AUD Becker Mock Exam 3 Part 2

Question 1

Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP’s financial statements are audited by Cope, CPA, who recently issued a report on management’s description of EDP’s system and the suitability of the design and operating effectiveness of controls. Lake is considering Cope’s report on EDP’s system in assessing control risk on the Gill engagement. What is Lake’s responsibility concerning making reference to Cope as a basis, in part, for Lake’s own opinion?

Answer 1

Lake may not refer to Cope under the circumstances above.

Question 2

Audit evidence is obtained by the auditor when performing all of the following, except when:

Reviewing the previous audit.
Determining the sample size.
Performing substantive procedures.
Completing a risk assessment.

Answer 2

Determining the sample size.

Question 3

Which of the following is an inherent limitation in internal control?

a.

Faulty human judgment.

b.

Lack of an audit committee.

c.

Lack of segregation of duties.

d.

Incompatible duties.

Answer 3

Explanation

Choice “a” is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls.

Choice “d” is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control.

Choice “c” is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control.

Choice “b” is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.

Question 4

An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to:

a.
Records produced by investment services.

b.
Annual audited financial statements of investee companies.

c.
Stock ledgers maintained by independent registrars.

d.
Dividend records on file with the SEC.

Answer 4

Choice “A” is correct. Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services such as “Moody’s Dividend Record.” These books state the dividend that was declared and paid by the investee.
Choice “c” is incorrect. Stock ledgers maintained by independent registrars indicate how many shares of stock are issued and outstanding, and identify the shareholders of record, but they do not contain information concerning dividends.
Choice “d” is incorrect. Dividend records on file with the SEC would probably include appropriate information, but it is more efficient to use a single source (such as “Moody’s”) than it is to obtain and review SEC records for each investee.
Choice “b” is incorrect. Annual audited financial statements of the investee companies give the total dividends paid, but there may not be enough information to determine exactly how much went to each type of stock and hence to each stockholder. In addition, it is more efficient to use a single source (such as “Moody’s”) than it is to obtain and review the financial statements of each investee.

Question 5

What is an auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?

Answer 5

Apply limited procedures to the information

Question 6

Apply limited procedures to the information

Answer 6

An auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample

Question 7

Louise, CPA is a registered accounting firm that is conducting the audit of violin industries, an issuer. Which of the following services may Louise provide?

Answer 7

Tax Services.

Tax Services are permissible if pre approved by the audit committee

Question 8

Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?

Answer 8

Inquiry.

The following tests are presented in the order of the sufficiency and appropriateness of the evidence they ordinarily produce (least to most): (1) inquiry, (2) observation, (3) inspection of relevant documentation, and (4) reperformance of a control. Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.

Question 9

In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods

Answer 9

Influence the design of internal control

Question 10

All of the following would be associated with fraud risk in the revenue cycle, except for:

Failure to record sales (product) returns by customers on a timely basis.

Materially understating the allowance for uncollectible accounts.

Holding the company’s books open past the close of the accounting period.

Recording revenue on “trial sales” after the consignment period to the customer expires.

Answer 10

Recording revenue on “trial sales” after the consignment period to the customer expires.

Question 11

A written client representation letter most likely would be an auditor’s best source of corroborative information of a client’s plans to:

Discontinue a line of business.

Settle an outstanding lawsuit for an amount less than the accrued loss contingency.

Make a public offering of its common stock.

Terminate an employee pension plan.

Answer 11

Discontinue a line of business.

Question 12

All of the following are effective ways to prevent and/or detect lapping, except for

1. Comparing the dollar amounts and dates on the bank deposit slips with customer remittance credits entered into the accounts receivable ledger.
2. Preparing a bank transfer schedule
3. Requiring the customers send their payments directly to a lockbox
4. Independently comparing the recorded cash receipts with funds actually deposited in the bank.

Answer 12

Preparing a bank transfer schedule

Question 13

The Auditor’s Responsibility paragraph of an auditor’s report contains the following sentences:
We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors.
These sentences:
a. Indicate a division of responsibility.
b. Are an improper form of reporting.
c. Assume responsibility for the other auditor.
d. Require a departure from an unmodified opinion.

Answer 13

A. proper form of disclosure when another auditor performs a substantial portion of the audit. When the group engagement partner makes reference to the audit of another auditor (component auditor), the report should indicate clearly the division of responsibility between the portion of the financial statements covered by each audit

Question 14

A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA’s independence with the client?

a. No, because the CPA would not have a direct financial interest in the client.
b. Yes, because the stock would be a direct financial interest and materiality is a factor.
c. Yes, because the stock would be an indirect financial interest and materiality is not a factor.
d. Yes, because the stock would be a direct financial interest and materiality is not a factor.

Answer 14

d- The Independence Rule requires that a CPA not have any direct financial interests in the client, regardless of materiality. This rule extends to the covered member’s spouse and dependents.

Question 15

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?

1) accounts receivable
2) credit
3) accounts payable
4) treasurer

Answer 15

2

Question 16

As part of the process of observing a client’s physical inventories, an auditor should be alert to:

a. The verification of inventory values assigned to goods in process.
b. The existence of outstanding purchase commitments.
c. Any change in the method of pricing from prior years.
d. The inclusion of any obsolete or damaged goods.

Answer 16

The inclusion of any obsolete or damaged goods.

Question 17

Which of the following is true about the assurance provided by special reports?
a.
All special reports result in positive assurance.
b.
A list of procedures and findings (but no assurance) is provided in some special reports.
c.
All special reports result in negative assurance.
d.
A positive opinion may be rendered in some types of special reports.

Answer 17

Choice “d” is correct. Positive assurance is provided in OCBOA reports, reports on specified elements, accounts, or items, and reports on special-purpose financial presentations to comply with contractual agreements or regulatory provisions. Where applicable, the emphasis-of-matter paragraph in the report indicates that the financial statements (elements, accounts, items) were prepared in accordance with the applicable special purpose framework (positive assurance).

Question 18

A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client’s management questions the extent of procedures and objects to the confirmation of certain contracts. The client asks the accountant to change the scope of the engagement from an audit to a review. Under these circumstances, the accountant should do each of the following, except

Answer 18

issue an accountant’s review report with a separate paragraph discussing the change in engagement scope.

Question 19

In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are

Answer 19

Susceptible to bias

Question 20

reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are
Susceptible to bias

Answer 20

By following the firm’s policies and procedures

Question 21

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?

• Observing the entity’s distribution of payroll checks.
• Confirming a sample of recorded receivables by direct communication with the debtors.
• Reviewing standard bank confirmations for indications of cash manipulations.
• Comparing a sample of shipping documents to related sales invoices.

Answer 21

Comparing a sample of shipping documents to related sales invoices.

Question 22

Which of the following procedures most likely would not be included in a review engagement of a nonpublic entity?

Answer 22

Assessing control risk

Question 23

Janus Company, a client of Peterman, CPA, has recently automated its accounting system. While Peterman has been the auditor of Janus for several years, this will be the first audit encompassing the new system. Which of the following is most likely a result of this change?

I.

Peterman will need to take courses to develop an appropriate level of IT skill.

II.

Peterman will need to revise his audit objectives from prior years to reflect the new situation.

III.

Peterman will need to revise his audit program from prior years to reflect the new situation.

a.
III only.

b.
Both II and III.

c.
Both I and II.

d.
I, II, and III.

Answer 23

Choice “A” is correct. The audit program will likely need to be revised to reflect the risks and capitalize on the strengths inherent in an automated system. For example, there will likely be a greater risk of unauthorized access, while there may also be greater opportunities for data analysis and review. Audit objectives are the same in a computerized environment as they are in a manual environment. If specialized IT skills are needed, the auditor is less likely to take IT courses than he or she is to seek the assistance of an IT professional.Choices “b”, “c”, and “d” are incorrect, based on the above explanation.

Question 24

A document in an auditor’s working papers includes the following statement: “Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential.”

The above passage is most likely from:

Answer 24

an engagement letter

Question 25

An auditor wishes to perform tests of controls on a client’s cash disbursements procedures. If the control leaves no audit trail of documentary evidence, the auditor most likely will test the control by
A. Confirmation and observation.
B. Analytical procedures and confirmation.

C. Observation and inquiry.

D. Inquiry and analytical procedures.

Answer 25

C is corrent because the professional standards suggest that when no audit trail exists an auditor should use the observation and inquiry techniques since no documentation is involved.
A is incorrect because confirmation is a substantive test, not a test of a control.
B is incorrect because neither analytical procedures nor confirmation are tests of controls.
D is incorrect because analytical procedures are not used as tests of controls.

Question 26

An auditor most likely would apply analytical procedures in the overall review stage of an audit to

Answer 26

Determine whether additional audit evidence may be needed.

Question 27

A CPA was engaged to audit the financial statements of a municipality that received federal financial assistance and that required a Single Audit for compliance with the terms of the financial assistance. Which of the following guidelines should the CPA consider?

Answer 27

When auditing a governmental entity under the Single Audit Act, the auditor should perform the engagement both in accordance with GAAS and in accordance with Generally Accepted Government Auditing Standards that impose several additional audit requirements.

Question 28

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:

Answer 28

Financial statement assertions

Question 29

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, year 1?
A. Loss on an uncollectible trade receivable recorded in year 1 from a customer that declared bankruptcy in year 2.
B. Proceeds from a capital stock issuance in year 2 which was being approved by the board of directors in year 1.

C. Uninsured loss of inventories purchased in year 1 as a result of a flood in year 2.

D. Settlement of litigation in year 2 over an event that occurred in year 2.

Answer 29

A is corrent because the loss on the trade receivable may be a “type 1” subsequent event requiring an adjustment if the company was in weak financial condition as of the end of year 1.
B is incorrect because the issuance of the stock is in year 2—only note disclosure is necessary.
C is incorrect because the flood occurred in year 2 and represents a “type 2” subsequent event which may result in a note disclosure.
D is incorrect because the event and its resolution occurred in year 2 and may require note disclosure.