AUD Becker Mock Exam 1 Part 2 Flashcards
Questions 19-36
Which of the following is least likely to be used as a substantive test relating to cash balances?
Choice “4” is correct. Verifying that cash disbursements have been properly approved is a test of controls, not a substantive test.
Choices “1”, “3”, and “2” are incorrect. Cash confirmations, cash counts, and bank reconciliations are all a means of verifying the ending cash balance.
Which of the following types of audit evidence is the least reliable?
Choice “3” is correct. A purchase order is internal documentation and as such, it is more easily manipulated by the client.
Choices “2”, “1”, or “4” are incorrect. A vendor’s invoice, a canceled check, and a bank statement obtained from the client are all considered external evidence, which is less likely to be manipulated than is internal evidence.
Which of the following constitutes a weakness in control related to the revenue cycle?
Choice “2” is correct. Allowing the cash receipts clerk to prepare a credit memo constitutes an inadequate segregation of duties, because the clerk can misappropriate cash and cover the theft by issuing a credit memo.
Choice “1” is incorrect. The shipping clerk should prepare a bill of lading.
Choice “3” is incorrect. The accounts receivable clerk should prepare an aging schedule.
Choice “4” is incorrect. The billing clerk should prepare a sales invoice.
Which of the following standards should a CPA firm apply in a review of Management Discussion and Analysis?
Choice “1” is correct. A CPA should refer to Statements on Standards for Attestation Engagements (SSAE) for a review of Management and Discussion Analysis.
Choice “2” is incorrect. A CPA should refer to Statements on Standards for Consulting Services when performing consulting services.
Choice “3” is incorrect. A CPA should refer to Statements on Auditing Standards when performing an audit for a nonissuer.
Choice “4” is incorrect. A CPA should refer to Statements on Standards for Accounting and Review Services when performing a preparation, compilation, or review of historical financial statements for nonissuers. SSARS also applies to preparation and compilations of pro forma and prospective financial information
Robbins Company uses an outside service organization called Payroll Plus to process its payroll. Matthews, CPA is the auditor of Payroll Plus, and Stevens, CPA is Robbins’ auditor. Stevens assessment of the risk of material misstatement may be based on the effective operation of controls surrounding payroll if:
Choice “4” is correct. Stevens may assume controls are operating effectively if Matthews provides a report on controls placed in operation and tests of operating effectiveness, and if this report supports a reduction in the assessed level of control risk. A SOC 1® Type 2 report provides the user auditor with assurance about the design, implementation, and operating effectiveness of the service organization’s internal controls.
Choice “1” is incorrect. The fact that none of the significant deficiencies in internal control are serious enough to be material weaknesses is not sufficient to support a reduction in the assessed level of control risk.
Choice “2” is incorrect. An audit report on the financial statements of Payroll Plus does not indicate whether controls are operating effectively. It only indicates that the financial statements are fairly stated, and this could be the case regardless of how controls are functioning.
Choice “3” is incorrect. A report on controls placed in operation does not provide evidence about operating effectiveness and therefore cannot be used to support a reduction in the assessed level of control risk. A SOC 1® Type 1 report does not include the testing of the operating effectiveness of controls at a service organization and therefore cannot be used as a basis for assessing control risk below maximum.
Which of the following statements is true about required procedures in a review of annual financial statements?
Choice “1” is correct. Assessment of fraud risk is not required, but obtaining a representation letter from management is required.
Choice “2” is incorrect. Obtaining an understanding of the client’s operations is required, and corroboration of management’s material estimates is an audit procedure that is not required in a review engagement.
Choice “3” is incorrect. Analytical review procedures are required, whereas communication with the predecessor accountant is not required.
Choice “4” is incorrect. While it is true that obtaining an understanding of internal control is not required in a review of annual financial statements, confirmation of accounts receivable is an audit procedure that is not required in a review engagement. Note: Obtaining an understanding of internal control is required in a review of interim financial statements (when the annual financial statements are audited)
Which of the following is a required component of the independent auditor’s report expressing an unmodified opinion?
Choice “1” is correct. An auditor’s responsibility paragraph including a reference to generally accepted auditing standards is a required component of the auditor’s unmodified opinion.
Choice “2” is incorrect. The firm name is generally not included in the introductory paragraph.
Choice “3” is incorrect. The opinion paragraph includes a reference to generally accepted accounting (not auditing) principles.
Choice “4” is incorrect. An other-matter paragraph is not where the reason for an unmodified opinion is expressed. The other-matter paragraph is used when required by GAAS or at the auditor’s discretion. It refers to matters other than those presented or disclosed in the financial statements that are relevant to the user’s understanding of the audit, the auditor’s responsibilities, or the auditor’s report.
Cyrus, CPA is the continuing auditor of Topaz, Inc. During the current year’s audit, Cyrus becomes aware of evidence that affects the previous years’ statements as well as the opinion that was expressed. Topaz is planning to present comparative financial statements that will include last year’s financial statements. How should Cyrus handle this situation?
Choice “3” is correct. The auditor reports on the financial statements “taken as a whole”, which applies to all financial statements presented. Since the auditor’s report is generally dated as of the completion of fieldwork for the most recent audit, it is implied that previous reports would be updated.
Choice “1” is incorrect. Since the auditor’s report is generally dated as of the completion of fieldwork for the most recent audit, it is implied that previous reports would be updated. “Update” can mean either to reaffirm the previous opinion, or to change it based on new circumstances.
Choice “2” is incorrect. The auditor reports on the financial statements “taken as a whole”, which applies to all financial statements presented.
Choice “4” is incorrect. Regardless of the fact that auditing standards may have been followed in the previous year, the auditor still has a responsibility to update the previous report for changes in circumstances.
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the report for:
I. A justified change in accounting principle
II. An unjustified change in accounting principle
III. A justified change in accounting estimate
Choice “1” is correct. Only a justified change in accounting principle would result in an unmodified opinion with an emphasis-of-matter paragraph. An unjustified change leads to a qualified or adverse opinion, and a change in estimate does not require an emphasis-of-matter paragraph.
Choices “2”, “4”, and “3” are incorrect, based on the above explanation.
Management’s written representation to the auditor in connection with a governmental audit would most likely include:
Choice “4” is correct. The management letter will include a statement that management has disclosed any communications from grantors concerning possible noncompliance.
Choice “1” is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements. Management representations do not provide negative assurance.
Choice “2” is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor. Management’s representation is not limited to only material government programs.
Choice “3” is incorrect. Management will assert that they have disclosed all known noncompliance or positively state that there was no such noncompliance. Management representations do not provide negative assurance.
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:
Choice “2” is correct. The revenue cycle includes sales, receivables, and cash receipts, so an auditor using a transaction cycle approach would be likely to test sales and receivables together.
Choice “1” is incorrect. Payables are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Choice “3” is incorrect. Purchases are part of the expenditures cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Choice “4” is incorrect. Sale of long-term debt falls within the “other liabilities” transaction cycle while sales are part of the revenue cycle, so an auditor using a transaction cycle approach would be unlikely to test these items together.
Which should be the auditor’s primary focus when considering related party transactions?
Choice “2” is correct. The auditor’s primary concern with related party transactions is that they are properly disclosed in accordance with GAAP.
Choice “1” is incorrect. The auditor generally would not be expected to evaluate the legality of related party transactions, although appropriate response would be necessary if the auditor became aware of a possible illegality.
Choice “3” is incorrect. Generally it will not be possible for an auditor to determine whether or not a transaction would have taken place in exactly the same manner if the parties were not related. For this reason, related-party transactions are not considered to be arm’s-length transactions.
Choice “4” is incorrect. GAAP requires disclosure of material related party transactions except compensation arrangements, expense allowances, and other similar items in the ordinary course of business.
An auditor concerned with the completeness of dividend income would most likely:
Choice “3” is correct. The auditor would likely choose a sample of companies in which the client owns stock, and review dividend record books (such as Moody’s) to determine whether such companies declared dividends during the year under audit.
Choice “1” is incorrect. An auditor concerned with the completeness assertion would be searching for unrecorded dividends. Starting an audit test with recorded dividend receipts would not provide any evidence about those items which may have been unrecorded.
Choice “2” is incorrect. The board of directors does not approve dividends coming from other companies, only dividends being declared by their own company.
Choice “4” is incorrect. Confirmations are not generally used to audit dividend income, nor would this be particularly efficient. Reference to dividend record books produced by investment advisory services such as Moody’s is a much faster way to audit dividend income.
Which of the following is not true about those charged with governance of an organization?
Choice “4” is correct. Management is not typically included in the term “those charged with governance.”
Choice “1” is incorrect. The term “those charged with governance” refers to those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity.
Choice “2” is incorrect. The term “those charged with governance” is broadly interpreted to encompass the terms “board of directors” and “audit committee.”
Choice “3” is incorrect. The term “those charged with governance” refers to those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity.
With respect to an auditor’s consideration of fraud risk, which of the following is not required?
Choice “2” is correct. It is management’s responsibility (not the auditor’s) to design and implement programs and controls to prevent, deter, and detect fraud.
Choice “1” is incorrect. There is a presumption in every audit that risk of management override of controls exists.
Choice “3” is incorrect. During planning, engagement personnel are required to discuss the potential for material misstatement due to fraud.
Choice “4” is incorrect. The auditor should incorporate an element of unpredictability into every audit.
