AUD Becker Mock Exam Part 3 Flashcards
Questions 37-54
A report issued on significant deficiencies in internal control noted during a financial statement audit of a nonissuer should contain all of the following except:
Choice “3” is correct. No statement of compliance with laws and regulations is required in the report.
Choices “1”, “2”, and “4” are incorrect. The definition of material weaknesses, a restriction on the use of the report, and an indication that the purpose of the audit was to report on the financial statements all should be part of the report.
Which of the following best describes a difference between an audit and a review of a nonpublic entity’s annual financial statements?
Choice “4” is correct. Auditing standards require that, during the planning stage, the accountant obtain a sufficient understanding of the entity and its environment, including its internal control. A review of annual financial statements does not contemplate obtaining an understanding of internal control.
Note: An interim review (where the annual financial statements are audited) falls under SAS or PCAOB requirements for a nonissuer and issuer, respectively, and would require an understanding of internal control.
Choice “1” is incorrect. A review provides negative assurance regarding the financial statements, so it is not correct to say that a review provides no assurance. Both audits and reviews provide some level of assurance regarding the financial statements.
Choice “2” is incorrect. Although it is true that a review requires inquiry and analytical review procedures, this is not the best answer as to the difference between a review and an audit. Inquiry and analytical review procedures are also required as part of an audit engagement.
Choice “3” is incorrect. Both an audit and a review require independence.
Which of the following statements regarding control risk is true?
Choice “2” is correct. A high level of control risk results in an increased risk of material misstatement, which should be offset by a reduction in detection risk. This is accomplished by performing more (and/or more effective) substantive tests.
Choice “1” is incorrect. If control risk is assessed at a low level, the auditor is likely to focus more on tests of controls and less on substantive audit procedures.
Choices “4” or “3” are incorrect. The auditor is always required to document the basis for his or her conclusion about the assessed level of risk.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
Choice “1” is correct. The hiring function provides authorization for payment. Distributing payroll is a custodial function.
Choice “2” is incorrect. Segregation of duties generally refers to the separation of authorization, recordkeeping and custody, not the separation of various functional units.
Choice “3” is incorrect. Hiring is an administrative function.
Choice “4” is incorrect. Hiring and payroll distribution are not types of application controls or general controls.
When issuing an unmodified opinion, the auditor who evaluates the audit findings should be satisfied that the:
Choice “2” is correct. An unmodified opinion states that the financial statements are presented fairly, in all material respects. Accordingly, if the auditor believes that total misstatement (includes factual, judgmental, and projected misstatements) is immaterial, an unmodified opinion is appropriate.
Choice “1” is incorrect. Documenting misstatements in the management representation letter is not required, nor would it eliminate the need to modify the opinion if the identified misstatements were material.
Choice “3” is incorrect. Even if the client adjusts the financial statements to correct factual misstatements, the auditor still must feel comfortable that any remaining misstatements would not be material to the financial statements before rendering an unmodified opinion.
Choice “4” is incorrect. An auditor is not concerned with misstatements already corrected by the client. It is the auditor’s estimate of uncorrected–and perhaps unknown–errors that affects the type of opinion rendered
Which of the following procedures are required for a compilation engagement?
I. Read the financial statements
II. Obtain an understanding of the client’s business and the accounting principles used.
III. Assess fraud risk.
Choice “4” is correct. In a compilation engagement, the accountant is required to read the financial statements and to have a general understanding of the client’s business and of the accounting principles and practices used by the client. There is no requirement that the accountant specifically assess fraud, although a discovery of fraud cannot be ignored.
Choices “3”, “1”, and “2” are incorrect, based on the above explanation.
Which of the following procedures would an auditor be least likely to use in an effort to obtain evidence regarding subsequent events?
Choice “2” is correct. Personnel changes generally would not have financial statement implications.
Choice “1” is incorrect. The auditor should read the minutes of board meetings and examine the latest available interim financial statements to determine whether there are any items that might have financial statement implications.
Choice “3” is incorrect. The auditor should inquire of the client’s legal counsel concerning litigation, claims, and assessments, because such issues might have financial statement implications.
Choice “4” is incorrect. The auditor should inquire of management regarding any material unusual adjustments made after year-end, because such adjustments might require financial statement adjustment or disclosure.
Which risk, when assessed at a high level, is most likely to result in an inappropriate opinion on financial statements which are not fairly stated?
Choice “1” is correct. If there is a high risk of incorrect acceptance, this means that it is quite possible that the auditor will incorrectly accept a balance as fairly stated, when in fact it is not fairly stated.
Choice “2” is incorrect. If control risk is assessed too high, the auditor will rely less on controls than he/she otherwise might have, and will perform an increased level of substantive testing. The auditor will do more work than is necessary, which ultimately should lead to a proper opinion on the financial statements.
Choice “3” is incorrect. If there is a high risk of incorrect rejection, this means that the auditor will do more work than is necessary, which ultimately should lead to a proper opinion on the financial statements.
Choice “4” is incorrect. If control risk is assessed too low, the auditor will rely on controls to a greater extent than he/she should. The fact that controls are not functioning as effectively as believed does make it more likely that a misstatement could occur and not be identified, but not quite as likely as is the case with a high risk of incorrect acceptance. Remember that a lack of controls does not imply that there is a misstatement in the financial statements, only that it is more likely. An incorrect acceptance situation does imply that there is an error in the financial statements.
Which of the following is not true about the Department of Labor’s independence guidelines?
Choice “4” is correct. Under the Department of Labor’s independence guidelines, any direct financial interest in the plan impairs independence.
Choice “1” is incorrect. Under the Department of Labor’s independence guidelines, a former employee of the plan may be employed by the accounting firm provided the individual has completely disassociated from the plan or plan sponsor and the individual does not participate in auditing the financial statements of the plan covering any period of his or her employment by the plan or plan sponsor.
Choice “2” is incorrect. The Department of Labor’s independence guidelines prohibit the accountant from maintaining financial records for the employee benefit plan.
Choice “3” is incorrect. The Department of Labor’s independence guidelines apply to rendering an opinion on employee benefit plans.
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when the client:
Choice “4” is correct. Failure to make the minutes available is a scope limitation sufficient to preclude an unmodified opinion.
Choices “1” and “3” are incorrect. Omission of the statement of cash flows and refusal to disclose a significant related party transaction are examples of GAAP violations, but they do not constitute a limitation on the scope of the audit.
Choice “2” is incorrect. Reporting on only one financial statement and not the others simply involves a limited reporting objective. The auditor should obtain an understanding of the purpose for which the financial statement is prepared, the intended users, and the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances. As long as these steps are taken by the auditor, auditing a single financial statement would not constitute a limitation on the scope of the audit.
Which of the following ratios would most likely be used to evaluate an entity’s profitability?
Choice “2” is correct. Net income divided by net sales, which equals net profit margin, indicates the percentage of every sales dollar that becomes profit.
Choice “1” is incorrect. Dividends per common share divided by earnings per share measures the percentage of earnings being paid to shareholders, but it does not indicate the company’s overall profitability.
Choice “3” is incorrect. Net sales divided by average total assets measures how effectively assets are used.
Choice “4” is incorrect. Cost of goods sold divided by average inventory measures how quickly inventory is sold.
For an entity’s financial statements to be presented fairly in accordance with an applicable financial reporting framework, the framework selected should:
Choice “2” is correct. The preparation and fair presentation of the financial statements requires identification of the applicable financial reporting framework and inclusion of an adequate description of the framework, as well as preparation and fair presentation in accordance with the framework.
Choice “1” is incorrect. There is no requirement that an entity’s financial statements be prepared in accordance with prevalent industry practices.
Choice “3” is incorrect. The Auditing Standards Board does not establish a financial reporting framework.
Choice “4” is incorrect. There may be other financial reporting frameworks, such as IFRS (International Financial Reporting Standards), that are used by companies that are audited in the United States.
Which of the following are required as part of an auditor’s planning process?
I. Understanding the design of controls
II, Determining whether controls have been implemented.
III. Evaluating the operating effectiveness of controls
IV. Documenting the understanding of internal control.
Choice “1” is correct. As part of planning, the auditor is required to obtain an understanding of the design of controls and determine whether they have been implemented, as well as to document this understanding. The auditor is not required to evaluate the operating effectiveness of controls during the planning process.
Choices “4”, “3”, and “2” are incorrect, based on the above explanation.
The auditor concluded that the disclosures made in the financial statements did not adequately inform financial statement users about the company’s ability to continue as a going concern. Under these circumstances, the auditor should issue a(n):
Choice “3” is correct. Improper disclosure of a going concern situation is a GAAP violation, so a qualified or adverse opinion should be issued.
Choice “1” is incorrect. The opinion would be unmodified with an emphasis-of-matter paragraph when there is a going concern issue that has been adequately disclosed. The auditor is never precluded from issuing a disclaimer of opinion, but this is not the general result of inadequate disclosure.
Choices “4” and “2” are incorrect. While the auditor is never precluded from issuing a disclaimer of opinion, the direct result of inadequate disclosure is either a qualified or adverse opinion.
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the check also
Choice “2” is correct. This prevents duplicate payments of vendor invoices since cancellation occurs immediately after the check is signed.
Choice “1” is incorrect. Accounts payable should not get the signed checks, since this would allow one group to have both recordkeeping and custodial duties. The check signer should mail the check.
Choice “3” is incorrect. The person who signs the check should have access to the supporting documents, as they must be cancelled after payment.
Choice “4” is incorrect. The responsibility for authorization and custody should be separated.
