding of a manufacturing entity’s internal control concerning inventory balances, an auditor most likely would:
Review the entity’s descriptions of inventory controls.
Which of the following services performed by another entity would not be considered to be part of the client’s information system?
Sale (specifically authorized by the client) of investment securities by an external broker.
Which of the following is an inherent limitation in internal control?
Faulty human judgment.
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that:
Material misstatements may exist in the financial statements.
Which of the following represents an inherent limitation of internal controls?
The CEO can request a check with no purchase order.
Which of the following factors is most relevant when an auditor considers the client’s organizational structure in the context of control risk?
The suitability of the client’s lines of reporting.
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?
Review reports on internal control placed in operation and its operating effectiveness produced by the agent’s own auditor.
Which of the following is an inherent limitation of internal controls?
Collusion.
An auditor should obtain sufficient knowledge of an entity’s information system relevant to financial reporting to understand the:
Process used to prepare significant accounting estimates.
In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the
Design of relevant internal controls pertaining to financial reporting in each of the five internal control components.
An auditor should obtain sufficient knowledge of an entity’s information system relevant to financial reporting to understand the:
Process used to prepare significant accounting estimates.
Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?
Client records documenting the use of EDP programs.
Which of the following are considered control environment factors?
Detection Risk
Human Resource policis and practices
Detection Risk = No
Human Resource policis and practices = Yes
In planning an audit, the auditor’s knowledge about the design of relevant internal controls should be used to
Identify the types of potential misstatements that could occur.
An advantage of using systems flowcharts to document information about internal control instead of using internal control questionnaires is that systems flowcharts:
Provide a visual depiction of client’s activities.
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?
The degree to which information technology is used in the accounting function.
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:
Make inquiries concerning Blue’s professional reputation.
Which of the following procedures is considered a test of controls?
An auditor interviews and observes appropriate personnel to determine segregation of duties.
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?
Verifying that approved spending limits are not exceeded.
In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement?
When transactions are high-volume and recurring.
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?
Inquiry and inspection of records.
Which of the following is not a component of internal control?
Inherent risk.
Each of the following types of controls is considered to be an entity-level control, except those:
Regarding the company’s annual stockholder meeting.
When a service organization provides services that affect the initiation, execution, processing, or reporting of a user company’s transactions, those services are:
Considered to be part of the user company’s information system.
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?
The sales manager does not enforce the client’s stated policies regarding authorization and approval of sales transactions.
Which of the following is not a possible reason why a properly designed system of internal control may fail to prevent or detect fraud?
Inadequate segregation of duties may allow one person to both perpetrate and conceal fraudulent activity.
Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:
Implemented.
Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?
Allowing for greater management oversight of incompatible activities.
Which of the following statements is correct concerning an auditor’s assessment of control risk?
Assessing control risk may be performed concurrently during an audit with obtaining an understanding of the entity’s internal control.
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:
Tests of controls and limited tests of current year property and equipment transactions.
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:
The auditor’s risk assessment is based on the effective operation of controls.
To obtain audit evidence about control risk, an auditor selects tests from a variety of techniques including:
Inquiry.
The objective of tests of details of transactions performed as tests of controls is to:
Evaluate whether internal controls operated effectively.
Which of the following audit techniques ordinarily would provide an auditor with the least assurance about the operating effectiveness of an internal control activity?
Preparation of system flowcharts.
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:
Perform tests of controls to support a lower level of assessed control risk.
Which of the following factors would least likely affect the extent of the auditor’s consideration of the client’s internal controls?
The amount of time budgeted to complete the engagement.
Which of the following statements about performing tests of controls to support a lower level of control risk is not true?
Inquiry alone generally will support a conclusion for a lower assessed level of control risk.
To obtain audit evidence about control risk, an auditor ordinarily selects tests from a variety of techniques, including:
Reperformance.
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:
Observation and inquiry.
After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that:
It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests.
As part of understanding internal control, an auditor is not required to:
Obtain knowledge about the operating effectiveness of internal control.
Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed?
Client records documenting the use of EDP programs.
Which of the following statements concerning control risk is correct?
Assessing control risk and obtaining an understanding of an entity’s internal control may be performed concurrently.
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?
Observation of client personnel.
Which of the following is not part of obtaining an understanding of internal control?
Determining whether internal controls are operating effectively.
Audit evidence concerning segregation of duties ordinarily is best obtained by:
Observing the employees as they apply control procedures.
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:
Increase the assessment of control risk and increase the extent of substantive tests.
In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?
Internal controls during the remaining period are effective.
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?
Perform only substantive tests on inventory.
Which of the following could be difficult to determine because electronic evidence may not be retrievable after a specific period?
The timing of control and substantive tests.
Evidence concerning the proper segregation of duties for receiving and depositing cash receipts ordinarily is obtained by:
Observing the employees who are performing the control activities.
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?
Observe whether the data center is monitored.
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
The basis for the auditor’s decision not to perform tests of controls concurrently with obtaining an understanding of internal control.
If an auditor’s risk assessment is based on the effective operation of controls, the auditor will likely:
Identify specific internal controls that are likely to detect or prevent material misstatements.
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?
Perform tests of details of transactions to detect material misstatements in the financial statements
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?
Test the operating effectiveness of such controls in the current audit.
Which of the following explanations best describes why an auditor may decide to reduce tests of details for a particular audit objective?
Analytical procedures have revealed no unusual or unexpected results.
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.
II and III.
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?
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.
Which of the following should an auditor do when control risk is assessed at the maximum level?
Document the assessment.
Under which circumstance would an auditor be most likely to perform substantive tests before the balance sheet date?
The account in question has very little activity from year to year.
Which of the following statements best describes why an auditor would use only substantive procedures to evaluate specific relevant assertions and risks?
Testing the operating effectiveness of the relevant controls would not be efficient.
Which of the following items does not pertain to the control environment?
The accounting records.
Which of the following factors are included in an entity’s control environment?
Participation of those charged with governance
Management philosophy
Organizational structure
Participation of those charged with governance = Yes
Management philosophy = Yes
Organizational structure =Yes
Which of the following are considered control environment factors?
Assignment of authority and responsibility
Detection risk
Integrity and ethical values
Assignment of authority and responsibility = Yes
Detection risk = No
Integrity and ethical values = Yes
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?
Significantly fewer responses to confirmation requests are received than expected.
Which of the following factors is most important concerning an auditor’s responsibility to detect errors and fraud?
The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.
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
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
Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity’s financial statements?
Supporting records that should be readily available are frequently not produced when requested.
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:
Acts of noncompliance with laws and regulations by clients often relate to operating aspects rather than accounting aspects.
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:
Been forced to discontinue operations in a foreign country.
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:
Apply audit procedures specifically directed to ascertaining whether an act of noncompliance with laws and regulations has occurred.
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:
Evaluate the effect on the financial statements.
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:
Control activities related to each account balance, transaction class, and disclosure component in the financial statements or to every assertion relevant to them.
Which of the following information discovered during an audit most likely would raise a question concerning possible noncompliance with laws and regulations?
The entity prepared several large checks payable to cash during the year.
Which of the following is not a control environment factor?
Proper segregation of duties.
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:
Employees’ actions affect the auditor’s ability to rely on management’s representations.
Which of the following statements is true regarding the risk assessment component of internal control?
An auditor evaluates an entity’s risk assessment to understand how management addresses risks relevant to financial reporting.
Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date, an auditor should:
Consider whether the amounts of the year-end balances selected for interim testing are reasonably predictable.
Which of the following is not true with respect to the control activities of an entity?
Control activities are the policies and procedures that help ensure that the financial statements are fairly presented in conformity with generally accepted accounting principles.
Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:
The difficulty in controlling the incremental audit risk.
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?
The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.
When assessing an internal auditor’s objectivity, an independent auditor should:
Consider the organizational level to which the internal auditor reports.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding:
Disagreements the predecessor had with the client concerning auditing procedures and accounting principles.
Ordinarily, the predecessor auditor permits the successor auditor to review the predecessor’s audit documentation relating to:
Contingencies
Balance sheet accounts
Contingencies = Yes
Balance sheet accounts = Yes
The understanding with a client of an auditor’s contractual obligation ordinarily is set forth in the:
Engagement letter.
An auditor should obtain knowledge of a client’s information and communication system in order to understand each of the following, except
The means used by an entity to ensure that management directives are carried out.
The monitoring component of internal control excludes:
Eliminating controls that are not operating effectively.
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:
Influence the design of internal control.
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):
Description of the scope and nature of Price’s procedures.
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:
Contain a disclaimer of opinion on the operating effectiveness of PDC’s controls.
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:
Management’s description of the service organization’s system.
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
Engagement letter = No
Audit documentation = Yes
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?
Lake may not refer to Cope under the circumstances above.
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:
Extent of tests of details.
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.
Both I and II.
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?
Making inquiries regarding the professional reputation of Robinson, CPA.
Which of the following is a management control method that most likely could improve management’s ability to supervise company activities effectively?
Establishing budgets and forecasts to identify variances from expectations.
In obtaining an understanding of a manufacturing entity’s internal control concerning inventory balances, an auditor most likely would:
Review the entity’s descriptions of controls over inventory.
Proper segregation of duties reduces the opportunities to allow persons to be in positions to both:
Perpetrate and conceal errors and fraud
The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that:
Material misstatements may exist in the financial statements.
An auditor’s flowchart of a client’s information system relevant to financial reporting is a diagrammatic representation that depicts the auditor’s:
Understanding of the system.
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:
Management is dominated by one individual who is also a shareholder.
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?
Make constructive suggestions to the client for improvement.
An auditor would most likely be concerned with internal controls that provide reasonable assurance about the:
Entity’s ability to process and summarize financial data.
An auditor’s primary consideration regarding an entity’s internal control is whether the controls:
Affect the financial statement assertions.
Which of the following statements about internal control is correct?
Internal control is relevant to the entire entity, or to any of its operating units or business functions.
Objectives of an entity include:
Information and communication systems
Reliale financial reportng
Effective and efficient operations
Information and communication systems = No
Reliale financial reportng = Yes
Effective and efficient operations = Yes
Internal control over safeguarding of assets may include controls relating to:
Financial reporting objectives
Operations objectives
Compliance objectives
Financial reporting objectives = Yes
Operations objectives = Yes
Compliance objectives = No
Which of the following factors would most likely be considered an inherent limitation to an entity’s internal control?
Human judgment in the decision making process.
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to:
Document the auditor’s understanding of the entity’s internal control.
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:
Reperformance and observation.
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:
Observation and inquiry.
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?
Observation of client personnel.
Audit evidence concerning proper segregation of duties ordinarily is best obtained by:
Direct personal observation of the employees who apply control activities.
An auditor may decide not to test controls related to certain assertions because the auditor believes:
Evaluating the effectiveness of controls is inefficient.
For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the controls by:
Observation and inquiry.
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:
Additional evidence to support a reduction in control risk was not cost-beneficial to obtain.
An auditor generally tests the segregation of duties related to inventory by:
Personal inquiry and observation.
An auditor’s engagement letter most likely would include:
Management’s acknowledgment of its responsibility for maintaining effective internal control.
Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be conducted?
The integrity of the entity’s management is suspect.
Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
The adequacy of the accounting records.
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s:
Understanding as to the reasons for the change of auditors.
Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
Concluding that the entity’s management probably lacks integrity.
Before accepting an engagement to audit a new client, an auditor is required to
Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.
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):
Engagement letter.
In assessing the objectivity of internal auditors, an independent auditor should:
Determine the organizational level to which the internal auditors report.
An auditor should design the written audit plan so that
The audit procedures selected will achieve specific audit objectives.
Which of the following statements is correct concerning an auditor’s use of the work of a specialist?
The work of a specialist who is related to the client may be acceptable under certain circumstances.
When assessing the internal auditors’ competence, the independent CPA should obtain information about the:
.
Educational background and professional certification of the internal auditors.
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:
Auditor, as a result of the specialist’s findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.
An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor:
Should assess the risk that the actuary’s objectivity might be impaired.
When assessing the competence of the internal auditors, an independent CPA should obtain information about the:
Quality of the internal auditors’ working paper documentation.
An auditor who discovers that a client’s employees paid small bribes to municipal officials most likely would withdraw from the engagement if:
Management fails to take the appropriate remedial action.
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?
Management places substantial emphasis on meeting earnings projections.
Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity’s financial statements?
Transactions selected for testing are not supported by proper documentation.
Which of the following is a true statement regarding documentation requirements for analytical procedures?
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.
Which of the following comparisons would an auditor most likely make in evaluating an entity’s costs and expenses?
The current year’s payroll expense with the prior year’s payroll expense.
An auditor may achieve audit objectives related to particular assertions by:
Performing analytical procedures.
An auditor’s analytical procedures most likely would be facilitated if the entity:
Uses a standard cost system that produces variance reports.
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:
Valuation and allocation.
Which of the following would not be considered an analytical procedure?
Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.
Which of the following types of audit evidence generally is the most reliable?
Confirmation of account information.
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:
Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.
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?
The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
Which of the following procedures would yield the most reliable evidence?
A recalculation of bad debt expense.
Which of the following procedures would be most effective in reducing attestation risk?
Examination of evidence.
Which of the following factors would most likely influence an auditor’s consideration of the reliability of data when performing analytical procedures?
Whether the data were developed under a system with adequate controls.
An auditor’s decision whether to apply analytical procedures as substantive tests usually is determined by the:
Precision and reliability of the data used to develop expectations.
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?
Interest expense.
Which of the following documents are examples of audit evidence generated by the client?
Shipping documents and receiving reports.
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?
Interest expense.
In determining whether transactions have been recorded, the direction of the audit testing should be from the:
Original source documents.
Which of the following pairs of accounts would be analyzed together in the audit documentation?
Notes receivable and interest income.
The objective of tests of details of transactions performed as substantive tests is to:
Detect material misstatements in the financial statements.
Which of the following types of audit evidence is the most persuasive?
Bank statements obtained from the client.
Analytical procedures are most appropriate when testing which of the following types of transactions?
Operating expense transactions.
Which of the following procedures would an auditor most likely perform when auditing the statement of cash flows?
Reconcile the amounts included in the statement of cash flows to the other financial statements’ amounts.
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?
Obtain additional evidence regarding the valuation of inventory.
When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?
Identifying reasonable explanations for unexpected differences before talking to client management.
Which of the following most likely would cause an auditor to consider whether a client’s financial statements contain material misstatements?
The results of an analytical procedure disclose unexpected differences.
Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows?
Reconcile the amounts included in the statement of cash flows to the other financial statements’ balances and amounts.
PCAOB standards state that the relevance of audit evidences depends on all but which of the following?
The auditor’s risk assessment.
Which of the following best explains why an analytical procedure might be used as a substantive test?
To achieve audit objectives in the most effective and efficient manner possible.
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?
Select a sample of sales invoices and trace to the related shipping documents.
Which of the following would provide an auditor with the most reliable evidence regarding the existence of accounts receivable?
An accounts receivable confirmation received by the auditor from the client’s customer.
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?
Comparing the current year’s financial statements with those of the prior year.
Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?
Investigate changes in capital stock recorded after year end.
What type of evidence would provide the highest level of assurance in an attestation engagement?
Evidence obtained from independent sources.
Which of the following would not be considered an analytical procedure?
Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.
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:
Valuation and allocation.
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
Understand-ability and classification = No
Rights and obligations = Yes
On receiving a client’s bank cutoff statement, an auditor most likely would trace:
Prior-year checks listed in the cutoff statement to the year-end outstanding checklist.
Which of the following characteristics most likely would be indicative of check kiting?
Low average balance compared to high level of deposits.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also:
Is responsible for mailing the checks.
Which of the following sets of information does an auditor usually confirm on one form?
Cash in bank and collateral for loans.
The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may:
Be unaware of all the financial relationships that the bank has with the client.
Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?
Vouch a sample of cash disbursements recorded just after year-end to receiving reports and vendor invoices.
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:
Determine that purchases were properly recorded.
Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:
Prepare a duplicate listing of checks received.
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:
Stamped “paid” by the check signer.
Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?
Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
Which of the following internal control activities is not usually performed in the vouchers payable department?
Accounting for unused prenumbered purchase orders and receiving reports.
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?
Examine shipping documents for matching sales invoices.
Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
Under properly designed internal control, the same employee most likely would match vendors’ invoices with receiving reports and also:
Recompute the calculations on vendors’ invoices.
The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whether:
The information is presented in conformity with the GAAP rules on segment information.
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:
Shipping document file.
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?
The chief financial officer waived approvals on all checks to one vendor to expedite payment.
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:
Collection of receivables.
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that:
Sales billed to customers were actually shipped.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
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
Understand ability and classification = No
Existence = Yes
In the Bank Transfer Schedule below, which of the following cash transfers results in a misstatement of cash at December 31, 20X1?
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
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
Rights and obligations = No
Allocation and valuation = Yes
An auditor’s tests of controls for completeness for the revenue cycle usually include determining whether:
An invoice is prepared for each shipping document.
Which of the following describes a weakness in accounts payable procedures?
The accounts payable manager issues purchase orders.
Which of the following situations most likely could lead to an embezzlement scheme?
Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statement.
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:
Shipping document file.
Which of the following procedures would best detect a liability omission by management?
Review purchase contracts and other legal documents.
Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales?
Sales orders are sent to the credit department for approval.
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:
Cash receipts and accounts receivable.
If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
Allowance for doubtful accounts.
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?
The form was mailed by the controller.
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:
Stamped “paid” by the check signer.
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:
Shipping documents to the sales invoices.
An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:
Identify potential liabilities for unpaid payroll taxes.
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?
An acknowledgment by a client representative that the securities were returned intact.
Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?
Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.
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:
Tests of controls and limited tests of current year property and equipment transactions.
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:
Observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
A weakness in internal control over recording retirements of equipment may cause an auditor to:
Select certain items of equipment from the accounting records and locate them in the plant.
Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?
Plant assets were retired during the year.
Which of the following circumstances most likely would cause an auditor to suspect an employee payroll fraud scheme?
There are significant unexplained variances between standard and actual labor cost.
An auditor generally tests the segregation of duties related to inventory by:
Personal inquiry and observation.
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:
Cutoff.
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would:
Ask the client to contact the customers to request that the confirmations be returned.
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:
Sales returns.
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:
Recalculating payroll accruals.
Which of the following questions would an auditor least likely include on an internal control questionnaire concerning the initiation and execution of equipment transactions?
Are procedures in place to monitor and properly restrict access to equipment?
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:
Confirm the number of shares owned that are held by an independent custodian.
Determining that proper amounts of depreciation are expensed provides assurance about management’s assertion of:
Valuation, allocation, and accuracy.
In auditing accounts receivable the negative form of confirmation request most likely would be used when:
The combined assessed level of inherent and control risk relative to accounts receivable is low.
When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be:
Vendors with whom the entity has previously done business.
In auditing long-term bonds payable, an auditor most likely would:
Compare interest expense with the bond payable amount for reasonableness.
In performing tests concerning the granting of stock options, an auditor should:
Trace the authorization for the transaction to a vote of the board of directors.
Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead?
Use of time tickets to record actual labor worked on production orders.
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:
Trust company has no direct contact with the entity employees responsible for maintaining investment accounting records.
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:
Understandability and classification, and valuation and accuracy.
Which of the following procedures represents a weakness in internal controls for payroll?
The payroll clerk distributes signed payroll checks. Undistributed checks are returned to the payroll department.
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?
Test the computation of standard overhead rates.
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:
Number of shares issued and outstanding.
When a client engages in transactions involving derivatives, the auditor should:
Develop an understanding of the economic substance of each derivative.
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:
Records produced by investment services.
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:
Examine the contracts for possible risk exposure and the need to recognize losses.
An auditor’s principal objective in analyzing repairs and maintenance expense accounts is to:
Discover expenditures that were expensed but should have been capitalized.
An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?
Repairs and maintenance.
Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable?
Include a list of items or invoices that constitute the customers’ account balances.
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:
Confirm the number of shares owned that are held by an independent custodian.
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:
Electronically accessing the details of dividend records on the Internet.
In auditing an entity’s computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning:
Control and distribution of unclaimed checks.
The blank form of accounts receivable confirmations may be less efficient than the positive form because:
More nonresponses to the requests are likely to occur.
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?
Reasonableness test.
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?
Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.
Which of the following procedures would an auditor least likely perform before the balance sheet date?
Confirmation of accounts payable.
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:
Observe physical counts of the inventory items.
As part of the process of observing a client’s physical inventories, an auditor should be alert to:
The inclusion of any obsolete or damaged goods.
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?
Completeness.
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:
More nonresponses are likely to occur.
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:
Employees work the number of hours for which they are paid.
To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor most likely would trace:
Items listed in the inventory-listing schedule to inventory tags and the auditor’s recorded count sheets.
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:
Cash disbursements
In performing a search for unrecorded retirements of fixed assets, an auditor most likely would:
Inspect the property ledger and the insurance and tax records, and then tour the client’s facilities.
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:
Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
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:
Dates checks are deposited per bank statements with the dates remittance credits are recorded.
Which of the following payroll control activities would most effectively ensure that payment is made only for work performed?
Require employees to have their direct supervisors approve their time cards.
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:
An error in recording amortization of the excess of the investor’s cost over the investment’s underlying book value.
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?
When well-kept perpetual inventory records are checked by the client periodically by comparisons with physical counts.
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
Performing cutoff procedures for shipping and receiving.
Which of the following activities performed by a department supervisor most likely would help in the prevention or detection of a payroll fraud?
Approving a summary of hours each employee worked during the pay period.
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?
Accept the confirmation but verify the source and content through a telephone call to the respondent.
Which of the following tests of details most likely would help an auditor determine whether accounts payable have been misstated?
Examining vendor statements for amounts not reported as purchases.
An auditor most likely would analyze inventory turnover rates to obtain evidence concerning management’s assertions about:
Valuation and allocation.
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:
Classification and understandability.
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?
Confirmation
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:
Represented by tags were included on the listing.
When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations:
Client-prepared statements of account that show the details of the account balances.
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?
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.
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.
Both I and II.
Which of the following does not demonstrate an inappropriate segregation of duties?
A billing clerk prepares invoices and records the resulting increase in accounts receivable.
Which audit procedure is most likely related to the classification and understandability of the financial statements with respect to inventory?
Confirming inventories pledged under loan agreements.
Generally accepted auditing procedures have not been followed in which of the following situations?
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.
An auditor is required to confirm accounts receivable if the accounts receivable balances are:
Material to the financial statements.
Which of the following controls should prevent an invoice for the purchase of merchandise from being paid twice?
The check signer reviews and cancels the voucher packets.
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:
Individual invoices.
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?
Clerk 3 mails the checks and remittances after they have been signed.
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?
Inventory is complete.
Which of the following best describes the auditor’s responsibility with respect to fair values?
The auditor should obtain sufficient appropriate audit evidence to provide reasonable assurance that fair value measurements and disclosures are in conformity with GAAP.
Which of the following would an auditor least likely consider with respect to fair values?
The effect on fair value measurement and disclosures of information available subsequent to the audit.
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?
Review the lawyer’s letter for information about litigation.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are:
Susceptible to bias.
The refusal of a client’s attorney to provide information requested in an inquiry letter generally is considered:
A limitation on the scope of the audit.
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:
Issue an unmodified opinion.
When auditing related party transactions, an auditor places primary emphasis on:
Evaluating the disclosure of the related party transactions.
Which of the following procedures would an auditor ordinarily perform first in evaluating management’s accounting estimates for reasonableness?
Obtain an understanding of how management developed its estimates.
In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:
Deviations from historical patterns.
The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to provide the auditor with:
Corroboration of the information furnished by management about litigation, claims, and assessments.
After determining that a related party transaction has, in fact, occurred, an auditor should:
Obtain an understanding of the business purpose of the transaction.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
The prospective client’s unwillingness to permit inquiry of its legal counsel.
Which of the following procedures most likely could assist an auditor in identifying related party transactions?
Reviewing confirmations of compensating balance arrangements.
“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):
Audit inquiry letter to legal counsel.
Which of the following procedures would an auditor ordinarily perform first in evaluating the reasonableness of management’s accounting estimates?
Obtain an understanding of how management developed its estimates.
Which of the following parties should request inquiry of a client’s lawyer?
Client management.
If a client will not permit inquiry of outside legal counsel, the auditor’s report ordinarily will contain a(an):
Disclaimer of opinion.
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?
“I believe that the plaintiff will have problems establishing any liability.”
Which of the following events most likely would indicate the existence of related parties?
Selling real estate at a price significantly different from appraised value.
Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
Read the file of correspondence from taxing authorities.
Which of the following events least likely would indicate the existence of related party transactions?
Writing off obsolete inventory to net realizable value just before year end.
Which of the following procedures would an auditor most likely perform regarding litigation?
Discuss with management its policies and procedures for identifying and evaluating litigation.
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?
An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded.
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:
Corroboration of the information furnished by management concerning litigation, claims, and assessments.
Which of the following procedures should an auditor perform concerning litigation, claims, and assessments?
Obtain assurance from management that it has disclosed all unasserted claims that its lawyer has advised are probable of assertion.
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reviewing confirmations of loans receivable and payable for indications of guarantees.
Which of the following is an audit procedure that an auditor would most likely perform concerning litigation, claims, and assessments?
Discuss with management the controls adopted for evaluating and accounting for litigation, claims, and assessments.
Which of the following procedures would an auditor most likely perform to assist in the evaluation of loss contingencies?
Obtaining a letter of audit inquiry from the client’s lawyer.
Which of the following steps should an auditor perform first to determine the existence of related parties?
Request a list of related parties from management.
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?
“We believe that the action can be settled for less than the damages claimed.”
In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?
Read the minutes of the board of directors’ meetings.
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:
The appropriateness of management’s financial statement disclosure.
Which of the following is not a procedure the auditor would use in evaluating the reasonableness of an accounting estimate?
Confirm via the management representation letter that management has disclosed all significant estimates.
In auditing related party transactions, an auditor ordinarily places primary emphasis on:
The adequacy of the disclosure of the related party transactions.
Which of the following is true about the term “likely misstatement?”
It refers to misstatements that have not been specifically identified, but which are likely to exist based on the auditor’s judgment.
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
Significant differences between the physical inventory count and the accounting records are not investigated.
To be effective, analytical procedures in the overall review stage of an audit engagement should be performed by:
A manager or partner who has a comprehensive knowledge of the client’s business and industry.
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:
Additional tests of details are required.
Analytical procedures used in the overall review stage of an audit generally include:
Considering unusual or unexpected account balances that were not previously identified.
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?
Total debt/total assets.
Analytical procedures performed in the final review stage of an audit generally would include:
Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.
An auditor most likely would apply analytical procedures in the overall review stage of an audit to:
Determine whether additional audit evidence may be needed.
Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit?
Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.
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?
The client opened a second retail outlet in the current year and its credit sales approximately equaled the older, established outlet.
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?
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.
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?
Revenue.
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?
The dollar amount of the error.
According to PCAOB standards, which of the following does not represent an example of management bias?
Management reporting all insurance purchases initially as an expense and then adjusting the unexpired portion into prepaid insurance at the end of the period.
Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client’s financial statements?
Differences between reconciliations of control accounts and subsidiary records are not investigated.
A primary objective of analytical procedures used in the final review stage of an audit is to:
Assist the auditor in evaluating the overall financial statement presentation.
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into:
Cost of goods sold.
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
Current ratio = No effect
Quick ratio = No effect
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?
6%
$150,000 / [($2,000,000 + $3,000,000) / 2]
or [$150,000 / $2,500,000] = 6% rate of return.
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?
$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.
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?
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.
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?
Numerator = 365
Denominator = Inventory turnover
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?
Balance sheet.
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?
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.
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?
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.
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?
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.
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?
Gross profit percentage decreased.
The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that:
The company is more aggressively collecting customer accounts.
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:
There was an improper cutoff of sales at the end of the year.
Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?
Cost of goods sold/average inventory.
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:
Analytical procedures.
In testing the existence assertion for an asset, an auditor ordinarily works from the:
Accounting records to the supporting evidence.
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?
Payroll expense.
Which of the following statements concerning audit evidence is correct?
A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.
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:
Understandability and classification.
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:
Cutoff.
Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of:
Valuation.
Which of the following statements is generally correct about the reliability of audit evidence?
The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.
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?
Inspect agreements to determine whether any inventory is pledged as collateral or subject to any liens.
Which of the following procedures would an auditor most likely perform to verify management’s assertion of completeness?
Compare a sample of shipping documents to related sales invoices.
Which of the following procedures would provide the most reliable audit evidence?
Inspection of bank statements obtained directly from the client’s financial institution.
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?
Occurrence.
In a credit sales and cash receipts system flowchart symbol X could represent:
Remittance advices.
Which of the following statements concerning audit evidence is correct?
The measure of the sufficiency of audit evidence lies in the auditor’s judgment.
Which of the following presumptions does not relate to the reliability of audit evidence?
An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.
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:
Valuation and allocation.
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:
Completeness.
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:
Existence.
Which of the following evidence provides the greatest assurance of reliability?
Bank statement.
Which of the following evidence provides the least assurance of reliability?
Sales invoice.
Which of the following is not true about accounting estimates?
Accounting estimates measure the effects of past transactions or events that cannot be determined in a timely cost-effective manner.
In evaluating an entity’s accounting estimates, one of an auditor’s objectives is to determine whether the estimates are:
Reasonable under the circumstances.
Which of the following is true about an auditor’s responsibility with respect to accounting estimates?
The auditor is responsible for evaluating the reasonableness of accounting estimates.
Which of the following is not a reason justifying the use of accounting estimates?
Data about future events cannot be accumulated in a cost-effective manner.
An auditor would be most likely to identify a contingent liability by obtaining a (an):
Standard bank confirmation.
In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches?
Review the minutes of board of directors and shareholder meetings for discussion of the estimate.
The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):
Payroll register entry.
Which of the following procedures most likely would be considered a weakness in an entity’s internal controls over payroll?
The employee who distributes payroll checks returns unclaimed payroll checks to the payroll department.
An auditor most likely would perform substantive tests of details on payroll transactions and balances when:
Analytical procedures indicate unusual fluctuations in recurring payroll entries.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
Authorization of transactions from the custody of related assets.
An auditor most likely would extend substantive tests of payroll when:
Overpayments are discovered in performing tests of details.
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that:
Employees work the number of hours for which they are paid.
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:
Existence.
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because:
The auditor cannot infer that all nonrespondents have verified their account information.
Auditor confirmation of accounts payable balances at the balance sheet date may be unnecessary because:
There is likely to be other reliable external evidence available to support the balances.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are:
Rights and obligations and existence.
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
Assessed level of control risk relating to receivables is = Low
Number of small balances is = many
Consideration by the recipient is = likely
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?
Inspect the shipping records documenting the merchandise sold to the debtors.
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?
A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would:
Verify the sources and contents of the faxes in telephone calls to the senders.
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?
The recipients are likely to sign the confirmations without devoting proper attention to them.
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:
Confirms the number of shares owned that are held by an independent custodian.
An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the:
Completeness of recorded investment income.
An auditor would most likely verify the interest earned on bond investments by:
Recomputing the interest earned on the basis of face amount, interest rate, and period held.
Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?
The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.
To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would:
Examine the audited financial statements of the investee company.
Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?
An independent trust company that has no direct contact with the employees who have recordkeeping responsibilities has possession of the securities.
Which of the following controls most likely would give the greatest assurance that securities held as investments are safeguarded?
Access to securities requires the signatures and presence of two designated officials.
In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:
Completeness of recorded investment income.
Which of the following internal controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?
The internal auditor compares the securities in the bank safe deposit box with recorded investments.
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:
Request the client to have the bank seal the safe deposit box until the auditor can count the securities at a subsequent date.
Property acquisitions that are misclassified as maintenance expense would most likely be detected by an internal accounting control system that provides for:
Investigation of variances within a formal budgeting system.
Which of the following controls is most likely to prevent the improper disposition of equipment?
A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders
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):
Lien on the plant equipment.
Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions?
Inspecting documents and physically examining assets.
Which of the following internal controls most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions?
Periodic physical inspection of plant and equipment by the internal audit staff.
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:
Investigation of variances within a formal budgeting system.
In testing for unrecorded retirements of equipment, an auditor most likely would:
Select items of equipment from the accounting records and then locate them during the plant tour.
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:
Seek information about contingent liabilities and security agreements.
In an audit of contingent liabilities, which of the following procedures would be least effective?
Examining customer confirmation replies
The primary evidence regarding year-end cash balances in the financial statements is documented in the:
Bank reconciliations.
An auditor’s program to examine long-term debt should include steps that require:
Examining bond trust indentures.
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:
Matters to which the attorney has given substantive attention in the form of legal representation.
An auditor’s plan to examine long-term debt most likely would include steps that require:
Correlating interest expense recorded for the period with outstanding debt.
Which of the following is not an audit procedure that the independent auditor would perform concerning litigation, claims, and assessments?
Confirm directly with the client’s lawyer that all claims have been recorded in the financial statements.
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:
The corroboration of the information furnished by management concerning litigation, claims, and assessments.
The most likely result of ineffective internal control policies and procedures in the revenue cycle is that:
Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme.
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
Are direct borrowings on notes payable authorized by the board of directors?
In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:
Completeness.
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?
“I believe that the action can be settled for less than the damages claimed.”
An auditor should trace corporate stock issuances and treasury stock transactions to the:
Minutes of the board of directors.
When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the transfer agent and registrar concerning:
The number of shares issued and outstanding.
The primary responsibility of a bank acting as registrar of capital stock is to:
Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation.
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:
Understandability and classification
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
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:
Canceled checks.
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to:
Corroborate information regarding deposit and loan balances.
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:
Receiving reports.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
Compare cash payments occurring after the balance sheet date with the accounts payable trial balance.
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
Treasurer.
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:
Daily deposit slip.
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:
Accounting records to the source documents
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?
Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
An auditor should trace bank transfers for the last part of the audit period and first part of the subsequent period to detect whether:
Cash balances were overstated because of kiting.
Which of the following most likely would be detected by an auditor’s review of a client’s sales cut-off?
Unrecorded sales at year-end.
Tracing bills of lading to sales invoices provides evidence that:
Shipments to customers were invoiced.
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?
Employees involved in the credit-granting function are separated from the sales function.
Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?
The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.
An entity with a large volume of customer remittances by mail could most likely reduce the risk of employee misappropriation of cash by using:
A bank lockbox system
Which of the following internal control procedures most likely would deter lapping of collections from customers?
Segregation of duties between receiving cash and posting the accounts receivable ledger.
Tracing shipping documents to prenumbered sales invoices provides evidence that:
Shipments to customers were properly invoiced.
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?
Observe the consistency of the employees’ use of cash registers and tapes.
For effective internal accounting control, the accounts payable department should compare the information on each vendor’s invoice with the:
Receiving report and the purchase order.
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?
Match purchase order, receiving report, and vendor’s invoice for each voucher in accounts payable department.
For effective internal control purposes, the vouchers payable department generally should:
Establish the agreement of the vendor’s invoice with the receiving report and purchase order.
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:
Receiving reports.
Which of the following control activities is not usually performed in the vouchers payable department?
Controlling the mailing of the check and remittance advice.
Which of the following internal control procedures most likely addresses the completeness assertion for inventory?
Receiving reports are prenumbered and periodically reconciled.
Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?
Purchase orders, receiving reports, and vendor’s invoices are independently matched in preparing vouchers.
Mailing disbursement checks and remittance advices should be controlled by the employee who:
Signs the checks last.
Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
Debit memo.
The authority to accept incoming goods in receiving should be based on a (an):
Approved purchase order.
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
Negotiate terms with vendors.
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:
Valuation and allocation.
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:
Completeness.
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:
Valuation and allocation.
Sales Transaction - Cash Receipts and G/L Transaction file are all application programs (Symbol A)
Symbol A most likely represents:
Accounts receivable master file.
Remittance from customers - enter data,
Symbol B most likely represents:
Sales invoices.
To obtain assurance that all inventory items in a client’s inventory listing are valid, an auditor most likely would trace:
Items in the inventory listing to inventory tags and the auditor’s recorded count sheets.
Tracing shipping documents to prenumbered sales invoices provides evidence that:
Shipments to customers were properly invoiced.
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:
Fictitious credit sales have been recorded during the year.
Which of the follo
wing strategies most likely could improve the response rate of the confirmation of accounts receivable?
Including a list of items or invoices that constitute the account balance.
To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would:
Request the senders to mail the original forms to the auditor.
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
Existence = Yes
Understandability and classification = No
In auditing accounts receivable, the negative form of confirmation request most likely would be used when:
The combined assessed level of inherent risk and control risk relative to accounts receivable is low.
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:
Dividend record books produced by investment advisory services.
The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because:
Customers may not be inclined to report understatement errors in their accounts.
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.
I only.
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:
Valuation and allocation.
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:
Rights and obligations.
Which of the following statements is correct concerning the use of negative confirmation requests?
Unreturned negative confirmation requests rarely provide significant explicit evidence.
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:
Individual invoices.
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
Testing the entity’s computation of standard overhead rates.
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of control risk is high, an auditor would probably:
Request the client to schedule the physical inventory count at the end of the year.
In auditing payroll, an auditor most likely would:
Verify that checks representing unclaimed wages are mailed.
An auditor analyzes repairs and maintenance accounts primarily to obtain evidence in support of the audit assertion that all:
Expenditures for property and equipment have not been charged to expense.
Which of the following internal controls most likely would be used to maintain accurate inventory records?
Periodic inventory counts are used to adjust the perpetual inventory records.
Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity’s financial statements?
Accounts receivable confirmation requests yield significantly fewer responses than expected.
Which of the following internal controls most likely would reduce the risk of diversion of customer receipts by an entity’s employees?
A bank lockbox system.
For effective internal control, the accounts payable department generally should:
Establish the agreement of the vendor’s invoice with the receiving report and purchase order.
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
Treasurer.
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:
Valuation and allocation.
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?
Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the sales journal.
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?
Examining an analysis of inventory turnover.
Which of the following presumptions is correct about the reliability of audit evidence?
An effective internal control structure provides more assurance about the reliability of audit evidence.
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
As a Substantive test = No
In the final review stage = Yes
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?
Analytical procedures.
In evaluating an entity’s accounting estimates, one of the auditor’s objectives is to determine whether the estimates are:
Reasonable in the circumstances.
Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?
Management is unwilling to permit inquiry of its legal counsel.
Which of the following statements is correct regarding accounting estimates?
The auditor’s objective is to evaluate whether accounting estimates are reasonable in the circumstances.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor most likely concentrates on key factors and assumptions that are
Deviations from historical patterns.
What is an auditor’s primary method to corroborate information on litigation, claims, and assessments?
Reviewing the response from the client’s lawyer to a letter of audit inquiry.
Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence supporting the effective operation of controls?
Observing an entity’s employee prepare the schedule of past due accounts receivable.
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:
$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.
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:
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.
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
The average dollar value of the check requests = No
The allowable risk of assessing control risk too low = Yes
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
Variability in the dollar amounts of inventory items = Yes
Risk of incorrect acceptance = Yes
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting employee time cards for proper approval by supervisors.
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:
Effectiveness of the audit.
An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the:
Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.
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:
Initially concealed by a forged document.
Which of the following factors is (are) considered in determining the sample size for a test of controls?
Expected deviation rate
Tolerable deviation rate
Expected deviation rate - yes
Tolerable deviation rate - yes
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
Increase in intolerable misstatement = decrease in sample size
Increase in assessed level of control risk = increase in sample size
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:
Measure the sufficiency of the audit evidence obtained.
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:
More than the deviation rate in the auditor’s sample.
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:
Tolerable deviation rate.
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:
Provide an objective basis for quantitatively evaluating sample risk.
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if:
The population has highly variable recorded amounts.
The use of the ratio estimation sampling technique is most effective when:
The calculated audit amounts are approximately proportional to the client’s book amounts.
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls:
Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?
Variables sampling.
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?
Stratify the cash disbursements population so that the unusually large disbursements are selected.
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
Expected amount of misstatements = Yes
Measure of tolerable misstatement = Yes
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting employee time cards for proper approval by supervisors.
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:
Incorrect rejection.
The sample size of a test of controls varies inversely with:
Expected population deviation rate
Tolerable rate
Expected population deviation rate = No
Tolerable rate = Yes
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:
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.
In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?
Attributes.
Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
Inclusion of zero and negative balances generally does not require special design considerations.
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:
Tolerable rate (7%) was less than the upper deviation rate (8%).
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:
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%.
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%?
Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.
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:
Has been properly voided.
An auditor examining inventory most likely would use variables sampling rather than attributes sampling to:
Estimate whether the dollar amount of inventory is reasonable.
As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because:
Control risk based on the auditor’s sample is greater than the true operating effectiveness of the client’s control activity.
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:
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.
Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
The selection of negative balances requires no special design considerations.
Which of the following is the primary objective of probability proportional to sample size?
To identify overstatement errors.
In attribute sampling, a 25% change in which of the following factors will have the smallest effect on the size of the sample?
Number of items in the population.
For which of the following audit tests would a CPA most likely use attribute sampling?
Identifying entries posted to incorrect accounts.
Which of the following would be a consideration in planning an auditor’s sample for a test of controls?
The auditor’s allowable risk of assessing control risk too low.
Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size.
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?
Preliminary judgments about materiality levels.
Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?
The population size has little effect on the sample size.
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?
Incorrect acceptance.
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?
There is not enough information given to determine whether the auditor should rely on this control.
Stratified sampling would best be used in a situation where:
There is a lot of variation among items in the population.
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:
Sample size.
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:
Be related to preliminary judgments about materiality levels.
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:
Produces an estimate having a desired level of precision with a smaller sample size.
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:
Expected deviation rate.
Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?
The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
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:
Precision.
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?
Sampling for variables.
Which of the following statements is correct concerning statistical sampling in tests of controls?
There is an inverse relationship between the sample size and the tolerable rate.
An auditor may decide to decrease the acceptable level of risk when:
The cost and effort of selecting additional sample items is low.
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.
I only.
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting purchase orders for proper approval by supervisors.
Which of the following statements is generally correct about the sample size in statistical sampling when testing internal controls?
The population size has little or no effect on the sample size.
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.
Both I and II.
Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?
An auditor may communicate significant deficiencies during an audit or after the audit’s completion.
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?
Evidence of a lack of objectivity by those responsible for accounting decisions.
An auditor’s letter issued on significant deficiencies relating to a nonissuer’s internal control observed during a financial statement audit should:
Indicate that the audit’s purpose was to report on the financial statements and not to provide an opinion on internal control.
In reporting on a nonissuer’s internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:
Inherent limitations of any internal control.
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?
Management presents its written assertion about the effectiveness of internal control.
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?
An auditor’s report on significant deficiencies should include a restriction on the distribution of the report.
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:
Because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.
Which of the following best describes a CPA’s engagement to report on a nonissuer’s internal control over financial reporting?
An attestation engagement to examine and report on management’s written assertion about the effectiveness of its internal control.
When communicating internal control related matters noted in an audit of a nonissuer, an auditor’s report issued on significant deficiencies should indicate that:
The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
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:
Restriction on the use of the report.
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?
Only the scope paragraph should be modified.
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?
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.
Which of the following is true regarding significant deficiencies in internal control?
Auditors must communicate them to management and to those charged with governance.
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?
Eva’s management must provide a written report to accompany Henna and Company’s report.
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
Likelihood = Reasonable
Magnitude = Material
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.
Both I and II.
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.
I and III only.
Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?
The auditor must communicate both significant deficiencies and material weaknesses.
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
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
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?
The auditor must communicate both significant deficiencies and material weaknesses.
In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:
In writing, during the current audit.
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?
The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.
Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?
Jackson is required to audit and report on Saffer’s internal control.
Which of the following best describes an auditor’s responsibility with respect to communicating internal control deficiencies of issuers?
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.
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.
Neither I nor II.
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?
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.
Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?
Make inquiries to understand the potential consequence of the deviation.
Which of the following statements is correct regarding internal control?
An inherent limitation to internal control is the fact that controls can be circumvented by management override.
During consideration of internal control in a financial statement audit, an auditor is not obligated to:
Search for all significant deficiencies in the operation of internal control.
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:
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.
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:
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.
When engaged to express an opinion on a nonissuer’s internal control, an accountant should:
Obtain management’s written assertions regarding whether the company has maintained effective internal control.
Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?
All material weaknesses are significant deficiencies.
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:
Disclaim an opinion as to management’s cost-benefit statement.
An auditor’s communication of internal control related matters noted in an audit usually should be addressed to:
Management and those charged with governance.
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:
Restriction on the use of the report.
An engagement to express an opinion on the internal control of a nonissuer will generally:
Be more extensive in scope than the assessment of control risk made during a financial statement audit.
Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?
The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
Which of the following statements concerning an auditor’s communication of significant deficiencies identified during the audit of a nonissuer is correct?
Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.
Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?
There are no significant deficiencies in the design or operation of internal control.
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
Scope = Similar
Procedures = Different
Purpose = Similar
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?
When a material weakness exists, the auditor should issue an adverse opinion.
Which is true regarding PCAOB standards surrounding internal control?
PCAOB standards surrounding internal control apply only to audits of issuers.
In obtaining an understanding of an entity’s internal control in a financial statement audit, an auditor is not obligated to:
Search for significant deficiencies in the operation of internal control.
Which of the following is not true about significant deficiencies in internal control?
The auditor is required to search for significant deficiencies in internal control.
According to the ethical standards of the profession, which of the following acts by a CPA is generally prohibited?
Accepting a commission for recommending a product to an audit client.
According to the standards of the profession, which of the following circumstances will prevent a CPA performing audit engagements from being independent?
Employment of the CPA’s spouse as a client’s internal auditor.
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?
The lead partner has worked on the audit engagement of a client for ten years.
Which of the following actions by a CPA most likely violates the profession’s ethical standards?
Retaining client records after the client has demanded their return.
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?
Preparation of Perigee’s routine annual tax return, where Jackson’s fee will be calculated as a percentage of the tax refund obtained.
The concept of materiality would be least important to an auditor when considering the:
Effects of a direct financial interest in the client on the CPA’s independence.
Which of the following statements is incorrect regarding the SEC’s partner rotation rules?
All audit partners must rotate off the audit engagement after five years.
Which of the following services do not need to be pre-approved by the audit committee of an issuer?
Non-audit services that are less than five percent of total revenues from the audit client.
The auditor of an issuer may provide which of the following tax services?
Tax planning services.
Which of the following will impair independence under the U.S. Department of Labor’s independence rules for audits of employee benefit plans?
The auditor also serves as an investment advisor to the employee benefit plan.
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?
The auditor also provides internal audit outsourcing services.
Which of the following statements best describes the ethical standard of the profession pertaining to advertising and solicitation?
A CPA may advertise in any manner that is not false, misleading, or deceptive.
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?
A spouse’s employment with a client.
Under the ethical standards of the profession, which of the following investments in a client is not considered to be a direct financial interest?
An investment held through a nonclient regulated mutual fund.
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?
Mare commits to pay the past due fee in full before the audit report is issued.
According to the ethical standards of the profession, which of the following acts is generally prohibited?
Retaining client records after an engagement is terminated prior to completion and the client has demanded their return.
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
Consulting with experts = Yes
Obtaining specialty accreditation = No
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
New Legislation = Yes
Evolution of a new form of business transaction = Yes
To exercise due professional care an auditor should:
Critically review the judgment exercised by those assisting in the audit.
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
Compilation of personal financial statements = No
Preparation of a tax return = No
Compilation of a financial forecast = No
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?
A distinguishing mark of a profession is its acceptance of responsibility to the public.
Which of the following reports may be issued only by an accountant who is independent of a client?
Standard report on an examination of a financial forecast.
According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?
The auditor’s checking account that is fully insured by a federal agency, is held at a client financial institution.
According to the profession’s ethical standards, a CPA would be considered independent in which of the following instances?
The CPA belongs to a country club client in which membership requires the acquisition of a pro rata share of equity
According to the ethical standards of the profession, which of the following acts generally is prohibited?
Retaining client records after the client has demanded their return.
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):
Unmodified opinion.
An auditor’s independence is considered impaired if the auditor has:
A joint, closely-held business investment with the client that is material to the auditor’s net worth.
Under the ethical standards of the profession, which of the following positions would be considered a position of significant influence in an audit client?
A policy-making position in the client’s finance division.
A CPA who is not in public practice is obligated to follow which of the following rules of conduct?
Integrity and objectivity.
Under the ethical standards of the profession, which of the following business relationships would generally not impair an auditor’s independence?
Advisor to a client’s board of trustees.
Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?
If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings.
According to the ethical standards of the profession, a CPA’s independence would most likely be impaired if the CPA:
Contracted with a client to supervise the client’s office personnel.
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?
Only direct and material indirect financial interests.
Which of the following areas of professional responsibility should be observed by a CPA not in public practice?
Objectivity
Independence
Objectivity = Yes
Independence = No
Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?
An investment held through a regulated mutual fund.
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?
A CPA in public practice providing auditing and other attestation services.
Which of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information?
Releasing financial information to a local bank with the approval of the client’s mail clerk.
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:
Every five years.
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:
Seven years.
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?
One.
The Code of Professional Conduct, Rule 101, regarding independence does not consider which of the following circumstances to be a lack of independence:
The auditor’s brother-in-law’s father is the controller of the client being audited.
Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances impairs Kar’s independence?
Kar’s sibling is an internal auditor employed part-time by Fort.
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?
Yes, because the CPA was not required to be independent at the time the loan was granted.
According to the standards of the profession, which of the following activities would most likely not impair a CPA’s independence?
Providing extensive advisory services for a client.
A violation of the profession’s ethical standards most likely would have occurred when a CPA:
Issued an unqualified opinion on the Year 2 financial statements when fees for the Year 1 audit were unpaid.
Which of the following non-audit services may be provided to an issuer audit client of a firm registered with the PCAOB?
Tax services.
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?
The CPA does not audit the company and has no other business connection with the company.
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?
More than 100 audits.
In which of the following situations is there a violation of client confidentiality under the AICPA Code of Professional Conduct?
A member whose practice is primarily bankruptcy discloses a client’s name.
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?
Smith is a director of Hometown Bank.
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?
Yes, because the stock would be a direct financial interest and materiality is not a factor.
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?
Retaining client records after the client demands their return.
According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations?
The auditor has an investment in an entity that has the ability to exercise significant influence over the audit client.
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?
The CPA authorizes client transactions and reports them to management.
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:
Serving on at least one other issuer’s audit committee or disclosure committee of the board of directors.
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?
Staff accountant.
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:
Tax services pre-approved by the audit committee.
The Code of Professional Conduct, Rule 101 regarding independence, does not consider the following circumstances to be a lack of independence:
The auditor’s brother-in-law’s father is the controller of the client being audited.
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?
A CPA firm may disclose this information unless disclosure would suggest that the client may be experiencing financial difficulties.
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.
I and III only.
Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?
Five years.
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?
Tax planning services.
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:
Independent for purposes of examining financial information required to be filed annually with the DOL.
Under the ethical standards of the profession, which of the following is a “permitted loan” regardless of the date it was obtained?
Secured automobile loan.
According to the Code of Professional Conduct of the AICPA, for which type of service may a CPA receive a contingent fee?
Seeking a private letter ruling.
In which of the following circumstances would a covered member’s independence be impaired with respect to a nonissuer client?
The member owns municipal utility bonds issued by a client, and the bonds are not material to the member’s wealth.
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?
One year.
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
New legislation = Yes
Evolution of a new form of business transaction = Yes
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.
Both I and II.
Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer?
An auditor may communicate significant deficiencies during an audit or after the audit’s completion.
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?
Evidence of a lack of objectivity by those responsible for accounting decisions.
An auditor’s letter issued on significant deficiencies relating to a nonissuer’s internal control observed during a financial statement audit should:
Indicate that the audit’s purpose was to report on the financial statements and not to provide an opinion on internal control.
In reporting on a nonissuer’s internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the:
Inherent limitations of any internal control.
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?
Management presents its written assertion about the effectiveness of internal control.
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?
An auditor’s report on significant deficiencies should include a restriction on the distribution of the report.
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:
Because of its inherent limitations, internal control may not prevent, or detect and correct misstatements.
Which of the following best describes a CPA’s engagement to report on a nonissuer’s internal control over financial reporting?
An attestation engagement to examine and report on management’s written assertion about the effectiveness of its internal control.
When communicating internal control related matters noted in an audit of a nonissuer, an auditor’s report issued on significant deficiencies should indicate that:
The purpose of the audit was to report on the financial statements and not to provide assurance on internal control.
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:
Restriction on the use of the report.
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?
Only the scope paragraph should be modified.
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?
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.
Which of the following is true regarding significant deficiencies in internal control?
Auditors must communicate them to management and to those charged with governance.
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?
Eva’s management must provide a written report to accompany Henna and Company’s report.
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
Likelihood = Reasonable
Magnitude = Material
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.
Both I and II.
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.
I and III only.
Which of the following best describes the responsibility of the auditor to report significant deficiencies and material weaknesses in an audit of a nonissuer?
The auditor must communicate both significant deficiencies and material weaknesses.
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
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
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?
The auditor must communicate both significant deficiencies and material weaknesses.
In a financial statement audit of a nonissuer, a previously communicated significant deficiency that has not been corrected, ordinarily should be communicated again:
In writing, during the current audit.
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?
The auditor need not search for significant deficiencies in internal control but should document and communicate any such deficiencies that are discovered.
Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?
Jackson is required to audit and report on Saffer’s internal control.
Which of the following best describes an auditor’s responsibility with respect to communicating internal control deficiencies of issuers?
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.
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.
Neither I nor II.
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?
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.
Which of the following actions should the auditor take in response to discovering a deviation from the prescribed control procedure?
Make inquiries to understand the potential consequence of the deviation.
Which of the following statements is correct regarding internal control?
An inherent limitation to internal control is the fact that controls can be circumvented by management override.
During consideration of internal control in a financial statement audit, an auditor is not obligated to:
Search for all significant deficiencies in the operation of internal control.
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:
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.
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:
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.
When engaged to express an opinion on a nonissuer’s internal control, an accountant should:
Obtain management’s written assertions regarding whether the company has maintained effective internal control.
Which of the following statements concerning material weaknesses and significant deficiencies is correct with respect to an audit of a nonissuer?
All material weaknesses are significant deficiencies.
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:
Disclaim an opinion as to management’s cost-benefit statement.
An auditor’s communication of internal control related matters noted in an audit usually should be addressed to:
Management and those charged with governance.
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:
Restriction on the use of the report.
An engagement to express an opinion on the internal control of a nonissuer will generally:
Be more extensive in scope than the assessment of control risk made during a financial statement audit.
Which of the following statements is correct concerning significant deficiencies noted in an audit of a nonissuer?
The auditor should separately identify those significant deficiencies that are considered to be material weaknesses.
Which of the following statements concerning an auditor’s communication of significant deficiencies identified during the audit of a nonissuer is correct?
Any report issued on significant deficiencies should indicate that providing assurance on internal control was not the purpose of the audit.
Which of the following representations should not be included in a report on internal control related matters noted in an audit of a nonissuer?
There are no significant deficiencies in the design or operation of internal control.
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
Scope = Different
Procedures = Different
Purpose = Different
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?
When a material weakness exists, the auditor should issue an adverse opinion.
Which is true regarding PCAOB standards surrounding internal control?
PCAOB standards surrounding internal control apply only to audits of issuers.
In obtaining an understanding of an entity’s internal control in a financial statement audit, an auditor is not obligated to:
Search for significant deficiencies in the operation of internal control.
Which of the following is not true about significant deficiencies in internal control?
The auditor is required to search for significant deficiencies in internal control.
Which of the following matters would an auditor most likely communicate to those charged with governance?
The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance
In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:
It consulted with another CPA firm about accounting matters.
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.
The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.
An auditor would least likely initiate a discussion with those charged with governance concerning:
The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.
Which of the following statements is correct concerning an auditor’s required communication with those charged with governance?
This communication should include management changes in the application of significant accounting policies.
Which of the following matters is an auditor required to communicate to those charged with governance?
The process used by management in formulating sensitive accounting estimates.
Which of the following matters is an auditor not required to communicate to those charged with governance?
The degree of reliance the auditor placed on the management representation letter.
An auditor’s communication with those charged with governance is required to include the:
Discussion of disagreements with management about matters that significantly impact the entity’s financial statements.
Which of the following matters is an auditor required to communicate to those charged with governance?
Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity’s financial reporting process.
Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?
Disagreements of the amount of the LIFO inventory layer based on preliminary information.
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?
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.
Which of the following matters is an auditor required to communicate to those charged with governance?
Significant audit adjustments
Changes in significant accounting policies
Significant audit adjustments = Yes
Changes in significant accounting policies = Yes
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
Significant audit adjustments recorded by entity = Yes
Managements consultation with other accountants about significant accounting matters = Yes
Which of the following statements is correct concerning an auditor’s required communication with those charged with governance?
This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.
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.
I and III only.
Which of the following is true about the auditor’s communication with those charged with governance?
The communication should be two-way: those charged with governance should also communicate relevant matters to the auditor.
Which of the following should be included as a written representation from management?
The belief that misstatements identified by the auditor and not corrected are immaterial.
“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:
Management representation letter.
Which of the following matters would an auditor most likely include in a management representation letter?
The reasonableness of significant assumptions used in making accounting estimates.
To which of the following matters would materiality limits not apply in obtaining written management representations?
The availability of minutes of stockholders’ and directors’ meetings.
The date of the management representation letter should coincide with the date of the:
Auditor’s report.
“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):
Management representation letter.
Which of the following statements might be included among additional written client representations obtained by the auditor?
Compensating balances and other arrangements involving restrictions on cash balances have been disclosed.
Which of the following factors most likely would cause an auditor to question the integrity of management?
Audit tests detect material fraud that was known to management, but not disclosed to the auditor.
Which of the following expressions most likely would be included in a management representation letter?
No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure in, the financial statements.
Which of the following matters most likely would be included in a management representation letter?
A statement that the effects of all known or possible litigation and claims have been accounted for and disclosed.
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?
“Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified opinion.”
To which of the following matters would materiality limits not apply when obtaining written client representations?
Instances of fraud involving management.
Which of the following management roles would typically be acknowledged in a management representation letter?
Management has the responsibility for the design of controls to detect fraud.
A written client representation letter most likely would be an auditor’s best source of corroborative information of a client’s plans to:
Discontinue a line of business.
A limitation on the scope of an auditor’s examination sufficient to preclude an unmodified opinion will always result when management:
Refuses to furnish a management representation letter to the auditor.
To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?
Fraud involving employees with significant roles in the internal control structure.
“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:
Management representation letter.
To which of the following matters would materiality limits not apply when obtaining written client representations?
Fraud involving management.
A purpose of a management representation letter is to reduce:
The possibility of a misunderstanding concerning management’s responsibility for the financial statements.
Management representations should be obtained about all of the following, except:
Management’s consultation with other accountants.
Which of the following matters is most likely to be included in a management representation letter as a specific representation?
Information concerning fraud by the CFO.
