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
