AUD Becker Mock Exam 1 Part 4 Flashcards
Questions 55-72
When assessing the competence of an entity’s internal auditor, an independent CPA should obtain information about all of the following except:
Choice “4” is correct. The organizational status of the internal auditor is used to evaluate objectivity.
Choice “1” is incorrect. An internal auditor’s competence may be evaluated based upon his or her educational level and professional experience.
Choice “2” is incorrect. An internal auditor’s competence may be evaluated based upon the quality of his or her audit documentation.
Choice “3” is incorrect. An internal auditor’s competence may be evaluated based upon his or her professional certification.
The auditor performs a preliminary risk assessment for a new client. During the initial fieldwork phase the auditor’s test of the client’s controls indicate that certain controls are not operating effectively. Under this scenario, the auditor would most likely take which of the following actions?
Choice “4” is correct. Upon determining that the client’s internal controls are not operating effectively, the auditor would then modify the preliminary risk assessment and modify the planned audit procedures. This is part of the auditor’s ongoing assessment of risk during an audit.
Choice “1” is incorrect. Although the auditor may perform further audit procedures under this scenario, the preliminary risk assessment would first be revised to make that determination.
Choice “2” is incorrect. This is too severe of an action and, based on a revised risk assessment and additional audit procedures, may not be warranted.
Choice “3” is incorrect. While ultimately the auditor will determine if the control weaknesses will result in a material misstatement of the client’s financial statements, the risk assessment should first be revised and the planned audit procedures should be modified.
Which of the following is true?
Choice “2” is correct. If the client is an issuer, then the auditor must perform an integrated audit of the client’s financial statements and internal controls over financial reporting. Integrated audits may also be performed for nonissuers, but are not required.
Choices “3”, “4”, and “1” are incorrect, based on the above explanation.
An accountant’s standard report issued after compiling the financial statements of a nonissuer should state that:
Choice “1” is correct. An accountant’s standard report issued after compiling the financial statements of a nonissuer should state that the accountant was not required to perform any procedures to verify the accuracy or completeness of informaiton provided by management.
Choice “2” is incorrect. A review report (and not a compilation report) states that a review “is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.”
Choice “3” is incorrect. A review report (and not a compilation report) states that a review “includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.”
Choice “4” is incorrect. A review report (and not a compilation report) states that, “I am not aware of any material modifications that should be made to the accompanying financial statements.”
An auditor uses variables sampling techniques to project the inventory balance each year for comparison with the client’s assertion regarding the inventory balance in the financial statements. In 20X7, the auditor’s sample size was 112 inventory items. In 20X8, the number of units in inventory, the tolerable misstatement, and the required confidence were the same as in 20X7; however, the population variability increased due to the introduction of a new product line. The 20X8 required sample size would therefore, be:
Choice “2” is correct. Population variability has direct effect on sample size.
Choices “3”, “4”, or “1” are incorrect, as population variability has direct effect on sample size.
Which of the following is not true about audit documentation?
Choice "3" is correct. There is no requirement that documentation related to each material account balance or transaction class be included on a separate page. In fact, it is common for related accounts to be audited and documented together. Choice "1" is incorrect. Audit documentation should include identification of the staff who performed the audit work. Choice "2" is incorrect. Audit documentation should include significant audit findings, such as matters that are related to the selection and application of accounting principles.
Choice “4” is incorrect. Audit documentation should demonstrate that appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued.
Which of the following services require the accountant to comply with Statements on Standards for Accounting and Review Services?
Choice “1” is correct. Preparation of financial statements prior to audit or review by another accountant is an engagement that should be conducted in accordance with SSARS.
Choices “3” and “2” are incorrect. Processing payments and maintaining depreciation schedules are bookkeeping services, and, therefore, do not require complying with SSARS.
Choice “4” is incorrect. SSARS explicity excludes services involving preparing financial statements in conjunction with litigation services that involve regulatory proceedings.
A report on a nonissuer’s internal control based on an audit of internal control should include a statement indicating that:
I. Because there are inherent limitations in internal control, misstatements may occur and not be detected.
II. Projections of the evaluation of internal control to future periods are subject to the risk that the internal control may become inadequate.
III. The report is intended solely for the information and use of the audit committee, management, and other specified parties.
Choice “1” is correct. Each of the first two statements would be included in the inherent limitations paragraph of the report. The third statement, indicating restricted use, would not be included as there is no restriction on the use of this report. (A report on internal control matters noted during an audit would, however, include a restricted use paragraph.)
Choices “3”, “4”, and “2” are incorrect, based on the above explanation.
Whitney, CPA, is assessing the auditability of Nissen Manufacturing, a possible new client. Which of the following would be least likely to cause Whitney to reject Nissen as a new client?
Choice “1” is correct. If a potential client is unwilling to send accounts receivable confirmations, the auditor may perform alternative procedures, such as reviewing subsequent cash receipts.
Choice “2” is incorrect. Management’s disregard for its responsibility to maintain an adequate internal control environment compromises its ability to provide reasonable assurance regarding reliable financial reporting and may lead the auditor to decide not to accept a new engagement because the risk of financial statement misstatement is too high.
Choices “4” and “3” are incorrect. If a potential client is unable or unwilling to provide the financial information needed by the auditor to complete the audit, the auditor may not be willing to accept the engagement.
Assuming no other material misstatements are found, an independent auditor determines that supplementary information is not fairly stated relative to the basic financial statements taken as a whole. In this instance, the independent auditor should:
Choice “4” is correct. Supplementary information is outside the basic financial statements, so problems with this information do not prevent the issuance of an unmodified opinion on the basic financial statements. The situation should, however, be disclosed in an other-matter paragraph to the auditor’s report.
Choices “1” and “3” are incorrect. Since supplementary information is outside the basic financial statements, an unmodified opinion on the basic financial statements is still appropriate.
Choice “2” is incorrect. Auditing standards require the auditor to expand his or her report when required supplementary information is not fairly stated relative to the basic financial statements taken as a whole.
In planning the audit, the auditor should consider materiality for the financial statements as a whole in terms of:
Choice “3” is correct. Because the financial statements are interrelated, the auditor should consider materiality in terms of the smallest aggregate level of misstatement that could be material to any one of the financial statements.
Choices “2” or “1” are incorrect. The auditor is concerned with identifying the smallest aggregate level of misstatement that would affect the judgment of a reasonable person, not the largest such level. The smallest level provides a cutoff beneath which the auditor need not consider; the largest level provides no such cutoff.
Choice “4” is incorrect. Because the financial statements are interrelated, the auditor should consider materiality in terms of the smallest aggregate level of misstatement that could be material to any one of the financial statements.
Which of the following are considered internal control environment factors?
Choice “2” is correct. Management’s philosophy and human resource policies are both factors included in the control environment.
Choices “1” or “3” are incorrect. Accounting systems are part of the information and communication component of internal control, not the control environment. Detection risk is not part of any of the components of internal control.
Choice “4” is incorrect. Management’s philosophy and human resource policies and practices are both factors included in the control environment.
Plinth Industries, an issuer, employs several former employees of its auditor, Lawrence & Whitney, CPAs. Adams, CEO, began his career with L&W, but left ten years ago; Brooks, CFO, was with L&W until 18 months ago, and James, internal auditor, left L&W six months prior to the start of the current year’s audit. Which of the following properly describes the effect of these potential conflicts of interest?
Choice “1” is correct. L&W may audit Plinth since none of the situations described presents a conflict of interest as described in SOX Title II.
Choice “3” is incorrect. The conflict of interest provisions of SOX Title II apply only to the issuer’s CEO, CFO, Controller, or Chief Accounting Officer (or to any person serving in an equivalent position), not to an internal auditor.
Choices “4” and “2” are incorrect. Neither Adams nor Brooks was employed by L&W within the one-year period preceding the audit, so neither position poses a conflict of interest as described in SOX Title II.
A special report on financial statements prepared on the cash basis of accounting should include:
Choice “4” is correct. A special report on financial statements prepared on the cash basis of accounting should include, in the auditor’s responsibility paragraph, a statement that the audit was conducted in accordance with generally accepted auditing standards.
Choice “1” is incorrect. A special report on financial statements prepared on the cash basis of accounting includes positive assurance, not a disclaimer of opinion, regarding whether the financial statements are presented fairly in conformity with the cash basis of accounting.
Choice “2” is incorrect. A special report on financial statements prepared on the cash basis of accounting does include an emphasis-of-matter paragraph, but it does not provide an explanation of the cash basis of accounting. Instead, it refers to the note that discusses the cash basis of accounting.
Choice “3” is incorrect. A special report on financial statements prepared on the cash basis of accounting does not require a qualified or adverse opinion. An “unmodified” opinion may be presented stating that the financial statements are presented fairly in conformity with the cash basis of accounting.
Which of the following inquiries should be made of a predecessor auditor before accepting a new client engagement?
Choice “3” is correct. The successor auditor is required to make certain inquiries of the predecessor auditor before accepting an engagement, including the predecessor’s understanding as to the reasons for the change of auditors.
Choice “2” is incorrect. The auditor is not required to communicate to management, the audit committee, and those charged with governance about operational inefficiencies.
Choices “4” and “1” are incorrect. Specific inquiries of the predecessor regarding matters that the successor believes may affect the conduct of the audit, such as audit areas that have required an inordinate amount of time or audit problems that arose from the condition of the accounting system and records, should be made after acceptance.
