AUD Becker Mock Exam 3 Part 1

Question 1

Which of the following could be difficult to determine because electronic evidence may not be retrievable after a specific period?
A. The acceptance level of detection risk
B. The timing of control and substantive tests
C. Whether to adopt substantive or reliance test strategies.
D. The assessed level of inherent risk.

Answer 1

Choice “B” is correct. When electronic data is not maintained indefinitely, the auditor must be careful to consider the appropriate timing for audit tests, making sure that testing is performed while data is still available

Question 2

Which of the following factors most likely would cause an auditor to question the integrity of management?
A. Managerial decisions are dominated by one person who is also a stockholder
B. Weaknesses in internal control reported to the audit committee are not corrected by management
C. Audit tests detect material fraud that was known to management, but not disclosed to the auditor
D. Management has an aggressive attitude toward finance reporting and meeting profit goals.

Answer 2

.Audit tests detect material fraud that was known to management, but not disclosed to the auditor. Answer (C) is correct. The auditors request written representations from management. These include disclosures of fraud or suspected fraud affecting the entity involving (1) management, (2) employees who participate significantly in internal control, and (3) others if the fraud is material. If management fails to provide written representations about such matters, the auditor should (1) reevaluate management’s integrity, (2) determine the possible effect on the opinion, and (3) withdraw from the engagement in appropriate circumstances (AU-C 580).

Question 3

When auditing a client’s related party transactions (relationships), certain audit objectives should be met. Which of the following does not represent a primary audit objective pertaining to related party transactions?

A. Obtain sufficient audit evidence that the client’s related party transactions have been identified and disclosed.

B. Determine which of the client’s related party transactions were not completed on an arm’s length transactions basis.

C. Recognize fraud risk factors arising from the client’s related party transactions.

D. Determine whether the client’s financial statements achieve fair presentation of all related party transactions and relationships.

Answer 3

Determine which of the client’s related party transactions were not completed on an arm’s length transactions basis.

Question 4

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

A. Purchase returns and allowances.
B. Allowance for doubtful accounts.
C. Common stock.
D. Noncontrolling interest of a subsidiary purchased during the year

Answer 4

Allowance for doubtful accounts.

Question 5

The management of Cain Compant, a nonissuer, engaged Bell, CPA, to audit Cain’s internal control. Bell’s report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell’s report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:

Answer 5

Disclaim an opinion as to management’s cost-benefit statement

Question 6

An auditor’s letter issued on significant deficiencies relating to a nonissuer’s internal control observed during a financial statement audit should:

Answer 6

Conditions noted by the auditor that are significant deficiencies or material weaknesses should be reported in writing. Any report issued on such conditions should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide an opinion on internal control; (2) include the definition of a material weakness and, if applicable, significant deficiency; (3) include a restriction on use (i.e., the report is intended solely for the information and use of management, those charged with governance, etc.).

Question 7

Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?
A. Is an authorized purchase order require before the receiving department can accept a shipment or the vouchers payable department can record a voucher?
B. Are purchase requisitions prenumbered and independently matched with vendor invoices?
C. Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions?
D. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for?

Answer 7

Correct: (D)
Prenumbering and accounting for purchase orders, receiving reports, and vouchers will allow a company to determine that purchases are completely recorded.

Question 8

The likelihood of assessing control risk too high is the risk that the sample selected to test controls
A) Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment.
B) Does support the auditor's planned assessed level of control risk when the true operating effectiveness of the control does not justify such an assessment.
C) Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transaction classes.
D) Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.

Answer 8

A) Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment.

Question 9

Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material noncompliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to?

Answer 9

Issue a qualified compliance report describing the subsequent noncompliance

Question 10

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:

Answer 10

results are consistent with the conclusions to be presented in the auditors report

Question 11

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Answer 11

Repairs and maintenance.

Question 12

In using the work of a specialist, an auditor of a nonissuer may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor:

Answer 12

modifies the opinion

aka the findings must result in a change to the auditors report

Question 13

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Answer 13

Inclusion of zero and negative balances generally does not require special design considerations.
Because PPS sampling utilizes dollar units for sampling, the inclusion of zero and negative balances requires special design considerations. This would be an advantage for classical variables sampling, rather than PPS sampling.

Question 14

A successor auditor is required to attempt communication with the predecessor auditor prior to:

Answer 14

accepting the engagement.

Question 15

which of the following circumstances most likely will cause an auditor to suspect an employee payroll fraud scheme

Answer 15

the are significant unexplained variances between the standard and actual labor costs

Question 16

“When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative financial statements, the auditor should express a qualified opinion:

Answer choices:

a. Only if the change is to an accounting principle that is not generally accepted.
b. Each year that the financial statements initially reflecting the change are presented.
c. Only in the year of the accounting principle change.
d. Each year until management changes back to the accounting principle formerly used.

Answer 16

Choice “b” is correct. When management does not provide reasonable justification that a change in accounting principle is preferable and it presents comparative FS, the auditor should express a qualified opinion each year that the FS initially reflecting the change are presented.
Choices “c”, “d”, and “a” are incorrect, per the rule stated above.

Question 17

Reporting on internal control to meet the requirements of Government Auditing Standards differs from reporting under other generally accepted auditing standards in that Government Auditing Standards requires a:

Answer 17

Report describing the scope of the auditor’s testing of compliance and of internal control.

Question 18

B. Which of the following would not have a direct impact in determining the sufficiency of evidence gathered during an audit?(1) The cost benefit relationship of obtaining the audit evidence (2) The quality of audit evidence obtained (3) The auditor’s professional judgment (4) The risk of material misstatement

Answer 18

(1) The cost benefit relationship of obtaining the audit evidence

Question 19

Which of the following entity-level controls is specifically identified in the professional standards as a control of importance that should be evaluated?

1. Period-end financial reporting controls
2. Risk-mgmt policies
3. Monitoring of controls
4. Centralized processing controls

Answer 19

1. Period-end financial reporting controls

All are entity level controls BUT..
-period-end financial reporting controls
AND
-control environment
are listed as important to evaluate

Question 20

Pell CPA decides to serve as group eng partner in audit of FS of Tech Inc. Smith CPA audits one of Tech’s subsidiaries. In which situation(s) should Pell make reference to Smith’s audit under US GAAS?

1. Pell reviews Smith’s audit doc and assumes responsibility for Smith’s work, but expresses a qualified opinion on Tech’s FS.
2. Pell is unable to review Smith’s audit doc; however Pell’s inquiries indicate that Smith has an excellent reputation for prof. competence and integrity

Answer 20

2 only

Question 21

51. An auditor may reasonably issue an “except for” qualified opinion for a(n) A.A scope limitation or an unjustified accounting changeB. A scope limitation, but not an unjustified accounting change.C. An unjustified accounting change, but not a scope limitation.D. Neither an unjustified accounting change nor a scope limitation

Answer 21

a scope limitation or an unjustified accounting change.

Question 22

Management philosophy and operating style most likely would have a significant influence on an entity’s control environment when:

a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate specific duties.
d. Those charged with governance actively oversee the financial reporting process.

Answer 22

b. Management is dominated by one individual.

Choice “b” is correct.

Such characteristics may include the following: management’s approach to taking and monitoring business risks, management’s attitudes and actions toward financial reporting, and management’s attitudes toward information processing and accounting functions and personnel.

These characteristics are more likely to have a significant influence on the control environment when management is dominated by one individual, since there will be few alternative viewpoints presented.

Choice “d” is incorrect. The involvement of those charged with governance in the reporting process would tend to moderate or offset the influence that management philosophy and operating style have on the entity’s control environment.

Question 23

During consideration of internal control in a financial statement audit, an auditor is not obligated to
A. Search for significant deficiencies in the operation of internal control
B. Understand the internal control environment
C. Determine whether the control activities relevant to audit planning have been implemented
D. Perform procedures to understand the design of internal control

Answer 23

A. Search for significant deficiencies in the operation of internal control

Question 24

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality for the financial statements as a whole?
A. The anticipated sample size of the planned substantive procedures.
B. The entity’s year-to-date financial results and position
C. The results of the internal control questionnaire
D. The contents of the representation letter

Answer 24

B. The entity’s year-to-date financial results and position

Question 25

1. A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules.
A. Compilations
B. Reviews
C. Audits
D. Agreed-upon procedures

Answer 25

A. Compilations

Question 26

To reduce the risks associated with accepting fax responses to requests for confirmations of AR, an auditor most likely would

Answer 26

Verify the sources and contents of the faxes in telephone calls to the senders.

Question 27

A practitioner’s report on agreed-upon procedures should contain which of the following statements?

Answer 27

The procedures performed were those agreed to by the specified parties identified in the report.

Question 28

Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal
control procedure?

A. Confirmation with outside parties.

B. Inquiry of client personnel.

C. Recomputation of account balanced amounts.

D. Observation of client personnel.

Answer 28

D. Observation of client personnel.

Confirmation with outside parties and recomputation of account balances are substantive procedures designed to gather evidence about the fair presentation of account balances. Inquiry of client personnel would provide some evidence about the operation of an internal control, but the best evidence about the effectiveness of operation of an internal control would be provided through the auditor’s observation of client personnel.

Question 29

An auditor is engaged to report the fairness of the financial statements of ABC Corp., a noninssuer. The auditor identifies several material misstatements in sales, which were caused by a control deficiency in the sales orders’ preparation process. This was the only control deficiency and the only material misstatement identified in testing. The auditor presented a journal entry to the client to correct these misstatements, which the client agreed to record. Which of the following actions is the auditor least likely to perform?

Answer 29

Issue a qualified opinion on the financial statements.

Question 30

Which of the following procedures would an auditor most likely perform to identify unusual sales transactions?

Performing a trend analysis of quarterly sales.

Examining duplicate sales invoices for credit approval by the credit manager.

Tracing credits in the accounts receivable ledger to source documentation.

Tracing cash receipt entries to the bank statement deposit for amount and date

Answer 30

Performing a trend analysis of quarterly sales.

Question 31

Q4. Digit Co a nonissuer, uses the FIFO method of costing for its international subsidiary’s inventory and LIFO for its domestic inventory, under these circumstances, the auditor’s report on digit’s financial statements should express what type of opinion?

Answer 31

A4. Unmodified, GAAP allows a company to use different methods for costing different inventories as long as the methods are disclosed.

Question 32

The client asked the auditor to audit financial statements covering the current year. The auditor did not observe at the prior year’s physical inventory. Which of the following actions would the auditor most likely take?

Answer 32

Audit the prior-year inventory using alternative substantive procedures

Question 33

According to the Sarbanes-Oxley Act of 2002, which of the following non-audit services can be provided by a registered public accounting firm to the client contemporaneously with the audit when preapproval is granted by audit committee action?
A. Internal audit outsourcing services.
B. Tax services.
C. Actuarial services related to the audit.
D. Advice on financial information system design.

Answer 33

B. Tax services.

Question 34

22. Which of the following procedures should an auditor generally perform regarding subsequent events? A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited. B. Send second requests to the client’s customers who failed to respond to initial accounts receivable confirmation requests. C. Communicate material weaknesses in internal controls to those charged with governance. D. Review the cutoff bank statements for several months after year-end.

Answer 34

A. Compare the latest available interim financial statements issued after year-end with the financial statements being audited.