AUD still wrong on 5/19/2024 Flashcards
ALL SECTIONS
Which of the following auditing procedures most likely would provide assurance about a manufacturing entity’s inventory valuation?
A. Tracing test counts to the entity's inventory listing. B. Reviewing shipping and receiving cutoff procedures for inventories. C. Obtaining confirmation of inventories pledged under loan agreements. D. Testing the entity's computation of standard overhead rates.
Choice “D” is correct. Testing the entity’s computation of standard overhead rates generally provides assurance about a client’s inventory valuation.
Choice “A” is incorrect. Tracing test counts to the entity’s inventory listing provides assurance about the completeness of the client’s listing.
Choice “B” is incorrect. Reviewing shipping and receiving cutoff procedures for inventories provides assurance about completeness and existence of inventory.
Choice “C” is incorrect. Obtaining confirmation of inventories pledged under loan agreements provides assurance about the appropriate presentation, description, and disclosure of such matters in the financial statements.
According to PCAOB standards, which of the following does not represent an example of management bias?
A. Management decreasing the allowance for doubtful accounts when there has been no change in the level of write-offs during the period. B. Selective correction of misstatements brought to management's attention during the audit. C. Management reporting all insurance purchases initially as an expense and then adjusting the unexpired portion into prepaid insurance at the end of the period. D. The identification by management of additional adjusting entries that offset misstatements accumulated by the auditor.
Choice “C” is correct. This is not an example of management bias because at the end of the period the financial statements are fairly presented. Unexpired insurance should be reported as prepaid insurance. This is a correct application of the matching principle.
Choice “A” is incorrect. Management decreasing the allowance for doubtful accounts when there has been no change in the level of write-offs during the period is an example of management bias in accounting estimates.
Choice “B” is incorrect. Selective correction of misstatements brought to management’s attention during the audit is an example of management bias.
Choice “D” is incorrect. The identification by management of additional adjusting entries that offset the misstatements accumulated by the auditor is an example of management bias.
The scope of an audit is not restricted when an attorney’s response to an auditor as a result of a client’s letter of audit inquiry limits the response to:
A. Matters to which the attorney has given substantive attention in the form of legal representation. B. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity. C. The attorney's opinion of the entity's historical experience in recent similar litigation. D. The probable outcome of asserted claims and pending or threatened litigation.
Choice “A” is correct. The scope of an audit is not restricted when an attorney’s response is limited to matters to which the attorney has given substantive attention in the form of legal representation. The attorney may also limit his or her response to matters that are considered individually or collectively to be material.
Choices “B”, “C”, and “D” are incorrect. The scope of an audit may be restricted when an attorney’s response is limited to:
B.
An evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity. (The attorney’s response should also address the nature of the claim, the progress to date, and the intended response.)
C.
The attorney’s opinion of the entity’s historical experience in recent similar litigation. (The attorney’s response should address the current situation, which may not parallel historical experience).
D.
The probable outcome of asserted claims and pending or threatened litigation. (The attorney’s response should also address the nature of the claim, the progress to date, and the intended response, as well as unasserted claims).
Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by an internal control activity that provides for:
A. Segregation of duties of employees in the accounts payable department. B. Independent verification of invoices for disbursements recorded as equipment acquisitions. C. Investigation of variances within a formal budgeting system. D. Authorization by the board of directors of significant equipment acquisitions.
Choice “C” is correct. Equipment acquisitions that are misclassified as maintenance expense most likely would be detected by internal control procedures that provide for investigation of variances within a formal budgeting system.
Choice “A” is incorrect. Segregation of duties of employees in the accounts payable department would not prevent the misclassification of equipment acquisitions as maintenance expense.
Choice “B” is incorrect. Verifying invoices for disbursements already recorded as equipment acquisitions would not include examining invoices for disbursements recorded as maintenance expense.
Choice “D” is incorrect. Since the authorization by the board of directors occurs before the disbursement is recorded, this control would not prevent any misclassification.
An auditor of a nonissuer should request that management provide written representations regarding uncorrected misstatements in the financial statements that state:
A. Management's rationale for not correcting misstatements noted during the course of the audit. B. The individual and cumulative differences between the auditor's point estimates and the recorded amounts for uncorrected misstatements. C. Whether management believes that the effects of uncorrected misstatements are immaterial, individually and in the aggregate, to the financial statements as a whole. D. Management's acceptance of responsibility for the auditor's opinion, if modified due to the uncorrected misstatements.
Choice “C” is correct. The management representation letter must include a statement that management believes the effects of uncorrected misstatements are immaterial to the financial statements as a whole and a summary of the uncorrected misstatements should be included.
Choice “A” is incorrect. With respect to uncorrected misstatements, management is only required to state that the effects of uncorrected misstatements are immaterial to the financial statements as a whole.
Choice “B” is incorrect. With respect to uncorrected misstatements, management is only required to state that the effects of uncorrected misstatements are immaterial to the financial statements as a whole. Information regarding the support for the uncorrected misstatements is not required.
Choice “D” is incorrect. Management would not accept responsibility for the auditor’s opinion as the opinion is the responsibility of the auditor.
The sampling unit in a test of controls pertaining to the existence of payroll transactions ordinarily is a (an):
A. Employee personnel record. B. Clock card or time ticket. C. Employee Form W-2. D. Payroll register entry.
Choice “D” is correct. To test controls pertaining to the existence of payroll transactions, entries in the payroll register would be the population from which the sample is selected. (To test existence, the auditor needs to start with the accounting records and vouch backward to the source documents.)
Choice “B” is incorrect. After the sample is taken from the payroll register, the selected samples are traced to clock cards or time tickets to verify that payroll transactions really exist/occurred.
Choices “C” and “A” are incorrect. Sampling employee form W-2s and employee personnel records would test controls related to the completeness of recorded payroll, not existence of specific transactions.
Which of the following statements is correct concerning an auditor’s required communication of significant deficiencies in internal control noted during a financial statement audit of a nonissuer?
A. An auditor's report on significant deficiencies should include a restriction on the distribution of the report. B. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation. C. An auditor should perform tests of controls on significant deficiencies before communicating them to the client. D. An auditor should communicate significant deficiencies after tests of controls, but before commencing substantive tests.
Choice “A” is correct. The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization.
Choice “B” is incorrect. Significant deficiencies may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. The auditor may elect to use a primarily substantive approach to test balances, so internal control deficiencies do not necessarily constitute a scope limitation.
Choice “C” is incorrect. No requirement to perform tests of controls exists. Significant deficiencies may be identified through the consideration of internal control, the application of audit procedures to balances or transactions, or otherwise during the course of the audit.
Choice “D” is incorrect. Significant deficiencies may be communicated during or after the audit.
Which of the following is not true about accounting estimates?
A. Accounting estimates measure the effects of past transactions or events that cannot be determined in a timely cost-effective manner. B. An accounting estimate is an approximation of an account pending the outcome of a future event. C. An accounting estimate is an approximation of past events that can be determined on a timely cost-effective basis. D. Accounting estimates are monetary values within the financial statements for which there is an inherent lack of precision.
Choice “C” is correct. An accounting estimate pertains to determining the approximation of past events that cannot be determined on a timely, cost-effective basis. If the effect of a past event can be determined on a timely, cost-effective basis, there would be no reason to make an estimate.
Choices “A”, “D”, and “B” are incorrect. Accounting estimates may:
A.
Measure the effects of past transactions that cannot be determined in a timely cost-effective manner.
D.
Have an inherent lack of precision.
B.
Be used to approximate an account pending the outcome of a future event (e.g., uncollectible accounts receivable)
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:
A. Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations. B. Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate. C. When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk. D. Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records.
Choice “B” is correct. In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate. In other words, sometimes the control is not working but that does not mean there is a dollar misstatement. Therefore, the actual misstatement rate could be lower than the control deviation rate.
For example, if the auditor is testing approval of sales orders and notices that 50 percent of sales orders were not approved, this does not mean that sales revenue on the income statement is incorrect by 50 percent. As a result of this control deficiency, the auditor will most likely change the nature, extent, and/or timing of substantive testing to ensure that more persuasive evidence is obtained. Once the auditor performs the substantive testing, the auditor most likely will find that the misstatements are lower than 50 percent.
Choice “A” is incorrect. The number of items selected typically does not affect the tolerable deviation rate. However, the tolerable deviation rate affects the sample size. For example, the greater the tolerable deviation rate the auditor is willing to accept, the smaller the selected sample size.
Choice “C” is incorrect. If the degree of assurance desired in a sample is high, the auditor should allow for a low (not high) level of sampling risk.
Choice “D” is incorrect. Deviations from internal controls do affect the risk of material misstatement. For example, if the upper deviation rate exceeds the tolerable rate, the auditor most likely would reduce the planned reliance on the control and may increase the risk of material misstatement (as a result of a higher control risk).
Frank wants to evaluate Copeland Distributor’s year-end allowance for doubtful accounts. Frank obtains a listing of all customers with open balances as of the end of the fiscal period. Frank decides to age the data to evaluate the reasonableness of the allowance for doubtful accounts balance. What type of data analytic is Frank executing?
A. Descriptive analytic B. Predictive analytic C. Diagnostic analytic D. Prescriptive analytic
Choice “A” is correct. Descriptive analytics describe what happened within the data. Aging the accounts receivable data would summarize and describe the data and therefore be a descriptive analytic.
Choice “B” is incorrect. Predictive analytics provide expected or predicted outcomes based on historical data. The analytic Frank uses is only providing a simple descriptive output.
Choice “C” is incorrect. Diagnostic analytics explain why something happened. The analytic Frank uses provides a simple descriptive output and does not explain the drivers or underlying causes of the value of the output.
Choice “D” is incorrect. Prescriptive analytics prescribe or recommend actions to be taken based on advanced analytics to reach a desired goal. The analytic Frank uses is only providing a simple descriptive output.
Which of the following statements is correct concerning statistical sampling in tests of controls?
A. As the population size increases, the sample size should increase proportionately. B. Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate. C. There is an inverse relationship between the expected population deviation rate and the sample size. D. In determining tolerable rate, an auditor considers detection risk and the sample size.
Choice “B” is correct. Deviations from control activities do not necessarily result in misstatements. Therefore, deviations from pertinent control activities at a given rate would ordinarily be expected to result in misstatements at a lower rate.
Choice “A” is incorrect. In tests of controls, population size has virtually no effect on sample size unless the population is small.
Choice “C” is incorrect. There is a direct relationship between expected deviation rate and sample size.
Choice “D” is incorrect. Detection risk and sample size are not factors in determining the tolerable deviation rate in a test of controls. The tolerable rate is simply the maximum rate that the auditor is willing to accept without altering his or her planned level of reliance.
In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of:
A. Discussing sales contracts with the sales manager. B. Reviewing the status of long-term leases. C. Obtaining a client representation letter. D. Reviewing derivative transactions reflected on the quarter-end balance sheet.
Choice “D” is correct. A client is expected to report material contingencies in the footnotes as they have not yet happened and are not reflected in the actual financial statements. Derivatives that are actually reflected on the client’s balance sheet at quarter end are not contingencies (the amount is provided and there is no possible or probable outcome). As a result, reviewing any type of transaction that is already recorded on the balance sheet will not identify a contingency.
Choice “A” is incorrect. By discussing the sales contracts with the sales manager, the auditor may identify contingencies pertaining to the client’s future revenue recognition.
Choice “B” is incorrect. The auditor should review the status of long-term leases to identify possible future contingencies related to these leases.
Choice “C” is incorrect. The auditor should obtain a client representation letter which would identify client contingencies.
In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonableness of the:
A. Valuation of marketable equity securities. B. Classification between balance sheet portfolios. C. Existence of unrealized gains or losses in the portfolio. D. Completeness of recorded investment income.
Choice “D” 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.
Choice “A” is incorrect. To test the valuation of marketable equity securities an auditor would most likely compare to market quotations (cost method) or examine the audited financial statements of the investee company (equity method).
Choice “B” is incorrect. Classification between balance sheet portfolios would most likely be tested by confirming the terms of the investment and making inquiries of management regarding how long they intend to hold the securities.
Choice “C” is incorrect. To identify and quantify the existence of unrealized gains and losses in the portfolio, an auditor would examine the trading prices in the Wall Street Journal (or other source) for those long-term investments carried under the cost method. For those carried under the equity method, an auditor would review the audited financial statements of the investee company.
Kell engaged March, CPA, to prepare to Kell a written personal financial plan containing unaudited personal financial statements. March anticipates omitting certain disclosures required by GAAP because the engagement’s sole purpose is to assist Kell in developing a personal financial plan. March is:
A. Required to follow SSARS if the omitted disclosures required by GAAP are material. B. Required to follow SSARS if the financial statements will be presented in comparative form with those of the prior period. C. Not required to follow SSARS if Kell agrees the financial statements will not be disclosed to a non-CPA financial planner. D. Not required to follow SSARS because preparing written personal financial plans are excluded from SSARS requirements.
Choice “D” is correct. SSARS explicitly states that SSARS does not apply when an accountant prepares personal financial statements for inclusion in written personal financial plans. Other situations where SSARS does not apply is when the accountant prepares financial statements:
solely for submission to taxing authorities,
in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
in conjunction with business valuation services.
Choice “A” is incorrect. The omission of disclosures does not determine whether or not SSARS should be followed.
Choice “B” is incorrect. The presentation of comparative financial statements does not determine whether or not SSARS should be followed.
Choice “C” is incorrect. The client is not required to agree that the financial statements will not be disclosed to a non-CPA financial planner.
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. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. C. Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements. D. Auditor, as a result of the specialist's findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.
Choice “D” is correct. When expressing an unmodified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in a departure from an unmodified opinion. The auditor may need the permission of the specialist before referencing the specialist in the report.
Choice “A” is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.
Choice “B” is incorrect. Lack of client familiarity with the specialist does not affect the auditor’s report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist’s qualifications.
Choice “C” is incorrect. The auditor must understand the form and content of the specialist’s findings in relation to the representations in the financial statements to be able to review the specialist’s work. However, this does not affect whether or not the auditor refers to the specialist in the auditor’s report.
When do you taint in a prob proportional to size sample?
When the recorded amount is LESS than the sampling interval.
NOTE: If it is greater than just take the Recorded amount minus the Audit amount and the difference is your projected error.
An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?
A. Test of details. B. Test of controls. C. Test of transactions. D. Analytical procedures.
Choice “D” is correct. Analytical procedures are evaluations of financial information made by a study of plausible relationships among data, and they include comparisons between current year and prior year financial information.
Choice “A” is incorrect. Tests of details are audit procedures used to gather evidence to support specific account balances. Comparing current year and prior year gross margin does not provide much information regarding specific account balances, although it might identify an account balance worthy of further consideration.
Choice “B” is incorrect. Tests of controls are performed to evaluate the effectiveness of controls. Comparing current year and prior year gross margin would not provide information regarding controls.
Choice “C” is incorrect. Tests of transactions involve selecting specific transactions and evaluating whether they were properly recorded. Comparing current year and prior year gross margin would not provide information regarding specific transactions.
Which of the following professional services would be considered an attest engagement covered by the Statements on Standards for Attestation Engagements (SSAEs)?
A. The compilation of financial statements from a client's accounting records. B. A management consulting engagement to provide EDP advice to a client. C. An income tax engagement to prepare federal and state tax returns. D. An engagement to report on management's discussion and analysis (MD&A).
Choice “D” is correct. An engagement to report on management’s discussion and analysis (MD&A) would be considered an attest engagement, because the accountant is issuing an examination or review report on another party’s assertion.
Choice “A” is incorrect. Compilations are governed by Statements on Standards for Accounting and Review Services (SSARS).
Choice “B” is incorrect. A management consulting engagement to provide EDP advice to a client is not considered to be an attest engagement, because the accountant is not issuing an examination, review, or agreed-upon procedures report on another party’s assertion.
Choice “C” is incorrect. An income tax engagement to prepare federal and state tax returns is not considered to be an attest engagement.
In an integrated audit of a nonissuer, if an auditor concludes that a material weakness exists as of the date specified in management’s assessment, the auditor should take which of the following actions?
A. Communicate, in writing, to the entity’s outside legal counsel that the material weakness exists. B. Disclaim an opinion. C. Issue an adverse opinion. D. Obtain written representations from management relating to such matters.
Choice “C” is correct. The presence of a material weakness in internal control results in an adverse opinion.
Choice “A” is incorrect. An auditor should communicate, in writing, to management and to those charged with governance that the material weakness exists. There is no requirement that the auditor communicate a material weakness in writing to the entity’s outside legal counsel.
Choice “B” is incorrect. A material weakness results in an adverse opinion. A scope limitation results in a disclaimer of opinion or withdrawal from the engagement.
Choice “D” is incorrect. Management is not required to include a written representation confirming the auditor’s conclusion that a material weakness exists. However, management will include a written representation that management disclosed all significant deficiencies and material weaknesses to the auditor.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
A. The CPA's lack of understanding of the entity's operations and industry. B. Management reputation for failing to provide schedules to prior auditors on a timely basis. C. The CPA's inability to review the predecessor auditor's working papers. D. Management's unwillingness to make all financial records available to the CPA.
Choice “D” is correct. A CPA most likely would not accept a new audit engagement if management is unwilling to make all financial records available to the CPA. This is a precondition for the audit.
Choice “A” is incorrect. A CPA could still accept a new audit engagement even if the CPA lacks an understanding of the entity’s operations and industry. However, the CPA will need to obtain the required level of knowledge (e.g., attending accounting conferences).
Choice “B” is incorrect. A CPA could still accept a new audit engagement even if management has a reputation for failing to provide schedules to prior auditors on a timely basis. Although it is helpful when management is timely when providing schedules, this is not a precondition for the audit. The auditor most likely would plan the engagement to allot more time for this audit or give management earlier deadlines than needed.
Choice “C” is incorrect. A CPA could still accept a new audit engagement even if the CPA is unable to review the predecessor auditor’s workpapers. Although review of the predecessor auditor’s workpapers are helpful in an initial audit, it is not a required procedure.
An entity’s control environment includes _ _ _ _ _ _ _ _ _ _ _ _ _ _ _.
participation of those charged with governance, management’s philosophy, and the organizational structure
The control environment includes the overall tone of the organization.
* Management’s philosophy and operating style help set the tone and are considered to be a part of this component.
- The organizational structure is a key element to ensuring the company is appropriately assigning responsibilities and creating a strong environment for oversight.
- The participation of those charged with governance is a key in building the foundation of a strong control environment.
_ _ _ _ _ _ _ _ _ _ _ _ involves the grouping of transactions sharing some characteristic (such as recorded amounts).
Stratification
The goal of stratification is to ensure selection of items for which potential misstatements may individually equal or exceed tolerable misstatement.
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also:
A. Reconcile the open invoice file. B. Authorize requisitions of goods. C. Negotiate terms with vendors. D. Inspect goods upon receipt.
Choice “C” is correct. In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors.
Choice “A” is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders.
Choice “B” is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders.
Choice “D” is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders.
Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence supporting the effective operation of controls?
A. Comparing an entity's uncollectible accounts expense to actual uncollectible accounts receivable. B. Sending confirmation requests to an entity's principal customers to verify the existence of accounts receivable. C. Inspecting an entity's analysis of accounts receivable for unusual balances. D. Observing an entity's employee prepare the schedule of past due accounts receivable.
Choice “D” is correct. In order to obtain audit evidence supporting the effective operation of controls, an auditor must obtain evidence regarding how controls were applied, the consistency with which controls were applied, and by whom or by what means controls were applied. Observing preparation of the schedule of past due accounts receivable provides some of this evidence.
Choice “A” is incorrect. Comparing an entity’s uncollectible accounts expense to actual uncollectible accounts receivable is a substantive test, not a test of the operating effectiveness of controls.
Choice “B” is incorrect. Sending confirmation requests is a substantive test, not a test of the operating effectiveness of controls.
Choice “C” is incorrect. Inspecting an entity’s analysis of accounts receivable for unusual balances is a substantive test, not a test of the operating effectiveness of controls.
When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:
A. Standard deviation. B. Projected error. C. Reliability. D. Precision.
Explanation
Choice “D” is correct. The statistical concept of precision is used to describe the auditor’s evaluation of sampling results by calculating the possible error in either direction.
Choice “A” is incorrect. Standard deviation is a measure of the variability of a frequency distribution about its mean.
Choice “B” is incorrect. Projected error is the auditor’s best estimate of the error in the total population based upon evaluating the actual error rate in the sample results. The auditor then adds an allowance for sampling risk to develop a “precision interval” within which the population is expected to fall.
Choice “C” is incorrect. Reliability measures how frequently the procedure used will yield differences between the estimated value and the population value.
Samples to test internal control are intended to provide a basis for an auditor to conclude whether:
A. The risk of incorrect acceptance is too high. B. Materiality for planning purposes is at a sufficiently low level. C. The financial statements are materially misstated. D. The control activities are operating effectively.
Explanation
Choice “D” is correct. Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively.
Choice “A” is incorrect. The risk of incorrect acceptance is an aspect of sampling risk related to substantive tests, not tests of controls.
Choice “B” is incorrect. Samples to test controls do not provide evidence regarding materiality levels for planning purposes.
Choice “C” is incorrect. Tests of controls may provide evidence regarding the likelihood of misstatement, but they do not provide a basis for concluding whether the financial statements are materially misstated.
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs:
A. Analytical procedures for property and equipment balances at the end of the year. B. Tests of controls and limited tests of current year property and equipment transactions. C. Tests of controls and extensive tests of property and equipment balances at the end of the year. D. Analytical procedures for current year property and equipment transactions.
Choice “B” is correct. Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the controls to support that assessed level. However, the need for some substantive tests of transactions is never eliminated.
Choice “A” is incorrect. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Year-end balances may therefore be unpredictable.
Choice “C” is incorrect. Extensive tests of property and equipment balances would not typically be required when control risk is assessed at a low level.
Choice “D” is incorrect. Since control risk is to be assessed at a low level, tests of controls would be required. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion.
An auditor most likely would extend substantive tests of payroll when:
A. Payroll expense is substantially higher than in the prior year. B. Payroll is extensively audited by the state government. C. Overpayments are discovered in performing tests of details. D. Employees complain to management about too much overtime.
Choice “C” is correct. An auditor most likely would extend (increase) substantive tests of payroll when significant errors, such as overpayments, are discovered in performing the tests of details.
Choice “A” is incorrect. A substantial increase in payroll expense would not necessarily increase the substantive tests of payroll if the increase is readily explainable and supportable with analytical review procedures.
Choice “B” is incorrect. The extensive auditing of payroll by the state government might serve to decrease substantive testing since presumably the extensive audit would have already flushed out any problem areas.
Choice “D” is incorrect. An increase in overtime would not necessarily cause the auditor to extend substantive tests of payroll, as long as the effect on payroll is supportable with analytical review procedures.
Obtaining a signed engagement letter would most likely help the auditor to avoid which of the following?
A. A disagreement between management and the auditor on the terms of the contingent portion of the audit fee agreement. B. The auditor believed that management intended to correct an identified material misstatement, however, management determined that the misstatement should be left as uncorrected. C. The auditor assumed that all subsequent events had been disclosed by management, but management failed to communicate a transaction that closed just before the audit report was issued. D. Management needed to obtain an audit report in accordance with a special purpose framework other than U.S. GAAP, but the auditor does not have the appropriate training and knowledge to perform the required engagement.
Choice “D” is correct. The main purpose of the engagement letter is to establish an agreement between the auditor and the client and to reduce the risk of misinterpretation. The engagement letter should include the identification of the applicable financial reporting framework to be used for the report.
Choice “A” is incorrect. Although the engagement letter would contain fee and billing arrangement information, contingent fees are not allowable between an auditor and a client.
Choice “B” is incorrect. The representation letter (not the engagement letter), obtained at the end of an engagement prior to the issuance of the auditor’s report, would include a confirmation by management that the effects of uncorrected misstatements are immaterial to the financial statements as a whole.
Choice “C” is incorrect. The representation letter (not the engagement letter), obtained at the end of an engagement prior to the issuance of the auditor’s report, would include a confirmation by management that all subsequent events have been disclosed.
An auditor would most likely perform _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ to evaluate the design of relevant controls when obtaining an initial understanding of the system of internal control sufficient to assess the risk of material misstatement of the financial statements.
risk-assessment procedures
