AUD Final Review Flashcards
A1 M2
Which of the following statements correctly defines the term reasonable assurance?
A. An absolute level of assurance to allow an auditor to detect a material misstatement. B. A significant level of assurance to allow an auditor to detect a material misstatement. C. A substantial level of assurance to allow an auditor to detect a material misstatement. D. A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.
Choice “D” is correct. Reasonable assurance is a high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.
Choice “A” is incorrect. Reasonable assurance is a lower standard than absolute assurance. Reasonable assurance is described as a high, but not absolute, level of assurance.
Choice “B” is incorrect. The term significant is not used to describe reasonable assurance. Reasonable assurance is described as a high, but not absolute, level of assurance.
Choice “C” is incorrect. The term substantial is not used to describe reasonable assurance. Reasonable assurance is described as high, but not absolute, assurance.
A1 M4
How does an auditor make the following representations when issuing the auditor’s report on comparative financial statements under U.S. auditing standards?
Obtaining evidence that
is sufficient and
appropriate
Consistent
application of
accounting principles
A. Implicitly
Explicitly
B. Explicitly
Explicitly
C. Implicitly
Implicitly
D. Explicitly
Implicitly
Choice “D” is correct. Explicitly - Implicitly.
Under U.S. auditing standards, the auditor explicitly states in the Basis for Opinion section of the auditor’s report: “We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.” Consistency is implied in the auditor’s report.
Choice “A” is incorrect. An explicit statement on obtaining evidence that is sufficient and appropriate is included in the Basis for Opinion section, while the concept of the consistent application of accounting principles is implicit to the auditor’s report.
Choice “B” is incorrect. Only a statement regarding obtaining evidence that is sufficient and appropriate is explicitly included in the auditor’s report. Such statement is included in the Basis for Opinion section.
Choice “C” is incorrect. Only the consistency of the application of accounting principles is implicit to the auditor’s report.
A1 M7
For which of the following events would an auditor of a nonissuer most likely issue an unmodified report with an emphasis-of-matter paragraph referencing a lack of consistency?
A. A change from percentage of completion to completed contract method. The effect of the change is not material. B. A change in useful life used to calculate the provision for depreciation expense. The effect of the change is material. C. A change in depreciation method from straight-line to double-declining balance. The effect of the change is material. D. A change in reporting entity as a result of purchasing a subsidiary during the year. The effect of the change is material.
Choice “C” is correct. A change in accounting estimate that is inseparable form a change in accounting principle, such as a change in depreciation method, should be described in an emphasis-of-matter paragraph.
Choice “A” is incorrect. An immaterial effect does not require an emphasis-of-matter paragraph.
Choice “B” is incorrect. A change in estimate, such as useful life, does not affect the consistency standard and does not require an emphasis-of-matter paragraph.
Choice “D” is incorrect. A change in the reporting entity that results from a transaction or event, such as the purchase of a subsidiary, does not require recognition in the auditor’s report. However, if the change in the reporting entity is not a result of a transaction or event, then an emphasis-of-matter paragraph would be required. Examples of a change in reporting entity that is not the result of a transaction or event include presenting consolidated or combined financial statements in place of financial statements of individual entities or changing the entities included in combined financial statements.
A1 M8
In Year 1, Randall, CPA, issued a qualified opinion on the financial statements of Celadon Industries, a nonissuer, due to the improper recording of lease obligations. During Year 2, Celadon restated the Year 1 financial statements to correct the error, and now plans to issue comparative financial statements for Year 1 and Year 2. Which of the following is true about Randall’s report on the comparative financial statements?
A. Randall may not change the prior opinion, but may add an other-matter paragraph to the report indicating that the previous error has been corrected. B. Randall may revise the prior opinion and need not make mention of the change, as long as the comparative financial statements include the revised statements (and not the original statements) for Year 1. C. Randall may not change the prior opinion, and should not issue a report on the comparative financial statements. D. Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation.
Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation and including the date and type of the previous opinion, the reason for the previous opinion, the changes that have occurred, and a statement that the new opinion differs from the old.
Choice “A” is incorrect. Randall may revise the prior opinion if the situation warrants such revision.
Choice “B” is incorrect. Randall may revise the prior opinion, but must include an emphasis-of-matter or other-matter paragraph describing the situation and including the date and type of the previous opinion, the reason for the previous opinion, the changes that have occurred, and a statement that the new opinion differs from the old.
Choice “C” is incorrect. Randall may revise the prior opinion if the situation warrants such revision, and is not prohibited from issuing a report on the comparative financial statements.
A1 M8
According to GAAS, which of the following procedures is not required when the group auditor decides to make reference to the component auditor in the auditor’s report on the group financial statements?
A. The group auditor should be satisfied with the independence of the component auditor. B. The group auditor should determine the type of work to be performed on the financial information of the components. C. The group auditor should be satisfied with the competence of the component auditor. D. The component auditor’s report is not restricted.
Determining the type of work to be performed on the components is not required when the group auditor decides to make reference to the component auditor. The group auditor should determine the type of work to be performed on the financial information of the components when assuming responsibility for the work of the component auditor.
Choice “A” is incorrect. The group auditor should be satisfied with the independence of the component auditor even when the group auditor references the component auditor in the report.
Choice “C” is incorrect. The group auditor should be satisfied with the competence of the component auditor even when the group auditor references the component auditor in the report.
Choice “D” is incorrect. One of the requirements to reference the component auditor in the group auditor’s report is that the component auditor’s report is not restricted.
A1 A9
GEMM, CPA is auditing the 12/31/X1 financial statements of Diamond, LLC. GEMM determined that sufficient, appropriate audit evidence was obtained as of 2/27/X2 and issued the audit report on the same day. A management representation letter was obtained from Diamond, LLC as of the report date. Which of the following circumstances would be considered a recognized subsequent event in the 12/31/X1 financial statements?
A. A material legal settlement was reached on 1/15/X2 related to litigation that occurred on 11/11/X1. B. Diamond, LLC completed a significant acquisition of a competitor on 2/12/X2. C. A hurricane taking place on 2/26/X2 destroyed a large warehouse owned by Diamond, LLC. D. A material legal settlement was reached on 12/15/X1 related to litigation that occurred on 11/11/X1.
Choice “A” is correct. Recognized subsequent events are conditions existing on or before the balance sheet date and normally require adjustment to the financial statements. As this legal settlement was reached prior to the report date and related to the year under audit, this would be considered a recognized subsequent event.
Choice “B” is incorrect. A significant transaction that occurred after the balance sheet date but prior to the report issuance would be considered a non-recognized event that would require disclosure, but not financial statement adjustment.
Choice “C” is incorrect. A significant loss that occurred after the balance sheet date but prior to the report issuance would be considered a non-recognized event that would require disclosure, but not financial statement adjustment.
Choice “D” is incorrect. A legal settlement reached prior to the balance sheet date would not be considered a subsequent event.
A1 M11
An auditor’s report should include a restricted use paragraph and an alert to readers about the preparation of the financial statements in accordance with a special purpose framework when the financial statements are prepared on the:
A. Contractual basis. B. IFRS basis. C. Cash basis. D. Tax basis.
An auditor’s report should include a restricted use paragraph and an alert to readers about the preparation of the financial statements in accordance with a special purpose framework when the financial statements are prepared on the contractual basis of accounting.
Choice “B” is incorrect. Financial statements prepared using IFRS do not require a restricted use paragraph in the auditor’s report. In addition, IFRS is not considered a special purpose framework.
Choice “C” is incorrect. An auditor’s report should include an alert to readers about the preparation of the financial statements in accordance with a special purpose framework when the financial statements are prepared on the cash basis of accounting. There is no requirement that the auditor’s report must be restricted for this type of framework.
Choice “D” is incorrect. An auditor’s report should include an alert to readers about the preparation of the financial statements in accordance with a special purpose framework when the financial statements are prepared on the tax basis of accounting. There is no requirement that the auditor’s report must be restricted for this type of framework.
A1 M11
When reporting on financial statements prepared in accordance with a regulatory basis and intended for general use, the auditor should express an opinion about whether the financial statements are prepared in accordance with the special purpose framework and:
A. That the special purpose framework is appropriate for the needs of all users. B. Fairly presented in a manner that will meet the needs of all users. C. Fairly presented, in all material respects, in accordance with GAAS. D. Fairly presented, in all material respects, in accordance with GAAP.
Choice “D” is correct. If the special purpose financial statements are prepared in accordance with a regulatory basis and intended for general use, the auditor should express an opinion about whether the financial statements are fairly presented, in all material respects, in accordance with GAAP and prepared in accordance with the special purpose framework.
Choice “A” is incorrect. This is not a requirement for special purpose financial statements prepared in accordance with a regulatory basis and intended for general use.
Choice “B” is incorrect. This is not a requirement for special purpose financial statements prepared in accordance with a regulatory basis and intended for general use.
Choice “C” is incorrect. Financial statements are never prepared in accordance with GAAS (GAAP used for financial statement presentation). GAAS (generally accepted auditing standards) are the standards that are followed by the auditor in evaluating the financial statements and forming an opinion on whether they are fairly presented.
A2 M3
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
A. The auditor’s understanding of the entity’s control activities that help ensure achievement of management’s objectives. B. The assessment of the risks of material misstatement at both the financial statement and relevant assertion levels. C. The basis for the auditor’s decision to perform tests of controls concurrently with obtaining an understanding the system of internal control. D. A written audit plan setting forth the procedures necessary to accomplish the audit objectives.
The auditor is not required to evaluate operating effectiveness as part of understanding the system of internal control, and therefore, need not document the basis for this decision.
Choice “A” is incorrect. An auditor should document key elements of the understanding of the entity and its environment, including each of the five components of internal control. The five components include the entity’s control activities.
Choice “B” is incorrect. The assessment of the risks of material misstatement at both the financial statement and relevant assertion levels are required to be documented.
Choice “D” is incorrect. A written audit plan setting forth the procedures necessary to accomplish the audit objectives is required to be documented.
A2 M4
A corporate board regularly convenes in a full meeting of all members that considers and approves recommendations made by various board committees that meet to consider such issues as nominations of new board members, audit issues, finance topics, and marketing initiatives. Board committees, in turn, evaluate and approve staff proposals regarding strategy, budgets, contracts, products, etc. that rise to the level of board consideration. Applying the Internal Control Integrated Framework, the corporation’s practices would demonstrate the application of the internal control principle of:
A. Control environment. B. Organizational structure. C. Board independence and oversight. D. Commitment to competence.
Choice “C” is correct. The board independence and oversight principle within the corporate governance component anticipates a corporate governance structure that oversees the development and performance of controls including establishing oversight responsibility and providing oversight for the system of internal controls. A layered structure of board and board committee oversight over staff initiatives demonstrates the principle of board independence and oversight.
Choice “A” is incorrect. Although the control environment component of the internal control framework includes the demonstrated principle of board independence and oversight, the control environment is a component, not a principle.
Choice “B” is incorrect. A layered structure of board and board committee oversight over staff initiatives demonstrates the principle of board independence and oversight, not organizational structure. Organizational structure includes management’s design of reporting lines that limit authority and responsibility, not the board’s independent design and oversight.
Choice “D” is incorrect. A layered structure of board and board committee oversight over staff initiatives demonstrates the principle of board independence and oversight, not commitment to competence. The commitment to competence is associated with the commitment to hire, develop, and retain competent employees.
A2 M5
Which of the following items should be included in the auditor’s communication of the planned scope and timing of the audit to those charged with governance?
I.
An overview of which documents will be considered part of the auditor’s permanent file
II.
Preliminary views on key audit matters
III.
Plan for using the work of internal audit or other specialists
IV.
All the audit areas that will be covered and the related planned procedures
A. II and IV B. I and III C. I, II, and III D. II and III
Choice “D” is correct. Among other items, both the preliminary views on key audit matters and the plan for using internal audit or specialists should be communicated to those charged with governance as a part of the planned scope and timing of the audit.
Choice “A” is incorrect. The auditor should not communicate the specific audit areas and related procedures to those charged with governance as it could compromise the effectiveness of the overall audit. Preliminary views on key audit matters would be communicated to those charged with governance.
Choices “B” and “C” are incorrect. An overview of which documents will become part of the auditor’s permanent file need not be communicated to those charged with governance.
A2 M5
Which of the following does not relate to planning?
A. The auditor must identify circumstances in which the planning of the audit has not been performed in a manner consistent with that of the prior year. B. An understanding of the entity and its environment, including its system of internal control and the applicable financial reporting framework, must be obtained to plan the audit. C. The auditor must adequately plan the work and properly supervise assistants. D. The auditor should exercise due professional care in planning the audit.
An audit is required to be adequately planned, but there is no requirement that the planning of the audit be performed in a manner consistent with the prior year.
Choices “D”, “B”, and “C” are incorrect, as each of these options relate to planning.
A2 M6
In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if the:
A. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist. B. Auditor, as a result of the specialist's findings, expresses a modified opinion. C. Client understands the auditor's corroborative use of the specialist's findings in relation to the representations in the financial statements. D. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.
Choice “B” is correct.
An auditor may refer to a specialist when the report is being modified due to the specialist’s findings. The auditor may need the permission of the specialist before making reference to the specialist.
Choice “A” is incorrect. An auditor does not divide responsibility with a specialist.
Choices “D” and “C” are incorrect. A client’s familiarity with a specialist or understanding of the auditor’s use of the findings of a specialist does not result in modification of the audit report.
A2 M6
In assessing whether the internal audit function applies a systematic and disciplined approach, the independent auditor most likely would consider the:
A. Internal auditor’s assessment of inherent risk is comparable to the independent auditor’s assessment. B. Organization status of the director of internal audit. C. Entity’s ability to continue as a going concern for a reasonable period of time. D. Adequacy and use of documented internal audit procedures.
Choice “D” is correct. In assessing whether the internal audit function applies a systematic and disciplined approach, the independent auditor most likely would consider the existence, adequacy, and use of documented internal audit procedures.
Choice “A” is incorrect. The comparison of the internal auditor’s assessment of inherent risk to the independent auditor’s assessment would not help the independent auditor assess whether the internal audit function applies a systematic and disciplined approach.
Choice “B” is incorrect. The independent auditor most likely would consider the organization status of the director of internal audit when assessing the objectivity of the internal audit function.
Choice “C” is incorrect. Obtaining information about the entity’s ability to continue as a going concern would not provide information about whether the internal audit function applies a systematic and disciplined approach.
A2 M9
In every audit when assessing risks due to fraud, there is a presumption that which of the following risks exist?
A. Fraudulent financial reporting and misappropriation of assets B. Errors and weak internal control environment C. Improper revenue recognition and management override of controls D. Pressures, opportunities, and rationalizations
Choice “C” is correct. In every audit, there is a presumption that there is risk of both improper revenue recognition and management override of controls. Both risks should be addressed by the auditor in evaluating the overall fraud risk.
Choice “A” is incorrect. Fraudulent financial reporting and misappropriation of assets represent the two categories of fraud rather than fraud risks presumed to exist in every audit.
Choice “B” is incorrect. Errors are an unintentional misstatement or omission (rather than a fraud risk), and a client’s control environment must be assessed through control testing rather than a presumption that the environment is weak.
Choice “D” is incorrect. Pressures, opportunities, and rationalization represent conditions generally present when fraud occurs rather than fraud risks presumed to exist in every audit.
A2 M8
After making a preliminary assessment of the risk of material misstatement during planning and beginning to apply audit procedures, an auditor determines that this risk is actually higher than anticipated. Which would be the most likely effect of this finding on the auditor’s desired level of detection risk and the overall level of audit risk, as compared to the levels originally planned?
Auditor’s Desired Level
of Detection Risk
Overall Level
of Audit Risk
A.
Decrease
Same
B. Increase
Same
C. Same
Higher
D. Decrease
Lower
Choice “A” is correct.
The auditor would initially have planned the audit to achieve a low level of audit risk. If the risk of material misstatement increased, the auditor would need to reduce detection risk to achieve the same low level of audit risk as initially planned.
Choice “B” is incorrect. The increase in the risk of material misstatement results in an increase in overall audit risk. Increasing detection risk would only exacerbate this problem by increasing audit risk even further.
Choice “C” is incorrect. If the auditor does not modify the desired level of detection risk, it is true that the overall level of audit risk will increase, but this is not the most likely situation. An auditor who discovers a higher risk than initially anticipated would need to develop an appropriate response to offset this increase in risk, so that an overall low level of audit risk could still be attained.
Choice “D” is incorrect. Assuming that the auditor had already planned the audit to achieve an appropriately low level of audit risk, the auditor would most likely revise audit procedures in an attempt to achieve the same low level of audit risk as initially planned. Although it is possible that the auditor would reduce detection risk enough to actually lower overall audit risk, this is not the most likely response to the scenario described.
A3 M1
Regardless of the industry in which a firm operates, the firm will maximize profits by producing where:
A. Average total cost equals average revenue. B. Average total cost equals marginal revenue. C. Marginal cost equals average revenue. D. Marginal cost equals marginal revenue.
Regardless of the industry in which a firm operates, a firm will maximize profits by producing where marginal revenue equals marginal cost (MR = MC).
Choice “A” is incorrect. If average total costs equals average revenue, then economic profits are zero.
Choice “B” is incorrect. This is a zero profit condition for a competitive firm.
Choice “C” is incorrect. This would be a profit maximizing position for a competitive firm only, as competitive firms operate where P = AR = MR = MC (because the firm faces a horizontal demand curve).
A3 M1
A CFO and budget director are working together to create the sales budget for the upcoming fiscal year. In developing the sales forecasts for their main products, they want to get a read on where they think the economy is headed over the next year. Which of the following indicators are they most likely to consider in their forecast?
A. Bond yield curve. B. The prime rate charged by banks. C. Industrial production as measured by GDP. D. The average duration of unemployment.
Choice “A” is correct. To forecast sales for the coming year, the CFO and budget director will look at leading indicators that are used to predict economic activity. The bond yield curve is the only option above that represents a leading indicator, as the others are either coincident indicators (which change at the same time as the economy overall) or lagging indicators (which change after a given economic trend has already begun).
Choice “B” is incorrect. The prime rate charged by banks is a lagging indicator.
Choice “C” is incorrect. Industrial production as measured by GDP (gross domestic product) is a coincident indicator.
Choice “D” is incorrect. The average duration of unemployment is a lagging indicator, while average new unemployment claims (which was not an option given) is a leading indicator.
A3 M2
Which of the following would most likely not be considered a specific IT risk?
A. Security and identity management B. Insufficient data storage C. Unauthorized access to confidential data D. High turnover
High turnover can be a risk to a business; however, it is most likely not to be considered a specific IT risk.
Choice “A” is incorrect. Security and identity management is an IT risk.
Choice “B” is incorrect. Insufficient data storage is an IT risk.
Choice “C” is incorrect. Unauthorized access to confidential data is an IT risk.
A3 M3
Using a combined approach most likely would involve:
A. Reducing inherent risk for most of the assertions relevant to significant account balances. B. Identifying specific controls relevant to specific assertions. C. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at year-end. D. Performing more extensive substantive tests with larger sample sizes than originally planned.
Choice “B” is correct.
Using a combined approach involves identifying specific controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions. If those controls are found to be operating effectively, substantive testing can be reduced.
Choice “A” is incorrect. A combined approach is based on the relationship between the operating effectiveness of controls and the required level of substantive testing. The level of inherent risk is not part of this evaluation.
Choice “C” is incorrect. Substantive tests performed at year-end would be more consistent with a substantive approach, which would require more competent substantive testing to be performed.
Choice “D” is incorrect. Using a combined approach would most likely lead to less extensive substantive tests with smaller sample sizes.
A3 M3
An auditor notices that interest expense stayed approximately the same as the prior year even though the debt outstanding significantly increased from the prior year. The client only invests in debt that has a fixed interest rate. Which of the following best explains the reason for the above explanation?
A. The company acquired a new loan for construction of a building that began during the year under audit. B. The company acquired a new loan at midyear related to the acquisition of a competitor. C. The Federal Reserve decreased interest rates in the current year. D. The company paid off a significant portion of the debt.
Choice “A” is correct.
Interest costs related to construction of a fixed asset by a company may be capitalized to the asset being constructed. This bests explains the reason for the increase in debt outstanding (acquisition of new debt) and interest expense staying approximately the same (the additional interest expense from the construction loan is being capitalized to the construction of the building).
Choice “B” is incorrect. Acquiring a new loan at midyear would increase the debt outstanding, but would not explain why interest expense stayed approximately the same.
Choice “C” is incorrect. The company only invests in debt that has a fixed interest rate; therefore, a decrease in the Federal Reserve rate probably would not affect their interest expense.
Choice “D” is incorrect. If the company paid off a significant portion of debt, then the overall debt outstanding probably would decrease, not increase.
A3 M7
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods:
A. Afford greater assurance than a nonstatistical sample of equal size. B. Provide an objective basis for quantitatively evaluating sample risk. C. Eliminate the need to use judgment in determining appropriate sample sizes. D. Can more easily convert the sample into a dual-purpose test useful for substantive testing.
Choice “B” is correct.
By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable.
Choice “A” is incorrect because statistical sampling does not afford greater assurance than a nonstatistical sample of the same size. It only provides the auditor with a better measure of the sufficiency of the evidence found, and helps to evaluate the results found.
Choice “C” is incorrect because statistical sampling still requires judgment to determine sample sizes. The tolerable rate of deviation, the likely rate of deviation, and the allowable risk of assessing control risk too low are all determined by the auditor’s professional judgment.
Choice “D” is incorrect because statistical sampling does not provide any advantage with respect to converting the test into a dual-purpose test.
A3 M8
Which of the following characteristics most likely would be an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?
A. The selection of negative balances requires no special design considerations. B. The sampling process can begin before the complete population is available. C. The sample will result in a smaller sample size if few errors are expected. D. The auditor need not consider the preliminary judgments about materiality.
Choice “A” is correct. Inclusion of negative balances requires special design considerations with PPS sampling, but it does not require special design considerations with classical variables sampling.
Choice “B” is incorrect. All items in the population should have an equal chance to be included in the sample. Therefore, the sampling process should not begin before the complete population is available, regardless of whether classical variables sampling or PPS sampling is used.
Choice “C” is incorrect. If no errors are expected, PPS sampling generally requires a smaller sample than other methods.
Choice “D” is incorrect. When planning a particular sample for a substantive test of details, the auditor should consider preliminary estimates of materiality.
A3 M9
Sophie wants to perform an analytic that will evaluate whether large sales should have been made to new customers. She will do this by creating a classification model using past transactions that were approved and rejected to determine whether the transactions being evaluated were in line with prior activities. What type of analytic is Sophie executing?
A. Diagnostic analytic B. Predictive analytic C. Prescriptive analytic D. Descriptive analytic
Choice “B” is correct. Predictive analytics provide expected or predicted outcomes based on historical data. This analytic is using past transactions to create a model that would predict whether current transactions should have been approved or rejected.
Choice “A” is incorrect because diagnostic analytics explain why something happened. This analytic is predicting an outcome as opposed to explaining the drivers or underlying causes of the value of the output.
Choice “C” is incorrect because prescriptive analytics prescribe or recommend actions to be taken based on advanced analytics to reach a desired goal. This analytic is only predicting an outcome as opposed to prescribing an action.
Choice “D” is incorrect because descriptive analytics describe what happened within the data. This analytic is predicting an outcome as opposed to describing it.
A4 M3
Which of the following controls would most likely detect a kiting scheme?
A. Preparing a bank reconciliation. B. Comparison of the details of deposit tickets and recorded remittance credits. C. Preparing a bank transfer schedule. D. Use of a lockbox system for customer receipts.
Choice “C” is correct.
A kiting scheme occurs when a check drawn on one bank is deposited in another bank, and the funds are included in both accounts. A bank transfer schedule is used to analyze bank transfers and identify such situations.
Choice “A” is incorrect. Preparation of a bank reconciliation involves analysis of one account at a time, and therefore would not be useful in detecting a scheme involving interbank transfers.
Choice “B” is incorrect. Comparing the details of deposit tickets and recorded remittance credits would help detect a lapping scheme, not a kiting scheme.
Choice “D” is incorrect. A lockbox system helps safeguard customer receipts and might prevent lapping, but would not be helpful in detecting a kiting scheme.
A4 M5
Which of the following provides the best evidence supporting the existence of marketable securities included in the client’s financial statements?
A. A custodial statement received and held by the client. B. A year-end listing of market prices for the securities obtained by reference to the Wall Street Journal. C. The client's securities ledger. D. Broker's advices regarding purchases and sales of marketable securities.
Choice “A” is correct.
A custodial statement provides valid and relevant external evidence regarding the existence of securities.
Choice “B” is incorrect. A year-end listing of market prices is not relevant to the existence of marketable securities, although it would provide evidence about the valuation of such securities.
Choice “C” is incorrect. The client’s securities ledger is internal evidence, and as such it is not as valid as a custodial statement.
Choice “D” is incorrect. Broker’s advices regarding purchases and sales provide valid external evidence about transactions occurring during the year, but a custodial statement provides more direct evidence about the existence of securities as of the year-end date.
A4 M6
An audit program for the examination of the retained earnings account should include a step that requires verification of the:
A. Authorization for both cash and stock dividends. B. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. C. Gain or loss resulting from disposition of treasury shares. D. Market value used to charge retained earnings to account for a two-for-one stock split.
Choice “A” is correct.
The legality of a dividend depends in part on whether it has been properly authorized. Thus, the auditor must determine that proper authorization exists, as both cash and stock dividends affect retained earnings.
Choice “B” is incorrect because the write-down of an account receivable will not, in general, be recorded in retained earnings.
Choice “C” is incorrect because gains from the disposition of treasury shares are recorded in paid-in capital accounts.
Choice “D” is incorrect because only a memo entry is required for a stock split.
A4 M1
After multiple attempts, an auditor is unable to obtain a response for several positive requests for year-end accounts receivable confirmations. An appropriate alternative procedure to verify the existence of accounts receivable is:
A. Visit the customer selected for confirmation and review documents in their possession. B. Obtain the aging of accounts receivable and trace it to the general ledger control account. C. Examine the applicable sales order, shipping document, and subsequent cash receipts. D. Examine subsequent cash disbursements and related receiving reports.
Choice “C” is correct.
An acceptable alternative procedure is to examine the applicable sales order, shipping document, and subsequent cash receipts.
Choice “A” is incorrect. Generally, an auditor would not visit the client’s customer and review documents in their possession. An appropriate alternative procedure is to review the specific subsequent cash receipts, shipping documentation, and invoice to verify the existence of the receivable.
Choice “B” is incorrect. Obtaining an aging of accounts receivable and tracing it to the general ledger control account would provide evidence about the completeness, not existence, assertion.
Choice “D” is incorrect. Examining subsequent cash disbursements and related receiving reports would be an appropriate alternative procedure when testing accounts payable for completeness when the accounts payable confirmations are not received.
A4 M1
The Dexter Corp. is evaluating its revenue accounts for risk of overstatement. The company manufactures and sells heavy equipment and has material sales at year-end. The company ships FOB destination. The most likely risk of misstatement resulting from poor cutoff controls would be:
A. Overstatement of revenues from sales recorded prior to year-end for shipments delivered after year-end. B. Overstatement of revenues for sales recorded after year-end for shipments delivered before year-end. C. Overstatement of revenues for sales recorded before year-end for shipments delivered before year-end. D. Overstatement of revenues of sales recorded after year-end for shipments delivered after year-end.
Choice “A” is correct. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Goods shipped FOB destination would not pass to the buyer until the goods are received. Sales recognized prior to receipt of the goods by the buyer would be overstated.
Choice “B” is incorrect. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Recording sales in the period after deliveries shipped FOB destination would understate revenue.
Choice “C” is incorrect. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Recording sales and deliveries shipped FOB destination in the same period would appropriately match revenues with transfer of title.
Choice “D” is incorrect. Risk of misstatement associated with poor cutoff controls would result from overstatement of revenues recorded prior to year-end for shipments delivered after year-end. Recording sales and deliveries shipped FOB destination in the same period would appropriately match revenues with transfer of title.
A4 M1
Which of the following procedures most likely represents a control designed to reduce the risk of errors in the billing process?
A. Comparing control totals for shipping documents with corresponding totals for sales invoices. B. Matching receiving documents with approved sales orders before invoice preparation. C. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger. D. Requiring customers that purchase on account to be approved by the credit department.
Choice “A” is correct. Comparing shipping totals with sales invoice totals is an effective control to reduce billing errors. This is a common internal control procedure performed by the accounts receivable department.
Choice “B” is incorrect. Shipping, not receiving, documents would be matched with approved sales orders before invoice preparation. Receiving documents typically relate to the expenditure cycle.
Choice “C” is incorrect. Reconciling control totals for sales invoices with the accounts receivable subsidiary ledger is not an effective control related to the billing process, because errors that exist in the preparation of invoices would likely carry through to accounts receivable.
Choice “D” is incorrect. Requiring customers that purchase on account to be approved by the credit department is an important internal control that helps reduce sales to customers who are unlikely to pay. However, this control is unlikely to reduce errors that occur during the billing process.
A4 M2
Which best describes an appropriate division of responsibilities in the expenditure cycle?
A. The purchasing department matches the purchase order, receiving report, and vendor invoice, while the treasurer reviews the matched documents and makes the payments. B. The receiving department compares the amount of goods received with the amount of goods ordered, while the accounts payable department compares the amount of goods ordered and received with the amount of goods billed. C. The purchasing department creates a purchase order based on an approved requisition, while the accounts payable department approves the corresponding invoice for payment. D. The purchasing department compares what was ordered to what was received, while the accounts payable department compares what was received to what was billed.
Choice “C” is correct.
The purchasing department creates a purchase order based on an approved requisition, while the accounts payable department approves the corresponding invoice for payment after matching the purchase order, receiving report, and vendor invoice.
Choice “A” is incorrect. The accounts payable department (not the purchasing department) matches the purchase order, receiving report, and vendor invoice. The treasurer then reviews the matched documents and makes the payment.
Choice “B” is incorrect. The receiving department should not have access to a complete copy of the purchase order, but rather should have a copy with the amounts blacked out, thus forcing an independent count to be made. Given this constraint, it would not be possible for the receiving department to compare the amount ordered with the amount received. The accounts payable department makes this comparison, as well as comparing these amounts with the amount billed.
Choice “D” is incorrect. The accounts payable department compares what was ordered, what was received, and what was billed, by comparing the purchase order, receiving report, and vendor invoice. The purchasing department does not receive a copy of the receiving report and therefore would have no means of comparing what was received to what was ordered.
A4 M2
When auditing expenditures, the proper segregation of duties would involve all the following departments except:
A. Warehouse and shipping. B. Vouchers payable. C. Receiving. D. Purchasing.
Choice “A” is correct. The warehouse and shipping departments would be part of the segregation of duties for the revenue cycle.
Choice “B” is incorrect. The vouchers payable department would be part of the segregation of duties for expenditures.
Choice “C” is incorrect. The receiving department would be part of the segregation of duties for expenditures.
Choice “D” is incorrect. The purchasing department would be part of the segregations of duties for expenditures.
A4 M9
Which of the following is most likely to be an indication of a material weakness in a client’s internal control environment?
A. The auditor finds that an account reconciliation was approved outside the timeframe as set by the client's policy but finds that compensating controls were in place and functioning. B. A misstatement is identified related to a reconciling item on a bank reconciliation and based on the assessment of quantitative and qualitative factors, it is determined to be immaterial. C. A misstatement that impacts net income is identified by the client in the current period. D. The auditor determines that the financial statements for the previous two years must be restated to correct a material misstatement.
Choice “D” is correct. Restatement of previously issued financial statements to correct a material misstatement is an indication of a material weakness.
Choice “A” is incorrect. Finding an incident of a control (approval of account reconciliation) not operating according to policy (approval was outside set timeframe) would not normally be considered a material weakness. The auditor must apply judgment in assessing whether the deficiency in the control would lead to a “reasonable possibility” that a material misstatement would go undetected. Compensating controls operating effectively would lead the auditor to conclude that the situation would not be considered a material weakness.
Choice “B” is incorrect. After assessing the quantitative and qualitative factors, an immaterial misstatement would not normally be an indication of a material weakness.
Choice “C” is incorrect. A misstatement that is identified by the client in the current period, would not normally be an indicator of a material weakness as it was identified through the processes put in place as a part of the client’s internal control environment. If misstatements are identified by the auditor that would not have been detected by the client’s internal control, that may be an indication of a material weakness.
A4 M9
A control deficiency exists in a client’s internal control environment when:
A. Fraud is committed but identified by management as they are acting in the normal course of their assigned functions. B. The design or operation of a control does not allow employees to prevent or detect and correct misstatements on a timely basis. C. Errors are identified by employees as they are acting in the normal course of their assigned functions. D. The design or operation of a control does not allow the auditor to detect and correct misstatements.
Choice “B” is correct. A control deficiency exists when a control is not designed or implemented and carried out in a way that would allow employees or management, acting in the normal course of their assigned functions, to prevent, or detect and correct misstatements on a timely basis.
Choice “A” is incorrect. Fraud schemes that are detected by management would not be considered to indicate a control deficiency as the controls in place allowed for the detection of the fraud.
Choice “C” is incorrect. Errors that are detected and corrected by employees would not be considered to indicate a control deficiency as the controls in place allowed for the identification of the error.
Choice “D” is incorrect. Controls are designed and operated by management and employees, and not by the auditors. The auditor’s role is to evaluate the design and operating effectiveness of the control environment.
A4 M4
Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate controls over the invoicing function allow goods to be shipped that are not invoiced. The inadequate controls could cause an:
A. Understatement of revenues and receivables, and inventory. B. Overstatement of revenues and receivables, and an understatement of inventory. C. Overstatement of revenues and receivables, and inventory. D. Understatement of revenues and receivables, and an overstatement of inventory.
Choice “D” is correct.
Items shipped without invoicing will result in a situation in which the accounting department is unaware of the sale. Therefore, debits to accounts receivable and credits to sales will not be recorded, resulting in an understatement of both revenues and receivables. Similarly, because accounting is unaware of the sale, no entry to reduce inventory will be made, resulting in an overstatement of inventory.
Choices “A”, “B”, and “C” are incorrect, based on the above explanation.
A4 M4
Jett, CPA, is auditing the inventory of Calico Company. Which of the following is an audit procedure Jett would be likely to perform?
A. Physically count Calico's inventory as of the year-end date. B. Ascertain that consigned goods held by Calico's customers (for resale to third parties) are excluded from inventory. C. Examine shipping documents and receiving reports for several days before and after year-end. D. Ascertain that consigned goods provided by Calico's suppliers (for resale to third parties) are included in inventory.
Choice “C” is correct.
Examining shipping documents and receiving reports for several days before and after year-end will help Jett determine whether purchases and sales were recorded in the proper period. Achieving an appropriate cutoff is important to the fair statement of inventory.
Choice “A” is incorrect. The auditor observes the client’s count, but does not typically perform the count.
Choice “B” is incorrect. Consigned goods held by Calico’s customers (for resale to third parties) are still owned by Calico, and would therefore properly be included in inventory.
Choice “D” is incorrect. Consigned goods provided by Calico’s suppliers (and held for resale to third parties) are not owned by Calico, and would therefore properly be excluded from inventory.
A4 M4
Blue, CPA is auditing the inventory of Crayon Factory Inc. During the auditor’s review of the client’s policy on periodic inventory counts, the auditor noted the following as an incorrect inventory count procedure:
A. Cycle counts will be performed bi-monthly, and each cycle count should clearly identify the specific inventory lots to be included in each count. B. Count supervisors must ensure that employees survey all secondary locations that may hold inventory, including receiving docks, leased facilities, and tractor-trailers. C. The auditor must count the physical inventory in full at least once annually. D. Inventory counts should take place outside of normal business hours to allow for the inventory under observation to be frozen until the count is complete.
Choice “C” is correct. The auditor is not responsible for counting the inventory as that is the responsibility of the client. The auditor’s responsibility is to observe the inventory count.
Choice “A” is incorrect. Cycle counts may be performed by the client throughout the year.
Choice “B” is incorrect. The client should ensure that any inventory owned by the client is included in the inventory count, regardless of whether it is held on or off-site.
Choice “D” is incorrect. Physical inventory counts are often performed outside of normal business hours to ensure that inventory is not being shipped or received as the count is in progress.
A5 M1
Although the objectives of an audit of internal control and an audit of financial statements are different, the auditor should design tests of controls to:
I.
Obtain sufficient appropriate evidence to support the auditor’s opinion on internal control as of the period end.
II.
Obtain sufficient appropriate evidence to support the auditor’s control risk assessments for purposes of the audit of financial statements.
A. I only. B. I or II. C. I and II. D. II only.
hoice “C” is correct. Although the objectives of an audit of internal control and an audit of financial statements are different, the auditor should perform the integrated audit to achieve the objectives of both engagements simultaneously. This would include obtaining sufficient appropriate evidence to support the auditor’s opinion on internal control as of the period end and obtaining sufficient appropriate evidence to support the auditor’s control risk assessments for purposes of the audit of financial statements.
Choice “A”, “D”, and “B” are incorrect, per the above explanation.
A2 M2
Which of the following is not correct regarding identified control deficiencies in an integrated audit of a nonissuer?
A. Communication of significant deficiencies and material weaknesses must be made by the report release date. B. Communication of significant deficiencies and material weaknesses must include restricted use language. C. Compensating controls may limit the severity of identified deficiencies. D. Auditors are not required to search for control deficiencies that are less severe than a material weakness.
Choice “B” is correct. In an integrated audit for a nonissuer, no restriction on the use of the report is required. The communication of significant deficiencies and material weaknesses should include restricted use language only when part of an audit of the financial statements.
Choice “A” is incorrect. In an audit of internal control for a nonissuer, communication of significant deficiencies and material weaknesses must be made by the report release date.
Choice “C” is incorrect. Compensating controls, if found to be operating effectively, may limit the severity of an identified deficiency and prevent it from being a material weakness.
Choice “D” is incorrect. Auditors are not required to search for control deficiencies that are less severe than a material weakness.
A2 M2
Which of the following is an auditor’s responsibility if a previously reported internal control weakness is subsequently eliminated and management engages an independent auditor to attest to the improvement?
A. Express an opinion on whether the weakness has been eliminated. B. Test all internal controls identified within the report. C. Only obtain evidence about the operating effectiveness of the identified control. D. An auditor may not accept this type of engagement.
Choice “A” is correct. If a material weakness is subsequently eliminated, management may wish to communicate this fact to the investing public, and may also wish to have an independent auditor attest to the improvements in internal control. The auditor’s objective is to express an opinion on whether the previously reported weakness has been eliminated.
Choice “B” is incorrect. An auditor’s testing is limited to the controls specifically identified by management as eliminating the material weakness.
Choice “C” is incorrect. The auditor must obtain evidence about the design and operating effectiveness of the identified control.
Choice “D” is incorrect. An engagement to report on whether a previously reported internal control weakness continues to exist is a voluntary engagement, not required by professional standards. The engagement may be performed at any time during the year.
A5 M4
Which of the following should a practitioner perform as part of an engagement for agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements?
A. Express a disclaimer of opinion on the subject matter. B. Express positive assurance on findings of work performed. C. Ensure the engagement procedures are comparable to those performed in a compilation. D. Disclose responsibility for the sufficiency of procedures.
Choice “A” is correct.
An engagement for agreed-upon procedures provides no assurance, which means that a disclaimer of opinion is rendered on the subject matter. Specifically, the report should state that “We do not express an opinion,” which is a disclaimer of opinion.
Choice “B” is incorrect. The report includes a listing of procedures performed and the related findings, but does not provide any assurance on these items.
Choice “C” is incorrect. The procedures do not need to be comparable to those performed in a compilation. The procedures that the practitioner and specified parties agree upon may be as limited or as extensive as the specified parties desire.
Choice “D” is incorrect. The sufficiency of procedures is solely the responsibility of the client, not the practitioner.
A5 M4
Sivan, CPA, was recently engaged by a client to examine and report on historical financial statements as they would have been if a hypothetical event occurred during the period covered by the financial statements. Sivan has never reported on these types of engagements before. To obtain more information on this, Sivan should look for guidance on reporting on:
A. Financial projection financial statements. B. Pro forma financial statements. C. Financial forecast financial statements. D. Internal control over financial reporting.
Choice “B” is correct. Pro forma financial statements are financial statements that show the effect of a hypothetical event on historical financial statements if it had occurred during the period covered by the financial statements.
Choice “A” is incorrect. Financial projections reflect the financial results of a future period based on hypothetical situations.
Choice “C” is incorrect. Financial forecasts reflect the expected financial results of a future period based on expected conditions and expected courses of action.
Choice “D” is incorrect. Internal control over financial reporting involves the auditor looking at internal controls of the organization.
A5 M5
Speedy Payroll processes payroll transactions for Goldstein Bears, a manufacturer. Everett, CPA, is engaged to report on management’s description of Speedy Payroll and the suitability of the design and operating effectiveness of internal control. These controls are relevant to Goldstein Bears’ internal control, so Everett’s report may be useful for Goldstein Bears’ auditor. Everett’s report should:
A. Include information about the competence of Everett. B. Include an opinion on the operating effectiveness of Speedy Payroll’s internal control. C. State whether Speedy Payroll's controls were operating effectively to achieve Goldstein Bears' objectives. D. Be available for general use.
Choice “B” is correct. A report on management’s description of Speedy Payroll and the suitability of the design and operating effectiveness of internal control is considered a Type 2 report. A Type 2 report includes an opinion on the operating effectiveness of internal control of the service organization.
Choice “A” is incorrect. Although Goldstein Bears’ auditors must be satisfied regarding Everett’s competence, this information is not included in the audit report.
Choice “C” is incorrect. The report should contain an indication that the controls were operating effective to achieve Speedy Payroll’s control objectives, but the report does not provide assurance regarding the achievement of the objectives of the user organization (in this case, Goldstein Bears).
Choice “D” is incorrect. Everett’s report should include a restricted use paragraph that restricts use to the management of Speedy Payroll, its customers, and the independent auditors of Speedy Payroll customers.
A5 M5
Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC’s internal controls placed in operation as of a specific date. These controls are relevant to the retailer’s system of internal control, so Cook’s report may be useful in providing the retailer’s independent auditor with information necessary to plan a financial statement audit. Cook’s report should:
A. State whether PDC's controls were suitably designed to achieve the retailer's objectives. B. Disclose Cook's assessed level of control risk for PDC. C. Contain a disclaimer of opinion on the operating effectiveness of PDC's controls. D. Identify PDC's controls relevant to specific financial statement assertions.
Explanation
Choice “C” is correct.
There are two types of reports on the processing of transactions by service organizations: “reports on controls placed in operation” and “reports on controls placed in operation and tests of operating effectiveness.” The former do not include tests of operating effectiveness and, therefore, are not intended to provide the user auditor with a basis for reducing the assessment of control risk below the maximum. Accordingly, such reports should include a disclaimer of opinion regarding the operating effectiveness of the controls.
Choice “A” is incorrect because the report should contain an indication that the controls were suitably designed to achieve specified control objectives, but it does not provide any assurance regarding the achievement of the user organization’s (in this case, the retailer’s) objectives.
Choice “B” is incorrect because the service auditor (Cook) is not required to disclose the assessed level of control risk for the service organization (PDC).
Choice “D” is incorrect because the service auditor (Cook) is not required to identify the service organization’s (i.e., PDC’s) controls relevant to specific financial statement assertions, because this is not a financial statement audit.
A5 M7
Reporting standards associated with government audits include requirements in addition to those associated with generally accepted auditing standards. A requirement that distinguishes audits performed in accordance with government auditing standards from audits that are not subject to these standards is:
A. No opinion on the financial statements is required. B. An opinion on the financial statements taken as a whole. C. A written communication of the auditor’s work on internal control. D. An opinion on internal control over financial reporting.
Choice “C” is correct.
Audits performed in accordance with government auditing standards require a written communication regarding the auditor’s work on internal control. Generally accepted auditing standards only require written communication about internal control when significant deficiencies are noted.
Choice “A” is incorrect. An opinion on the financial statements taken as a whole is required by both GAAS and GAGAS.
Choice “B” is incorrect. Both GAAS and GAGAS require an opinion on the financial statements taken as a whole.
Choice “D” is incorrect. Neither GAAS nor GAGAS audits require an opinion on internal control over financial reporting.
A5 M7
In performing an audit in conformity with Government Auditing Standards, the auditor will face more restrictive or expanded requirements related to each of the items listed below, except:
A. Independence. B. Reporting on informative disclosures. C. Reporting on financial statements. D. Reporting on internal control.
Choice “B” is correct.
Government Auditing Standards do not include expanded reporting requirements associated with the notes to the financial statements. They do, however, include requirements that expand reporting on the financial statements and internal controls, as well as provide more restrictive requirements on auditor independence.
Choice “A” is incorrect. Strict independence requirements associated with Government Auditing Standards limit consulting engagements for audit firms.
Choice “C” is incorrect. Government Auditing Standards require that the report on financial statements be expanded to include, among other requirements, the following items: a statement that the audit was performed in accordance with Government Auditing Standards, a description of the scope of the testing of internal controls, instances of fraud noted, etc.
Choice “D” is incorrect. Government Auditing Standards require a written report on the auditor’s understanding of internal control and the assessment of control risk in all audits. This is different from GAAS, which requires written communication only when significant deficiencies are noted.
A5 M8
Winkin, Blinkin, & Nod, CPAs, is conducting an audit of Community Fund Raisers, Inc., a not-for-profit organization, for the year ended December 31, Year 1, in accordance with generally accepted auditing standards. During their fieldwork, the firm discovers that Community Fund Raisers is administering a $750,000 Federal passthrough grant that is distributed to various subrecipients organized as not-for-profit organizations. As a result of its finding, Winkin, Blinkin, & Nod would be obligated to:
A. Communicate to management and the audit committee that a GAAS audit may not be sufficient to meet regulatory requirements associated with federal financial assistance. B. Withdraw from the engagement. C. Assess control risk at a higher level to account for management’s failure to properly evaluate compliance requirements associated with federal financial assistance. D. Conduct an audit in accordance with generally accepted auditing standards and disclaim an opinion on the federal financial assistance.
Choice “A” is correct.
The firm’s discovery of a major federal financial assistance program would create additional audit requirements not fully met by a GAAS audit. The firm would be obligated to inform management and the audit committee that the GAAS audit may not be sufficient to meet the additional audit requirements associated with the program.
Choice “B” is incorrect because the auditor is required to inform management and the audit committee that the scope of the engagement is too narrow, not to withdraw from the engagement.
Choice “C” is incorrect because the failure to identify federal programs as part of audit planning or client acceptance does not automatically indicate that control risk should be assessed at a higher level. It does, however, mean that the auditor should inform management and the audit committee that the GAAS audit may not fulfill the audit requirements implied by a major federal program.
Choice “D” is incorrect because the auditor is required to disclose the inadequacy of the audit’s scope to fully meet regulatory requirements, not to disclaim an opinion.
A6 M3
Before reissuing a compilation report on the financial statements of a nonissuer for the prior year, the predecessor accountant is required to perform all the following procedures, except for:
A. Compare the prior period financial statements with those issued previously and currently. B. Obtain a letter of representation from management. C. Obtain a letter from the successor accountants. D. Read the financial statements and the report of the current period.
Choice “B” is correct.
The predecessor accountant is not required to obtain a letter of representation from management before reissuing a compilation report. This procedure is required when an audit, not compilation, report is reissued.
Choice “A” is incorrect. The predecessor accountant is required to compare the prior period financial statements with those issued previously and currently before reissuing a compilation report.
Choice “C” is incorrect. The predecessor accountant is required to obtain a letter from the successor accountants before reissuing a compilation report.
Choice “D” is incorrect. The predecessor accountant is required to read the financial statements and the report of the current period before reissuing a compilation report.
A6 M4
An accountant has obtained an engagement letter, assessed, and concluded on independence, performed work primarily related to analytical procedures and inquiries with the client, and concluded that a qualified conclusion is appropriate for the financial statements. The accountant is most likely performing which type of engagement?
A. Compilation B. Preparation C. Audit D. Review
Choice “D” is correct. In a review engagement, an engagement letter is required, independence is required, procedures include analytical procedures and inquiry, and qualified conclusions are permitted.
Choice “A” is incorrect. No assurance is provided during a compilation engagement.
Choice “B” is incorrect. No assurance is provided during a preparation engagement, independence need not be assessed, and analytical procedures need not be performed.
Choice “C” is incorrect. An audit would include additional auditing procedures than only analytical procedures and client inquiries. Additionally, an opinion, rather than a conclusion, is issued for an audit.
A6 M5
Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review:
A. Provides only limited assurance that the financial statements are fairly presented. B. Does not contemplate obtaining corroborating audit evidence or applying certain other procedures ordinarily performed during an audit. C. Includes examining, on a test basis, information that is the representation of management. D. Includes primarily applying analytical procedures to management's financial data and making inquiries of company management.
Choice “D” is correct. A review report states that a review includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.
Choice “A” is incorrect because the review report does not state or express an opinion on the financial statements. The report states that the accountant does not express an opinion because the procedures are substantially less in scope than an audit.
Choice “B” is incorrect because although a review does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit, this is not stated in the report. The review report simply states that a review is substantially less in scope than an audit.
Choice “C” is incorrect because an audit report, not a review report, refers to “examining on a test basis.” A compilation report, not a review report, refers to “information that is the representation of management.”
