AUD Becker Mock Exam 2 Part 2 Flashcards
Which of the following best describes the auditor’s responsibility with respect to Statements on Auditing Standards (SASs)?
The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions. The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions. There is no requirement that the audit documentation include SAS section and paragraph numbers.
Which of the following is true when comparing a compilation engagement and a review engagement for a nonissuer?
Both compilations and reviews require establishment of an understanding with the client.
If control risk has increased in the current period as compared to the previous period, then:
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.
The auditor may choose to apply substantive tests to balance sheet accounts at an interim period:
When inherent risk and control risk are low. Applying substantive audit tests at interim increases detection risk, but this may be acceptable when the risk of material misstatement (comprised of inherent risk and control risk) is low.
- While performing an audit of the financial statements of a company for the year ended December 31, year 1, the auditor notes that the company’s sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor’s initial indication about the potential for fraud in sales revenue?
a. There is a broad indication of misappropriation of assets.
b. There is an indication of theft of the entity’s assets.
c. There is an indication of embezzling receipts.
d. There is a broad indication of financial reporting fraud.
d. There is a broad indication of financial reporting fraud.
In which situations should disagreements with management and significant audit adjustments be communicated to those charged with governance?
The auditor should discuss with those charged with governance any significant disagreements with management, whether or not satisfactorily resolved. The auditor should also inform those charged with governance about significant adjustments arising from the audit, regardless of whether such adjustments were recorded by the client.
Procedures performed by an internal auditor can be used to
I. Help the external auditor understand internal control
II. provide direct assistance to the external auditor by performing substantive tests
III. Provide direct assistance to the external auditor by performing tests of controls
I II and III. Internal auditors may assist the external auditors in obtaining an understanding of internal control or in performing tests of controls or substantive tests
“We disclosed to you on the instances of noncompliance or suspected noncompliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage most likely is from an:
A) attestation report on internal control
B) management representation letter
C) client engagement letter
D) Report on compliance with laws and regulations
B) management representation letter
Jonah, CPA is auditing the cash receipts area of Wildwood Widgets. Jonah notes that incoming cash receipts are listed in detail, and three copies of this list are made. One copy is sent to the cashier along with the actual cash receipts. One is sent to the accounts receivable department along with the remittance advices. One is sent to the accounting department. Is this sufficient?
Yes
Which of the following could be used to assess control risk surrounding the purchase of fixed assets?
Select a sample of fixed asset requisitions and inspect them for proper approval. Control activities should include proper authorization of purchase transactions before the commitment of resources.
An auditor is engaged to report on compliance with aspects of a loan agreement in connection with the audit of the financial statements. when an auditor expresses an adverse opinion on the financial statements, the auditor should issue a report on compliance only if:
a. the auditor identifies instances of noncompliance
b. the report is available for general distribution
c. the auditor has not identified instances of noncompliance
d. the report provides negative assurance
when an auditor has expressed an adverse opinion or disclaimer of opinion on the financial statements, the auditor should issue a report on compliance only when instances of noncompliance are identified. Negative assurance is not provided in this report
Which of the following subsequent events would most likely result in adjustment to the financial statements?
After the balance sheet date and before the financial statements are issued, the company settles litigation that had resulted in a liability as of the balance sheet date. Since the litigation existed at the balance sheet date, GAAP requires financial statement adjustment to reflect events that occurred after year-end, but before the financial statements were issued.
An auditor makes use of a specialist who has a contractual relationship with the client. Which of the following is true?
This is acceptable provided that the auditor evaluates the effect of the relationship on the specialist’s objectivity.
which of the following is not true about the five components of internal control?
a. the auditor is required to have an understanding of each component
b. each of the five components of internal control may affect any of the three overall entity objectives
c. the five components of internal control are applicable to all audits
d. the auditor is required to classify relevant controls into one of the five component groups
d. the auditor is not required to classify relevant controls into one of the five component categories, but rather should use the component categories as a usual framework for identifying and evaluating controls
Davis, CPA compiled financial statements for XYZ co. as of and for the year ended Dec 31, year 7 that omit substantially all disclosures required by GAAP. Davis was asked to compile the financial statements again for the year ended Dec 31, Year 8 and to include all necessary disclosures XYZ Co. plans to prepare the Year 8 FS in comparative form. In this situation Davis may:
a. not issue a report on comparative FS when statements for some, but not all, of the periods presented omit substantially all of the disclosures required by GAAP
b. Issue a standard compilation report on the current year (year 8) and add a paragraph to the prior year (year 7) compilation report indicating that the financial statements omitted substantially all disclosures
c. Issue an adverse opinion or a qualified (except for) opinion for lack of adequate disclosure
d. issue two separate reports (separate compilation reports for year 7 and 8) so that a clear indication may be provided that one year contains substantially all disclosure and the other does not
a. compiled FS that omit substantially all GAAP disclosures are not comparable to FS including such disclosures. the accountant should not issue a report in this situation
