AUD Becker A5 - Integrated Audits, Attestation Engagements, Compliance, and Government Audits Part 1 Flashcards
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):
A. Comprehensive document to be used in negotiating a new labor contract.
B. Offering statement of the entity’s initial public offering of common stock.
C. Mortgage application for the purpose of expanding the entity’s facilities.
D. Report to the audit committee that is not sent to the stockholders.
hoice “2” is correct. Financial projections are not appropriate for general use, and therefore should not be included in an offering statement of the entity’s initial public offering of common stock.
Choice “1” is incorrect. Financial projections are appropriate for limited use, such as a comprehensive document to be used in negotiating a new labor contract.
Choice “3” is incorrect. Financial projections are appropriate for limited use, such as a mortgage application for the purpose of expanding the entity’s facilities.
Choice “4” is incorrect. Financial projections are appropriate for limited use, such as a report to the audit committee that is not sent to the stockholders.
An auditor most likely would be responsible for communicating significant deficiencies in the
design of internal control:
A. To shareholders with significant influence (more than 20% equity ownership) when the
signficant deficiencies (reportable conditions) are deemed to be material weaknesses.
B. To a court-appointed creditors’ committee when the client is operating under Chapter
11 of the Federal Bankruptcy Code.
C. To specific legislative and regulatory bodies when reporting under Government
Auditing Standards.
D. To the Securities and Exchange Commission when the client is a publicly-held entity.
Choice “3” is correct. When reporting under Government Auditing Standards, the auditor should consider whether any noted deficiencies in such internal controls should be reported to specific legislative and regulatory bodies.
Choice “1” is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to significant shareholders by the Code of Professional Conduct.
Choice “2” is incorrect. When there is no audit committee, the auditor would report significant deficiencies in the design of the client’s internal control to an otherwise formally designated committee with oversight over the financial reporting process, not necessarily to a court-appointed creditors’ committee.
Choice “4” is incorrect. The auditor would report significant deficiencies to the audit committee. The auditor is prohibited from disclosing confidential client information to the SEC by the Code of Professional Conduct.
Reporting standards for financial audits under Government Auditing Standards (the Yellow
Book) differ from reporting under generally accepted auditing standards in that Government
Auditing Standards require the auditor to:
A. Provide positive assurance that control activities regarding segregation of duties are
consistent with the entity’s control objectives.
B. Present the results of the auditor’s tests of controls.
C. Provide negative assurance that the auditor discovered no evidence of intentional
override of internal controls.
D. Describe the scope of the auditor’s principal substantive tests.
Choice “2” is correct. The report on the audit of financial statements should describe the scope of the auditor’s testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests.
Choice “1” is incorrect. The auditor’s report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity’s objectives.
Choice “3” is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness.
Choice “4” is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor’s testing of compliance with laws and regulations and internal control over financial reporting.
The auditor is required to communicate each of the following items to those charged with
governance, except:
A. An overview of the planned scope and timing of the audit.
B. Any significant findings from the audit.
C. All control deficiencies detected during the course of the audit.
D. The auditor’s responsibilities to complete the audit in accordance with generally
accepted auditing standards.
Choice “3” is correct. The auditor is not required to communicate all control deficiencies to those charged in governance. However, control deficiencies that are determined to be significant deficiencies and material weaknesses are required to be communicated to those charged with governance.
Choice “1” is incorrect. An auditor is required to communicate an overview of the planned scope and timing of the audit.
Choice “2” is incorrect. An auditor is required to communicate any significant findings from the audit.
Choice “4” is incorrect. An auditor is required to communicate the auditor’s responsibilities to complete the audit in accordance with generally accepted auditing standards.
A practitioner is engaged to express an opinion on management’s assertion that the square
footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer
to which of the following sources for professional guidance?
A. Statements on Standards for Consulting Services.
B. Statements on Standards for Accounting and Review Services.
C. Statements on Auditing Standards.
D. Statements on Standards for Attestation Engagements.
Choice “4” is correct. The practitioner should refer to Statements on Standards for Attestation Engagements for an attestation engagement. In an attest service, the practitioner is engaged to issue a report on subject matter or on an assertion about the subject matter (in this case, the square footage of the warehouse), that is the responsibility of another party (in this case, management).
Choice “1” is incorrect. Statements on Standards for Consulting Services apply to consulting services. In a consulting service, the practitioner develops the findings, conclusions, and recommendations presented.
Choice “2” is incorrect. SSARS provide standards with respect to preparations, compilations, and reviews of financial statements. SSARS also apply to engagements in which the accountant is engaged to prepare, compile, or review specified elements, accounts, or items of a nonissuer’s financial statements, or to prepare or compile pro forma or prospective financial information of a nonissuer.
Choice “3” is incorrect. Statements on Auditing Standards apply to audits of financial statements.
When an auditor is asked to issue a report on a client’s compliance with contractual
agreements or regulatory requirements in connection with a financial statement audit, which
of the following statements is true?
A. The auditor must have audited the client’s financial statements and may only issue
reasonable assurance on compliance.
B. The auditor must have audited the client’s financial statements and may only issue
negative assurance on compliance.
C. The auditor must have expressed an unmodified opinion on the financial statements
and may only issue negative assurance on compliance.
D. The auditor may only issue negative assurance on compliance and an audit of the
client’s financial statements is not required.
Choice “2” is correct. In order for an auditor to issue a report on a client’s compliance in connection with a financial statement audit, the auditor must have audited the client’s financial statements and expressed an unmodified or qualified opinion. The auditor may only issue negative assurance on compliance in this situation.
Choice “1” is incorrect. Only negative assurance can be given.
Choice “3” is incorrect. The auditor’s opinion on the financial statements must be either unmodified or qualified.
Choice “4” is incorrect. An audit of the client’s financials statements is required.
Each of the following types of controls is considered to be an entity-level control, except
those:
A. Relating to the control environment.
B. Addressing policies over significant risk management practices.
C. Regarding the company’s annual stockholder meeting.
D. Pertaining to the company’s risk assessment process.
Choice “3” is correct. Entity level controls include controls related to the control environment, the risk assessment process, and the policies over risk management practices. Controls regarding the company’s annual stockholder meeting are controls related to a specific event, rather than the entity as a whole.
Choices “1”, “4”, and “2” are incorrect, based on the above explanation.
An audit performed in accordance with 2 CFR 200 single audit will expand the auditor’s
responsibilities beyond generally accepted auditing standards. The auditor’s expanded
responsibilities include:
A. Performance of additional procedures to test and report on compliance with laws,
rules, regulations and provisions of contracts or grant agreements that have a direct
and material effect on major federal award programs.
B. Performance of additional procedures to test for noncompliance with laws, rules and
regulations targeted for review by the Office of the Inspector General.
C. Performance of additional procedures to test and report on compliance with laws,
rules, regulations and provisions of contracts or grant agreements that have any effect
on federal award programs.
D. Performance of additional procedures to test and report on achievement of program
objectives.
Choice “1” is correct. 2 CFR 200 single audit expands the auditor’s responsibilities to include procedures designed to test and report on compliance matters having a direct and material effect on major federal award programs.
Choice “2” is incorrect. 2 CFR 200 single audit audit objectives relate to management’s assertions regarding compliance with laws, rules, and regulations, not to noncompliance issues identified by the Office of the Inspector General.
Choice “3” is incorrect. 2 CFR 200 single audit expands procedures to major programs as defined by the Circular, not to all programs.
Choice “4” is incorrect. 2 CFR 200 single audit relates to the financial and compliance audits of major federal financial assistance programs, not to the achievement of program objectives.
A user auditor of a nonissuer should perform which of the following procedures to obtain
audit evidence related to the operating effectiveness of a service organization’s controls
when the risk assessment includes an expectation that the controls are operating
effectively?
A. Performing substantive tests at the service organization.
B. Obtaining the user organization’s representation regarding the effectiveness of the
service organization’s controls.
C. Obtaining and reading a Type 2 report, if available.
D. Obtaining and reading a Type 1 report, if available.
Choice “3” is correct. A user auditor should obtain and read a Type 2 report, if available, to obtain audit evidence related to the operating effectiveness of a service organization’s controls when the risk assessment includes an expectation that the controls are operating effectively.
Choice “1” is incorrect. A user auditor would need to perform control, rather than substantive, tests at the service organization to support a risk assessment that includes an expectation that controls are operating effectively at the organization. In addition, a user auditor is more likely to rely on a Type 2 report, rather than perform control tests, because that would be more efficient for relying on the operating effectiveness of the service organization’s controls.
Choice “2” is incorrect. Obtaining the user organization’s representation regarding the effectiveness of the service organization’s controls is not sufficient to rely on the operating effectiveness of the service organization’s controls. A user auditor needs to obtain a Type 2 report when the auditor’s risk assessment includes an expectation that the service organization’s controls are operating effectively.
Choice “4” is incorrect. A Type 1 report aids the user auditor with obtaining an understanding of controls at the service organization, but does not provide the user auditor with evidence that the controls are operating effectively at the service organization.
A company engages a practitioner to assist the audit committee by performing specific
procedures that were agreed to by the audit committee. Which of the following statements
is correct regarding the procedures to be performed?
A. The practitioner has responsibility for the adequacy of the procedures to be
performed.
B. The specific procedures performed should be listed in the practitioner’s report to the
audit committee.
C. The practitioner should not involve the audit committee in determining what
procedures are to be performed.
D. The procedures should be designed to allow the practitioner to provide negative
assurance.
Choice “2” is correct. This question is describing an agreed-upon procedure engagement (“…performing specific procedures that were agreed to…”). An agreed-upon procedures report should include a list of the specific procedures performed.
Choice “1” is incorrect. The practitioner disclaims responsibility for the sufficiency of the procedures in an agreed-upon procedure engagement.
Choice “3” is incorrect. The practitioner should involve the audit committee in determining what procedures are to be performed.
Choice “4” is incorrect. An agreed-upon procedures report does not provide an opinion or negative assurance.
Which of the following characteristics of prospective financial statements would require the
practitioner to include in a report on the prospective financial statements a paragraph that
restricts the use and distribution of the report?
A. They are considered a financial projection.
B. They contain a range of forecasted results.
C. They are prepared by a practitioner who lacks independence.
D. They are considered a financial forecast.
Choice “1” is correct. Prospective financial statements considered a financial projection would require a paragraph restricting the use and distribution of the report.
Choice “2” is incorrect. Forecasted financial statements are not required to be restricted when they contain a range of forecasted results.
Choice “3” is incorrect. A practitioner may issue a compilation of prospective financial statements if the practitioner is not independent. Lack of independence does not require a restricted use paragraph. However, in such circumstances, the practitioner’s report would be modified to indicate his or her lack of independence in a separate paragraph of the practitioner’s report. A practitioner may not issue an examination of prospective financial statements if he or she is not independent.
Choice “4” is incorrect. Prospective financial statements considered a financial forecast are appropriate for general use and are not required to have a paragraph that restricts the use and distribution of the report.
When auditing an entity’s financial statements in accordance with Government Auditing
Standards, an auditor should prepare a written report on the auditor’s:
A. Understanding of internal control and assessment of control risk.
B. Field work and procedures that substantiated the auditor’s specific findings and
conclusions.
C. Opinion on the entity’s attainment of the goals and objectives specified by applicable
laws and regulations.
D. Identification of the causes of performance problems and recommendations for
actions to improve operations.
Choice “1” is correct. Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the scope of the auditor’s work in obtaining an understanding of internal control and his or her assessment of control risk.
Choice “2” is incorrect. A report on fieldwork and procedures that substantiated the auditor’s specific findings and conclusions would not be prepared as part of a GAGAS audit.
Choice “3” is incorrect. The objective of the audit of the financial statements is to provide an opinion on the financial statements, not on the entity’s attainment of goals and objectives.
Choice “4” is incorrect. In the report, the auditor would identify deficiencies, significant deficiencies, and material weaknesses in internal control over compliance (not performance problems) found in the examination of the entity’s internal control.
A CPA is required to comply with the provisions of Statements on Standards for Attestation
Engagements when engaged to:
A. Issue a letter for an underwriter, also known as a comfort letter, to a broker or dealer of
securities.
B. Compile financial statements in conformity with a comprehensive basis of accounting
other than GAAP.
C. Provide assurance on investment performance statistics prepared by an investment
company on established criteria.
D. Communicate with an audit committee regarding management’s consultations with
another CPA.
Choice “3” is correct. A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to provide assurance on investment performance statistics prepared by an investment company on established criteria. SSAE provide guidance on engagements other than reporting on historical financial statements.
Choice “1” is incorrect. Statements on Auditing Standards addresses the auditor’s responsibilities when engaged to issue letters (commonly referred to as comfort letters) to a broker or dealer of securities.
Choice “2” is incorrect. Statements on Standards for Accounting and Review Services addresses the requirements for a CPA to engage in the compilation of financial statements with an applicable financial reporting framework, such as a comprehensive basis of accounting other than GAAP.
Choice “4” is incorrect. Statement on Auditing Standards and PCAOB Auditing Standards address the auditor’s responsibilities when communicating with an audit committee regarding management’s consultations with another CPA for nonissuer and issuer engagements, respectively.
The auditor’s objectives in a compliance audit of a governmental entity include:
A. Minimizing control risk of noncompliance.
B. Forming an opinion on whether the government complied in all material respects with
applicable compliance requirements.
C. Providing negative assurance regarding a legal determination of compliance.
D. Limiting auditing procedures and audit exposure to the standards described by GAAS
and GAGAS.
Choice “2” is correct. An objective of a compliance audit of a governmental entity is to form an opinion on whether that government complied with applicable compliance requirements in all material respects, and then to report at the level specified by the governmental audit requirement.
Choice “1” is incorrect. The auditor cannot minimize or influence control risk.
Choice “3” is incorrect. The auditor specifically reports that the audit does not provide a legal determination of compliance with requirements.
Choice “4” is incorrect. The auditor is to identify audit and reporting requirements (e.g., Single Audit/OMB Circular A-133 requirements) supplementary to GAAS and GAGAS and perform procedures to address those requirements.
An auditor conducting a compliance audit will design and perform additional audit
procedures in response to the assessed risk of material noncompliance. These procedures
will include tests of controls if:
A. Tests of controls are required by the governmental audit requirement.
B. The auditor has determined a deficiency in the design of internal control over
compliance.
C. The auditor has been engaged to perform an organization-wide audit.
D. The auditor’s expectation of the operating effectiveness of controls over compliance is
otherwise unknown.
Choice “1” is correct. Tests of the operating effectiveness of controls may be required if any one of the following exist:
The risk assessment includes an explanation of the operating effectiveness of controls over compliance,
Substantive procedures do not provide enough evidence to support a conclusion, or
Tests of controls are required by the applicable governmental audit requirements.
Choice “2” is incorrect. The design of internal controls over compliance are not as significant as their operation for determination of the need for tests of controls.
Choice “3” is incorrect. The engagement to perform an entity-wide audit does not have direct bearing on whether tests of controls are performed.
Choice “4” is incorrect. Tests of controls are appropriate when the auditor has developed an expectation regarding the operation of controls; not when the operating effectiveness is unknown.
