AUD Missed Questions Flashcards
Which of the following events most likely would indicate the existence of related parties?
A. Failure to correct internal control weaknesses on a timely basis.
B. Selling real estate at a price significantly different from appraised value.
C. High turnover of senior management and members of the board of directors.
D. Entering into multiple market value transactions with the same party.
Choice “B” is correct. Transactions based on terms that are significantly different from those that would be expected in an arm’s-length transaction, such as selling real estate at a price significantly different from appraised value, may be indicative of related party involvement.
During a new audit engagement, the auditor notices that the client has had three external audit firms perform their annual audits over the past five years due primarily to increases in audit fees. The auditor also notes that the client has been twice downgraded by several of the major credit rating agencies over the past two years and that its current issuer credit rating is at the lowest investment grade level by both Standard & Poor’s and Moody’s Investors Service. Which (if any) of the following fraud risk factors would be most concerning to the auditor?
A. No fraud risk factor exists.
B. Incentives/Pressures.
C. Rationalization/Attitude.
D. Opportunity.
Choice “B” is correct. Because the client has been downgraded twice by several of the major credit rating agencies and the client is one notch from becoming “junk” status by both S&P and Moody’s, there is pressure from the rating agencies to improve or maintain the company’s performance. This external pressure may be a reason for client management to commit fraud.
Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance?
A. Recurring operating losses that may indicate going concern problems.
B. Evidence of a lack of objectivity by those responsible for accounting decisions.
C. Management’s failure to renegotiate unfavorable long-term purchase commitments.
D. Management’s current plans to reduce its ownership equity in the entity.
Choice “B” is correct. A lack of objectivity by those responsible for accounting decisions represents a significant internal control deficiency because it may result in financial statements that are biased rather than being presented fairly. This is a matter that would merit attention by those charged with governance.
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
A. Inquire about payroll checks that were recorded before the year-end but cashed after the year-end.
B. Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.
C. Compare the latest available interim financial information with the financial statements being reported upon.
D. Examine changes in the quoted market prices of investments purchased since the year-end.
Choice “C” is correct. In obtaining evidence about subsequent events, the auditor should examine the latest available interim financial information, and compare them with the financial statements under audit.
Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables:
A. Valuation.
B. Classification.
C. Existence.
D. Completeness.
Choice “C” is correct. Confirmation of accounts receivable provides evidence that the customer and the receivable exist.
An auditor is required to document the auditor’s understanding of the:
I. Entity’s control activities that help ensure management directives are carried out.
II. Entity’s control environment factors that help the auditor plan the engagement.
A. I only.
B. Neither I nor II.
C. Both I and II.
D. II only.
Choice “C” is correct. The 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 and the entity’s control environment.
In reporting on internal controls, the Sarbanes-Oxley Act requires that the CEO and the CFO who sign the report assert that they have disclosed:
A. Material fraud by management to the issuer’s auditors only.
B. All significant internal control deficiencies to the issuer’s auditors only.
C. Any fraud by any employee to both the audit committee and the issuer’s auditors.
D. All significant internal control deficiencies to both the audit committee and the issuer’s auditors.
Choice “D” is correct. All significant deficiencies in the operation or design of internal controls that may have an adverse effect on the financial statements should be disclosed to both the issuer’s auditors and the audit committee.
Each of the following is normally performed while conducting a review of interim financial information, except:
A. Reading minutes of the meetings of the board of directors.
B. Comparing disaggregated revenue data.
C. Making inquiries of financial management.
D. Obtaining litigation updates from external legal counsel.
Choice “D” is correct. Inquiry of the entity’s lawyer regarding litigation, claims, and assessments generally is not required during a review of interim financial information but may be appropriate in certain circumstances.
What procedure would an auditor be least likely to do to gain an initial understanding of a client’s business or industry?
A. Ask questions of client personnel.
B. Vouch accounting records for recurring transactions recorded just after the balance sheet date.
C. Review AICPA accounting and auditing guides.
D. Tour client facilities.
Choice “B” is correct. Vouching accounting records for recurring transactions would be used to identify related party transactions but would not be part of the process to gain an initial understanding of a client’s business.
According to COSO, each of the following is a principle relating to the risk assessment component of internal control, except:
A. The organization selects and develops activities contributing to the mitigation of risks to the achievement of objectives to acceptable levels.
B. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.
C. The organization considers the potential for fraud in assessing risks to the achievement of objectives.
D. The organization identifies and assesses changes that could significantly impact the system of internal control.
Choice “A” is correct. Selecting and developing activities contributing to the mitigation of risks is a principle related to the control activities component of internal control and is, therefore, not a principle related to the risk assessment component.
Which of the following areas of professional responsibility should be observed by a CPA not in public practice?
Objectivity Independence
A. No Yes
B. Yes No
C. No No
D. Yes Yes
Choice “B” is correct. A CPA must always be objective; however, a CPA need not be independent, except when engaged in public practice.
An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following?
A. Obtain permission from the audit committee to issue separate reports.
B. State in the audit report that separate reports will be issued.
C. Issue the same opinion in each report.
D. Report to the governing authority that separate reports will be issued.
Choice “B” is correct. If an auditor decides to issue separate reports rather than a combined report on internal control over financial reporting and compliance with laws and regulations, then the auditor should state in the audit report that separate reports will be issued. This would appear as a paragraph entitled “Other Reporting Required by Government Auditing Standards” in the auditor’s report.
Which of the following factors would the auditor not explicitly consider when determining sample size in an attribute sample for a test of controls?
A. The expected population deviation rate.
B. An acceptable level of the risk of overreliance.
C. The tolerable deviation rate.
D. The tolerable misstatement.
Choice “D” is correct. An auditor would consider tolerable deviation rate, not tolerable misstatement, when determining sample size in an attribute sample for a test of controls. Tolerable misstatement is considered when determining sample size in variable sampling.
While auditing a client’s purchase transactions, an auditor selects a sample of vouchers and then compares the dates on the vouchers to the dates the corresponding transactions were actually recorded in the client’s purchase journal. The audit procedure is most likely designed to test the:
A. Valuation, allocation, and accuracy assertion.
B. Cut-off assertion.
C. Completeness assertion.
D. Existence and occurrence assertion.
Choice “B” is correct. The scenario above indicates that the auditor is most likely testing the cut-off assertion. This is evidenced by the auditor’s comparison (focus) of dates on the sample of vouchers to the dates of the transactions recorded in the purchase journal.
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatement arising from fraudulent financial reporting?
A. Computer hardware is usually sold at a loss before being fully depreciated.
B. Management had frequent disputes with the auditor on accounting matters.
C. There is a lack of interest by management in maintaining an earnings trend.
D. Monthly bank reconciliations usually include several large checks outstanding.
Choice “B” is correct. Frequent disputes between management and the auditor is a fraud risk factor that would heighten an auditor’s concern about the risk of material misstatement arising from fraudulent financial reporting.
Silver, CPA, has been hired by Andrews Co., a publicly held company, to conduct a review of its interim financial information. While performing review procedures, Silver becomes aware of a significant change in the control activities at one of Andrew’s branch locations. Which of the following might Silver consider performing in response to this situation?
I. Making additional inquiries, such as whether management has monitored the changes and considered whether they were operating as intended.
II. Employing analytical procedures with a less precise expectation.
A. Both I and II.
B. Neither I nor II.
C. II only.
D. I only.
Choice “D” is correct. An accountant’s knowledge of an entity’s business and its system of internal control influences the inquiries made and analytical procedures performed. A significant change in control activities would likely result in further inquiry of management.
Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?
A. Use smaller, rather than larger, sample sizes.
B. Increase of tests of controls.
C. Perform substantive tests as of an interim date.
D. Select more effective substantive tests.
Choice “D” is correct. When the auditor determines that the overall risk of material misstatement is high, the acceptable level of detection risk decreases and the auditor must perform more effective substantive procedures.
In an audit of financial statements in accordance with generally accepted auditing standards, an auditor is required to:
A. Document the auditor’s understanding of the entity’s system of internal control.
B. Search for significant deficiencies in the operation of controls.
C. Determine whether controls operated effectively to prevent or detect material misstatements.
D. Perform tests of controls to evaluate the effectiveness of the entity’s information system relevant to financial reporting.
Choice “A” is correct. The auditor is required to document key elements of the understanding of the entity and its environment, including each of the components of the system of internal control.
Which of the following situations most likely represents the highest risk of a material misstatement arising from misappropriations of assets?
A. A large number of transactions processed using cash.
B. A large number of inventory items with low sales prices.
C. A large number of transactions processed in a short period of time.
D. A large number of fixed assets with easily identifiable serial numbers.
Choice “A” is correct. Transactions processed using cash have a higher risk of material misstatement related to misappropriation of assets. This is because cash is easier for an employee to take without recording the transaction or receipt in the books and records. A strong system of internal control, including proper segregation of duties and the use of a bank lock box for deposits, can reduce the risk of misappropriation of assets related to receipts.
When auditing a client’s year-end cash balance, an auditor uses standard bank confirmations and performs tests on the client’s year-end bank reconciliations. These substantive procedures test which of the following assertions?
A. Completeness and valuation and allowance.
B. Rights and obligations, and occurrence.
C. Cutoff.
D. Understandability of presentation and classification.
Choice “A” is correct. If an auditor performs tests on year-end bank reconciliations or sends standard bank confirmations to all banks where the client has transacted business during the year, the auditor would be testing the completeness, and valuation and allowance assertions pertaining to the client’s ending cash balance.
The acceptable level of detection risk is inversely related to the:
A. Preliminary judgment about materiality levels.
B. Risk of failing to discover material misstatements.
C. Risk of misapplying auditing procedures.
D. Assurance provided by substantive tests.
Choice “D” is correct. The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests.
Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor?
A. The internal auditor was previously an employee of the auditor’s public accounting firm.
B. The audit committee reviews employment decisions related to the director of internal auditing.
C. The internal auditor attends a number of comprehensive continuing professional education courses each year.
D. The internal auditor has obtained the Certified Internal Auditor designation.
Choice “B” is correct. The independent auditor most likely would consider that the audit committee reviews employment decisions related to the director of internal auditing when assessing the objectivity of the internal auditor.
Which of the following is not true about the report release date?
A. It is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
B. It is used to define the beginning of the retention period.
C. It is often the date on which the report is delivered to the client.
D. It is the date on which the auditor grants the client permission to use the report.
Choice “A” is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such.
In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:
A. Completeness of recorded investment income.
B. Classification between balance sheet portfolios.
C. Valuation of marketable equity securities.
D. Existence of unrealized gains or losses in the portfolio.
Choice “A” is correct. In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the completeness of recorded investment income. These procedures would probably include a comparison of the recorded investment income with the expected amount (based upon the related interest rate, dividends declared, etc.) and the income balance audited in the prior year.
Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern?
A. Comparing the entity’s depreciation and asset capitalization policies to other entities in the industry.
B. Reconciling the cash balance per books with the cut-off bank statement and the bank confirmation.
C. Inspecting title documents to verify whether any assets are pledged as collateral.
D. Confirming with third parties the details of arrangements to maintain financial support.
Choice “D” is correct. Confirming with third parties the details of arrangements to provide or “maintain (needed) financial support” is an audit procedure that may identify doubts about an entity’s ability to continue as a going concern.
An auditor’s inquiries of management disclosed that the entity recently invested in a series of energy derivatives to hedge against the risks associated with fluctuating oil prices. Under these circumstances, the auditor should:
A. Document the derivatives in the auditor’s communication with those charged with governance.
B. Confirm the marketability of the derivatives with a commodity specialist.
C. Examine the contracts for possible risk exposure and the need to recognize losses.
D. Perform analytical procedures to determine if the derivatives are properly valued.
Choice “C” is correct. Generally accepted accounting principles specify that, in order to qualify for hedge treatment, the entity must demonstrate and disclose a number of transaction features including risk exposure. The auditor would therefore need to examine the contracts to evaluate the character of the hedge and the degree to which losses should be recognized in the determination of income, as well as the character of any disclosures.
An auditor would be most likely to identify a contingent liability by obtaining a (an):
A. Standard bank confirmation.
B. Related party transaction confirmation.
C. Accounts payable confirmation.
D. Transfer agent confirmation.
Choice “A” is correct. An auditor would be most likely to identify a contingent liability by obtaining a standard bank confirmation, which has an “exceptions and comments” box that specifically discloses contingent liabilities as endorser of loans, for open letters of credit, etc.
An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant’s letterhead and that the report be manually signed by the accountant?
Printed on the Manually signed
accountant’s by the
letterhead accountant
A. Yes No
B. Yes Yes
C. No No
D. No Yes
Choice “C” is correct. SSARS does not require that the compilation report be printed on the accountant’s letterhead, nor does it require a manual signature. Although a signature is required, it need not be manual. Also, the report may be presented in the accountant’s letterhead, but is not required.
Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?
A. Confirm inventories at locations outside the entity.
B. Determine whether accounting estimates deviate from historical patterns.
C. Inquire about the existence of related party transactions.
D. Review the lawyer’s letter for information about litigation.
Choice “D” is correct. The auditor should inquire of management concerning pending or threatened litigation, and should obtain a letter from the client’s lawyer to corroborate this information. Included in this letter is either an identification of the omission of any pending or threatened litigation, claims, and assessments, or a statement that the list of such matters (as provided by management) is complete.
An auditor of a nonissuer is required to give special consideration to related party transactions because they:
A. Usually represent a significant source of revenue and expense for the two related entities.
B. Are not usually conducted in the normal course of business.
C. Could cause the financial statements to fail to achieve fair presentation.
D. Are generally required to be accounted for on a basis different from the basis that would be appropriate if the entities were not related.
Choice “C” is correct. Related party transactions are not considered to be an arm’s-length transaction, which may result in the substance of the transaction being different from its form. This means that the financial statements may not be fairly presented.
Which of the following procedures would an auditor most likely perform in searching for unrecorded payables?
A. Reconcile receiving reports with related cash payments made just prior to the year-end.
B. Review the responses of accounts receivable confirmations for indications of disputes with customers.
C. Compare cash payments made after the balance sheet date with the accounts payable trial balance.
D. Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.
Choice “C” is correct. An auditor most likely would compare cash payments made after the balance sheet date with the accounts payable trial balance in searching for unrecorded payables. The auditor is looking for items that should have been recorded as of the balance sheet date, but were not.
Which of the following statements is generally correct about the reliability of audit evidence?
A. Reliability of audit evidence refers to the audit evidence obtained from outside the entity.
B. The more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.
C. Information obtained indirectly from independent outside sources is more persuasive than the auditor’s direct personal knowledge obtained through observation and inspection.
D. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
Choice “B” is correct. The reliability of accounting data and financial statements is enhanced by a satisfactory system of internal control.
