AUD Becker Mock Exam 1 Part 1 Flashcards
Questions 1-18
Dante, CPA, is auditing the financial statements of Crest Computing. During the previous year, Kratzke & Kratzke, CPAs, audited Crest’s financial statements. Crest has decided to present comparative financial statements for the current year. Which statement is true about Kratzke & Kratzke’s report?
Choice “1” is correct. Kratzke & Kratzke should perform limited procedures, such as reading the current statements, comparing the current and prior statements, and obtaining representation letters from Crest’s management and from Dante.
Choice “2” is incorrect. A predecessor auditor may reissue a previous report after performing certain limited procedures.
Choice “3” is incorrect. Certain limited procedures are required to be performed before a predecessor auditor can reissue a previous report.
Choice “4” is incorrect. There is no requirement that the successor auditor co-sign the report on the previous year’s financial statements, and in fact it would be inappropriate to do so.
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Choice “4” is correct. In obtaining evidence about subsequent events, the auditor would most likely inquire of management whether there have been significant changes in working capital since year-end. Such changes could be indicative of a going concern problem, which would require financial statement disclosure.
Choice “1” is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Reviewing a sample of transactions occurring after year-end to verify the effectiveness of computer controls would not be likely to provide information about subsequent events.
Choice “2” is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Control deficiencies do not fall within this definition, so reperforming tests of controls would not provide evidence about subsequent events.
Choice “3” is incorrect. Subsequent events are material events or transactions occurring subsequent to the balance sheet date, but prior to the issuance of the financial statements, that require adjustment to or disclosure in the financial statements. Recomputing depreciation related to assets sold after year-end is not likely to provide information about subsequent events. Sales occurring after year-end are not considered to be subsequent events.
Which of the following impairs independence?
I. A threatened (and likely) lawsuit related to audit deficiencies.
II. Audit fees that are 120 days overdue.
III. A $15,000 credit card balance from a financial institution client.
Choice “4” is correct. A threatened (and likely) lawsuit and a credit card balance in excess of $10,000 impair independence, but overdue audit fees only impair independence if they are overdue by more than one year.
Choices “2”, “3”, and “1” are incorrect, based on the above explanation.
A risk assessment based on the effective operation of internal control most likely would involve all of the following, except:
Choice “3” is correct. A risk assessment based on the effective operation of internal control increases allowable detection risk, which reduces the required extent of substantive testing.
Choice “1” is incorrect. If the auditor’s risk assessment is based on the effective operation of internal control, the auditor must identify and test specific relevant controls to support that assessment.
Choice “2” is incorrect. If the auditor’s risk assessment is based on the effective operation of internal control, the auditor must test the controls to support that assessment.
Choice “4” is incorrect. The auditor should always use his or her understanding of internal control to consider the types of potential misstatements that may occur.
Which of the following properly describes the auditor’s responsibilities as opposed to management’s responsibilities?
Choice “4” is correct. Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.
Choices “1” and “3” are incorrect. Management is responsible for both the entity’s financial statements and for the selection and application of accounting principles.
Choice “2” is incorrect. Management is responsible for both identifying the laws and regulations applicable to the entity’s activities, and for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial.
As the acceptable level of detection risk decreases, an auditor may change the:
Choice “2” is correct. Better evidence must be obtained to achieve a lower level of detection risk.
Choice “1” is incorrect. The assessed level of inherent risk (based on the auditor’s evaluation of the nature of the assertion) determines the risk of material misstatement, which in turn affects the acceptable level of detection risk. The acceptable level of detection risk is therefore determined by the assessed level of inherent risk, not vice versa.
Choice “3” is incorrect. The assessed level of control risk (based on the auditor’s evaluation of the client’s controls) determines the risk of material misstatement, which in turn affects the acceptable level of detection risk. The acceptable level of detection risk is therefore determined by the assessed level of control risk, not vice versa.
Choice “4” is incorrect. Shifting tests from year-end to interim increases detection risk.
The primary reason an auditor requests that letters of inquiry be sent to a client’s attorney is to provide the auditor with:
Choice “3” is correct. It is management’s responsibility to identify and account for litigation, claims, and assessments. The letter of audit inquiry serves to corroborate information provided by management.
Choice “1” is incorrect. It is management’s responsibility to describe and evaluate litigation, claims, and assessments. While the client’s attorney should provide a professional opinion regarding such matters, the primary purpose of the attorney’s letter is to corroborate management representations.
Choices “2” or “4” are incorrect. It is management’s responsibility to determine the expected outcome and range of potential loss. While the attorney does provide a professional opinion regarding these estimates, the primary purpose of the attorney’s letter is to corroborate the information provided by management.
Which is true about accounts receivable confirmations?
Choice “1” is correct. The auditor should consider the types of information respondents will be readily able to confirm. For example, it may be easier for certain respondents to confirm individual transactions rather than entire balances. In such cases, the auditor may choose to confirm based on invoice number (i.e., single transactions).
Choice “2” is incorrect. The auditor should maintain control over the confirmation requests and responses, which means the auditor should be the one to mail the confirmations, not the client.
Choice “3” is incorrect. Accounts receivable confirmations do not provide reliable evidence about valuation. Just because a respondent confirms that he/she owes a certain amount does not mean that he/she has the intent or the ability to pay it.
Choice “4” is incorrect. Blank confirmations are those in which the recipient is requested to fill in the balance. They provide improved reliability since the respondent cannot simply sign off without actually verifying the balance. However, since more work is required, response rates are often decreased.
Which of the following ordinarily would not be included in the auditor’s responsibility regarding accounting estimates?
Choice “4” is correct. It is management’s responsibility (and not the auditor’s) to establish a process for preparing accounting estimates.
Choice “1” is incorrect. The auditor should evaluate whether management’s estimates are reasonable.
Choice “2” is incorrect. The auditor should assess management’s policies and practices regarding estimates.
Choice “3” is incorrect. The auditor should determine whether estimates are properly disclosed in the financial statements.
Which of the following should be included in a management representation letter?
Choice “4” is correct. Specific representations should be obtained regarding management’s responsibility for the design, implementation, and maintenance of internal control.
Choice “1” is incorrect. Specific representations should be obtained regarding management’s (and not the auditor’s) belief that the effects of any uncorrected misstatements are immaterial to the financial statements taken as a whole. Remember that the letter is coming from management to the auditor, and so should reflect management’s beliefs.
Choice “2” is incorrect. Specific representations should be obtained regarding management’s (and not the auditor’s) belief that the financial statements are fairly presented in conformity with GAAP. Remember that the letter is coming from management to the auditor, and so should reflect management’s beliefs.
Choice “3” is incorrect. Specific representations should be obtained regarding the absence of unrecorded transactions. A disclaimer stating that management is not responsible for unrecorded transactions would not be acceptable.
Kent Industries anticipates that its sales revenue will grow by 5% during the coming year based on historical returns, but also believes there is a slight chance for 20% growth if a new product that is currently being developed is launched during the year. Kent’s management has prepared two sets of financial statements, one based on 5% growth and the other based on 10% growth, in an effort to plan for the future. Giacomo, CPA, has been hired to examine both sets of financial statements. Which of the following is true regarding Giacomo’s two reports?
Note that the 5% growth financial statements are a financial forecast (based on expected results) whereas the 10% growth financial statements are a financial projection (based on the hypothetical release of the new product).
Choice “2” is correct. Both financial forecasts and financial projections are appropriate for limited use.
Choice “1” is incorrect. Use of the report on the 10% growth financial statements (projection) would be restricted; use of the report on the 5% growth financial statements (forecast) could be restricted or unrestricted.
Choice “3” is incorrect. Both financial forecasts and financial projections should include a statement that the results might not be achieved.
Choice “4” is incorrect. Examinations of prospective financial statements include positive assurance regarding whether the statements are presented in conformity with AICPA guidelines, and whether the underlying assumptions provide a reasonable basis for the financial statements. Both reports would therefore include positive assurance.
An auditor provides positive assurance in all of the following reports except:
Choice “1” is correct. Negative assurance is provided on compliance with contractual or regulatory requirements related to audited financial statements.
Choice “2” is incorrect. Positive assurance is provided in a report on a specified account in a financial statement.
Choice “3” is incorrect. Positive assurance is provided in a report on other comprehensive basis of accounting financial statements.
Choice “4” is incorrect. Positive assurance is provided in a report on a financial presentation to comply with contractual agreements or regulatory requirements.
Min, CPA, is unable to perform necessary procedures in a review of the financial statements of a nonissuer. What will be the effect on Min’s review report?
Choice “2” is correct. Accountants must be able to perform whatever procedures they deem necessary, and if those procedures are not accomplished, the review is incomplete. A review that is incomplete will prevent the issuance of a review report.
Choice “1” is incorrect. Regardless of the reason for the scope restriction, a review that is incomplete will prevent the issuance of a review report.
Choice “3” is incorrect. Adding an additional paragraph is not an appropriate response. If the review is incomplete, no review report should be issued.
Choice “4” is incorrect. Adding an additional paragraph is not an appropriate response. If the review is incomplete, no review report should be issued.
Which correctly describes the relationship between the PCAOB and the SEC?
Choice “1” is correct. The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers.
Choice “2” is incorrect. The PCAOB is not a subsidiary of the SEC. It is, however, tasked with registering public accounting firms, establishing rules relating to the preparation of audit reports, and conducting inspections, investigations, and disciplinary proceedings.
Choices “3” and “4” are incorrect. The SEC is not subject to the oversight of the PCAOB.
Under which of the following circumstances would an adverse opinion be most appropriate?
Choice “4” is correct. An adverse opinion is required when serious GAAP problems exist. (GAAP requires that property, plant, and equipment be stated at cost less accumulated depreciation.)
Choices “2” and “1” are incorrect. Scope limitations, as opposed to GAAP problems, result in qualified opinions or disclaimer of opinion, not adverse opinions.
Choice “3” is incorrect. A justifiable change in accounting principle does not result in an adverse opinion.
