AUD Becker Mock Exam 2 Part 1

Question 1

Which of the following is a communication requirement with respect to registered audit firms?

a. registered firms must report to the audit committee the critical accounting policies and practices used
b. registered firms must provide to management a schedule of unadjusted audit differences
c. registered firms must provide a copy of the firms quality control policies and procedures to management and the audit committee
d. registered firms must report to the internal audit manager any alternative accounting treatments discussed with management

Answer 1

a. registered firms must report to the audit committee the critical accounting policies and practices used

Question 2

Which of the following is true about the quality control standards?

a. the control environment is one of the quality control standards
b. quality control standards affect the performance of a firms practice overall, not the performance on a specific engagement
c. quality control standards do not apply to attestation engagements
d. a firm does not have an adequate system of quality control may still have complied with professional standards on a specific engagement

Answer 2

d. a firm does not have an adequate system of quality control may still have complied with professional standards on a specific engagement

Question 3

During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client’s internal controls led the auditor to reduce the assessment of control risk. Which of the following will most likely occur as a result?

(1) The auditor may reduce the assessment of inherent risk to match the control risk, since they were assessed at the same level during the initial planning.
(2) The auditor may decrease the allowed level of detection risk.
(3) The auditor may rely solely on analytical procedures, with no substantive procedures performed.
(4) The auditor may reduce the amount of substantive procedures performed.

Answer 3

(4) The auditor may reduce the amount of substantive procedures performed.

Question 4

Which of the following is least likely to affect an auditors judgment about materiality?

A) the dollar amount of key figures in the previous year’s financial statements
B) the clients evaluation of materiality
C) the nature of an item, such as an illegal but very small payment
D) consideration of what a reasonable person would thing

Answer 4

B) the clients evaluation of materiality

Question 5

If control risk has increased in the current period as compared to the previous period, then:

Answer 5

The acceptable level of detection risk will decrease and more substantive testing will be required in the current period relative to the previous period. An increase in control risk increases the risk of material misstatement and requires a corresponding decrease in detection risk to maintain the same low level of overall audit risk. Detection risk is reduced by using more (or more effective) substantive testing.

Question 6

Adam, CPA, is a staff accountant assigned to audit both the cash account and the fixed asset account for one of his clients. the cash account had many transactions that occurred during the year, while the fixed asset account had very few transactions during the year. both accounts were audited by Adams firm last year, and were found to be fairly stated. which of the following accurately describes the strategies that would likely be applied to these accounts?

a. Adam would likely focus on the transactions that occurred during the year for cash, but would focus more on the ending balance for fixed assets
b. Adam would likely focus on the ending balance for cash, but would focus more on the transactions that occurred during the year for fixed assets
c. Adam would likely focus on the ending balance for both the cash account and the fixed asset account, since it is the ending balance that is included in the FS
d. Adam would likely use analytical procedures to audit these accounts

Answer 6

b. since there are many transactions affecting the cash account it is more efficient to focus on the ending balance. Fixed assets, on the other hand, had only a few transactions, so it would make sense to simply audit the transactions that occurred then use them to adjust the beginning (audited) balance

Question 7

Which situation would constitute an improper segregation of duties related to payroll?

a. the department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department
b. the payroll department, which computes and records payroll information, also prepares the paychecks
c. the treasurer signs paychecks, distributes them, and holds any unclaimed checks
d. the personnel department, which authorizes new hires, is also responsible for approving annual pay rate increases

Answer 7

a. approving timesheets is an authorization function, which should be separated from custody of assets

Question 8

Which of the following circumstances requires modification of the accountants report on a review of interim financial information of a publicly held entity prepared on the basis of GAAP?

a. lack of adherence to GAAP and lack of adequate disclosures
b. an accounting change, lack if adequate disclosures, and lack of adherence to GAAP
c. none of the following: an uncertainty, lack of adherence to GAAP, lack of adequate disclosure
d. an uncertainty, lack of adherence to GAAP and lack of adequate disclosure

Answer 8

a. departure from GAAP require modification of the review report

Question 9

Julio, CPA, is auditing the financial statements of Megastar Multimedia. Megastar has included the audited financial statements (and Julio’s audit report) in its annual report to
shareholders. Julio reads the annual report and discovers both a material inconsistency and a material misstatement of fact. The material misstatement of fact is unrelated to
financial statement data. Julio believes both the financial statements and the audit report are correct. What should the auditor do first to respond to this situation?

Answer 9

Julio should request that the annual report be revised to eliminate both the material inconsistency and the material misstatement of fact.

Question 10

To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?

Answer 10

A. Fraud involving employees with significant roles in the internal control structure. –> even fraud that causes an immaterial effect on the FSs may have serious implications with respect to the integrity of the employees involved.

Question 11

An auditor notes that retained earnings includes an amount appropriated in accordance with a loan covenant. Which procedures would the auditor use to audit retained earnings?
I. Trace dividend declarations to appropriate authorization by management.
II. Analyze the retained earnings account since the last audit.
III. Use a standard bank confirmation to confirm the amount appropriated.

Answer 11

Statement II only. –> The auditor should analyze the retained earnings account since the last audit. Generally this is fairly easy to do, since there are not very many direct entries to retained earnings.
Statement I is false because dividends should be approved by the board of directors, not by management.
Statement III is false because appropriations represent restrictions on the amount that can be paid as dividends, not a segregation of actual cash funds, so the bank would be unable to confirm appropriation amounts.

Question 12

Lou, CPA, is reviewing the financial statements of trading corporation and becomes aware of the material departure from generally accepted accounting principles. What is the proper next course of action for Lou to take?

A) modify the report by stating that, except for the issue noted in the known departure from accounting principles generally accepted in the United States of America, Lou is not aware of any material modifications and should be made.
B) withdraw from the engagement and provide no further services.
C) modify the report by adding a separate paragraph disclosing the departure.
D) recommend that treating Corporation revise the financial statements to conform with generally accepted accounting principles

Answer 12

D) recommend that treating Corporation revise the financial statements to conform with generally accepted accounting principles

Question 13

Which of the following is the most likely sequence of events an auditor might follow in considering internal control?

Answer 13

An auditor performs tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.

Question 14

An auditor performs a search for unrecorded liabilities to ascertain that all payables have been recorded in the proper period. The search may be performed in each of the following areas except:

Answer 14

Significant payments prior to the end of the period. The search for unrecorded liabilities focuses on identifying items that should have been but were not included in the year-end payable balance. Payments made prior to year-end reflect items that are no longer liabilities.

Question 15

The risk of incorrect rejection and the likelihood of assessing control risk too high relate to the:

Answer 15

Efficiency of the audit. Both incorrect rejection and assessing control risk too high will cause the auditor to perform more procedures than are necessary, which affects audit efficiency.

Question 16

The auditor would not express an unmodified opinion in which of the following situations?

Answer 16

There has been a justifiable change in accounting principle inseparable from a change in accounting estimate, which the client has accounted for as a change in principle. A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in estimate, not a change in principle. The client’s accounting constitutes a departure from GAAP.

Question 17

Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?

Answer 17

A flowchart depicting the auditor’s understanding of the design of internal control.

Question 18

Which of the following documents should be sent to the accounts payable department?

Answer 18

The accounts payable department should receive the purchase order, receiving report, and vendor invoice, to assure that the goods received agree with what was ordered, and that the company is being billed only for what was received. Sales orders relate to the revenue cycle, and accounts payable would have no use for them. The treasurer should mail the signed check after it is signed; to send it to accounts payable (a recordkeeping department) would be an inappropriate segregation of duties.

Question 19

Which of the following best describes a difference between a compilation of prospective financial statements and an examination of prospective financial statements?

Answer 19

A compilation does not contemplate the auditor providing any form of assurance whereas an examination does include assurance. In an examination engagement, an auditor provides 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. In a compilation engagement, no assurance is provided.

Question 20

In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 will have a material effect on an entity’s income statement, but that misstatement will have to aggregate to $20,000 to materially affect the balance sheet. Ordinarily, it is appropriate to design audit procedures that are expected to detect misstatements that aggregate to…

Select one:
A. $15,000
B. $20,000
C. $10,000
D. $30,000

Answer 20

C. $10,000

Question 21

In order to gain knowledge of new clients business during the audit planning phase, the auditor may engage in civil information gathering activities. Which of the following is not one of those activities?

A) performing inquiries with outside legal counsel to gain understanding of existing lawsuits
B) reviewing the minutes of the stockholder and Board of Directors meetings
C) Taking a tour of the clients facilities
D) Reviewing the client’s policies and procedures manual to gather information on the client’s accounting process

Answer 21

A) performing inquiries with outside legal counsel to gain understanding of existing lawsuits

Question 22

Based on new information gained during an audit of a nonissuer an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?

Answer 22

Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

Question 23

An auditor decides not to perform tests of the operating effectiveness of controls surrounding receivables. Which one of the following is not likely to be a reason for this decision?

Answer 23

A very material error is noted in the accounts receivable account. An error in the receivables balance is not definitive evidence that controls are not working. The auditor would need to evaluate the situation surrounding the error to determine its cause.

Question 24

Tracing shipping documents to entries in the sales journal provides evidence that:

Answer 24

Shipments to customers were properly recorded. Tracing forward is a test for completeness. A missing entry in the sales journal implies that a shipment wasn’t recorded and sales is not complete.

Question 25

which of the following would least likely be part of an auditors procedures with respect to fair values?

a. obtain managements representations relating to intent and ability to carry out planned courses of action
b. evaluate the appropriateness of the valuation model used by management
c. review subsequent events occurring after completion of the audit for evidence regarding fair value measurements as of the balance sheet date
d. develop an independent fair value estimate

Answer 25

c. events occurring after the balance sheet date may provide audit evidence regarding the year end fair value measurements, but the auditor is only responsible for evaluating such events if they occur prior to the date of the auditors report. the auditor would not continue to review subsequent events once the audit has been completed

Question 26

An auditor wishes to test for overstatement of sales and understatement of expenses. Which of the following is true?

Answer 26

The auditor will test the existence assertion for sales and the completeness assertion for expenses.

Question 27

Nissen, CPA is a registered public accounting firm, whichc situation is least likely to violate PCAOB standards?

a. Nissen accepts an engagement in which the engagement fee is dependent upon the results of the audit
b. Nissen provides non-audit services related to internal control to an audit client
c. Nissen provides tax services related to an aggressive tax transaction
d. Nissen provides tax services to the CEO of an audit client

Answer 27

b. Non-audit services related to internal control must be communicated to the audit committee in writing, but they are not prohibited

Question 28

THat AICPA COde of Professional COnduct includes which of the following as discreditable acts?

Answer 28

Failure to return client records upon request, negligence in preparing client records, and failure to file a personal tax return on a timely basis are all considered to be acts discreditable to the profession.

Question 29

Disclosure of fraud to parties other than a client senior management, does charge of governance, or its Board of Directors ordinarily is not part of the auditors responsibility. However, to which of the following outside parties made duty to disclose the regularities exist?

I. To the SEC when the client reports an auditor change
II. To a successor auditor when the successor makes appropriate inquires
III. To a government funding agency from which the client receives financial assistance

A) II and III, only
B) I and III, only
C) I, II, and III
D) I and II, only

Answer 29

C) I, II, and III

Question 30

Josh, CPA, is receiving the previous year’s audit documentation related
to the audit of accounts receivable, and notes that statistical sampling methods were applied. Josh would like to perform a similar sampling application in the current year. He observes that there is more variation in the dollar value of the accounts this year than existed in the previous year. He would also like to reduce the risk of incorrect acceptance, which was 5% in the previous year to 3%in the current year. How will these changes affect sample size?

A. Sample size will increase
B. Sample size will decrease
C. The increase in variation will result in a decrease in sample size, whereas the decrease in the desired risk of incorrect acceptance will result in an increase in sample size. The net effect on sample size is therefore indeterminate.
D. The increase in variation will result in an increase in sample size, whereas the decrease in the desired risk of incorrect acceptance will result in a decrease in sample size. The net effect on sample size is therefore indeterminate.

Answer 30

C. The increase in variation will result in a decrease in sample size, whereas the decrease in the desired risk of incorrect acceptance will result in an increase in sample size. The net effect on sample size is therefore indeterminate.

Question 31

A retail entity uses electronic data interchange in executing and recording most 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:

a. increase the sample of EDI transactions to be selected for cutoff tests
b. Perform tests several times during the year, rather than only at year end
c. plan to make a 100% count of the entity’s inventory at or near year end
d. decrease the assessed level of control risk for the existence or occurrence assertions

Answer 31

when an entity transmits, processes, maintains, or accesses significant information electronically, some accounting data and source documents may be available only in electronic form, or only at a certain point in time. the auditor would generally perform tests of controls several times during the year to compensate for this limitations

Question 32

Which of the following is least likely to explain an increase in inventory turnover from Year 1 to Year 2?

Answer 32

Direct labor charges were inadvertently applied twice to some inventory items during Year 2.