Audit Flashcards
A1
When opining on whether supplementary information presented with audited financial statements is fairly stated in all material respects and in relation to the financial statements as a whole, an auditor of a nonissuer must ensure that:
A. The board of directors has reviewed the supplementary information. B. Neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements. C. The supplementary information complies with applicable federal and state laws. D. The supplementary information is measurable.
In order to issue an opinion on supplementary information, the auditor must determine that, along with other conditions, neither an adverse opinion nor a disclaimer of opinion was issued on the financial statements.
A1
An entity’s comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor should:
A. Issue an updated comparative audit report indicating the division of responsibility. B. Express an opinion only on the current year's financial statements and make no reference to the prior year's statements. C. Explain to the client that comparative financial statements may not be presented under these circumstances. D. Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.
When a predecessor auditor’s report is not presented, the successor auditor should indicate the following items:
- That the statements were audited by a predecessor auditor. The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the successor.
- The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reason for the modification.
- The nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the predecessor auditor’s report.
- The date of the predecessor auditor’s report.
A1
March, CPA, is engaged by Monday Corp., a client, to audit the financial statements of Wall Corp., a company that is not March’s client. Monday expects to present Wall’s audited financial statements with March’s auditor’s report to 1st Federal Bank to obtain financing in Monday’s attempt to purchase Wall. In these circumstances, March’s auditor’s report would usually be addressed to:
A. Monday Corp., the client that engaged March. B. Wall Corp., the entity audited by March. C. 1st Federal Bank. D. Both Monday Corp. and 1st Federal Bank.
The auditors should address their report to the entity that engaged them. In this case, Monday Corp. engaged the auditor to perform an acquisition audit and the report should be addressed to Monday.
A2
Which of the following components (elements) of an entity’s system of internal control includes the development of personnel manuals documenting employee promotion and training policies?
A. Monitoring. B. Control environment. C. Quality control system. D. Information and communication system.
The control environment element of an entity’s system of internal control relates to the tone of the organization, which includes human resource policies and practices.
A2
Which of the following statements is correct concerning an auditor’s responsibility to report fraud?
A. The disclosure of material management fraud to principal stockholders is required when both senior management and the board of directors fail to acknowledge the fraudulent activities. B. The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility. C. The auditor is required to communicate to those charged with governance all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved are inconsequential. D. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC.
The disclosure of fraudulent activities to parties other than the client’s senior management and those charged with governance is not ordinarily part of the auditor’s responsibility.
A2
Proper supervision of assistants is required for all of the following reasons, except:
A. To stay informed regarding significant accounting and auditing questions, new developments, and material problems. B. To ensure that the work performed by assistants provides the professional development they will need to advance within the firm. C. To ensure that the work performed by assistants is consistent with the conclusions presented in the report. D. To ensure that the work performed by assistants is adequate to accomplish the objectives of the engagement.
Although it is beneficial when assistants receive the experience they need for professional development, this is not the purpose of supervision.
A2
Communication related to the inherent limitations of internal control of a nonissuer is required in which of the following documents?
A. An engagement letter B. A review report C. A letter of inquiry sent to the client's attorney D. A management letter
The engagement letter should include a statement saying that, because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even if the audit is properly planned and performed.
A3
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that:
A. Irregularities exist among the relevant account balances. B. The communication with those charged with governance should be revised. C. Control activities are not operating effectively. D. Additional tests of details are required.
If analytical procedures suggest unexpected relationships, the auditor would perform additional tests of details of the accounts involved
A3
Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?
A. "I believe that the plaintiff will have problems establishing any liability." B. "I believe that the company will be able to defend this action successfully." C. "I believe that this action has only a remote chance in establishing any liability." D. "I believe that the plaintiff's case against the company is without merit."
The lawyer’s comment that the plaintiff “will have problems establishing any liability” is vague…it does not provide an evaluation of the likelihood of an unfavorable outcome. Does “will have problems” mean a loss is probable, reasonably possible, or remote? The auditor would likely want to request clarification to ensure that the situation has been properly accounted for and disclosed.
A3
Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence?
A. Payroll expense. B. Accounts receivable. C. Accounts payable. D. Advertising expense.
Auditors try to identify predictable relationships when using analytical review procedures. Payroll expense is predictable because it is based on objective information (number of employees and pay rates). It can generally be computed directly by the auditor.
A3
Which of the following best describes the primary purpose of an auditor performing audit procedures and gathering evidence related to potential litigation, claims, and assessments of the client?
A. To determine if management has adequately accounted for and recorded any amounts that are considered probable and reasonably estimable and to verify that amounts that are remote and not reasonably estimable are adequately disclosed. B. To determine if management has adequately accounted for and recorded any amounts that are considered possible and reasonably estimable and to verify that amounts that are uncertain or remote but reasonably estimable are adequately disclosed. C. To determine if management has adequately accounted for and recorded any amounts that are considered possible and reasonably estimable and to verify that amounts that are possible but not reasonably estimable are adequately disclosed. D. To determine if management has adequately accounted for and recorded any amounts that are considered probable and reasonably estimable and to verify that amounts that are probable but not reasonably estimable or that are reasonably possible are adequately disclosed.
Choice “D” is correct. The primary purpose of an auditor’s procedures around potential litigation, claims, and assessments is to ensure that management has appropriately recorded items that are considered probable and reasonably estimable and that management has disclosed items that are probably but not reasonably estimable or that are reasonably possible.
A4
According to PCAOB standards which one of the following statements does not reflect a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement?
A. The cost of the correction. B. The dollar amount of the error. C. The significance of the misstatement relative to the needs of users. D. The effects of misclassifications, for example, between operating and nonoperating.
The dollar amount of the error is a quantitative standard, not a qualitative standard.
A4
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. A significant deficiency previously communicated during the prior year's audit that remains uncorrected causes a scope limitation. B. An auditor's report on significant deficiencies should include a restriction on the distribution of the report. 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.
The report should state that the communication is intended solely for the use of management, those charged with governance, and others within the organization.
A4
An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:
A. Shipping and receiving activities. B. Cutoffs of sales and purchases. C. Cash receipts and accounts receivable. D. Opening and closing inventory balances.
Examination of accounts receivable and cash receipts provides the auditor with evidence with respect to both the completeness and the occurrence of sales transactions, thus limiting the need to test sales transactions.
A4
In auditing payroll, an auditor most likely would:
A. Observe entity employees during a payroll distribution. B. Compare payroll costs with entity standards or budgets. C. Verify that checks representing unclaimed wages are mailed. D. Trace individual employee deductions to entity journal entries.
The analytical procedure comparing payroll to standards or budgets is the substantive procedure most likely used for payroll.
A5
When an accountant compiles projected financial statements, the accountant’s report should include a statement that:
A. Evaluates the hypothetical assumptions used to prepare the projection. B. Disclaims any form of assurance on the historical financial statements. C. Expresses limited assurance that the results will be within the projected range. D. Describes the limitations on the usefulness of the projection.
A compilation of a financial projection report describes the limitations on the usefulness of the projection by including a caveat that the prospective results may not be achieved.
A5
A subsequent event related to an entity’s internal control was discovered before the date of the auditor’s report. Which of the following is not an auditor’s responsibility regarding subsequent events in an integrated audit?
A. Obtain written representations from management. B. Perform tests of controls on the subsequent event. C. Inquiry of management. D. Examine documentation related to the subsequent event.
The auditor is not required to perform tests of controls specifically related to the subsequent event. The auditor should inquire of management, obtain written representations from management, and inquire about and examine documentation for the subsequent period.
A6
Kar, CPA, is a staff auditor participating in the audit engagement of Fort, Inc. Which of the following circumstances impairs Kar’s independence?
A. Kar's friend, an employee of another local accounting firm, prepares Fort's tax returns. B. During the period of the professional engagement, Fort gives Kar tickets to a football game worth $75. C. Kar owns stock in a corporation that Fort's 401(k) plan also invests in. D. Kar's sibling is an internal auditor employed part-time by Fort.
Independence of a member is impaired if the CPA’s spouse, parent, child, sibling, etc. are employed by the client in a position that is audit sensitive (i.e., internal auditor, cashier, accounting supervisor, etc.).
A6
An independent accountant’s report is based on a review of interim financial information. If this report is presented in a registration statement, a prospectus should include a statement clarifying that the:
A. Accountant obtained corroborating evidence to determine whether material modifications are needed for such information to conform with GAAP. B. Accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report. C. Accountant's review report is not a part of the registration statement within the meaning of the Securities Act of 1933. D. Accountant's review was performed in accordance with standards established by the Securities and Exchange Commission.
If a report on a review of interim financial information is presented in a registration statement, the prospectus should include a statement that the report is not a “report” or “part” of the registration statement. The accountant should also read the other portions of the registration statement to ensure that his or her name is not used in a way that indicates greater responsibility than he or she intends.
A6
Each of the following statements is true with regard to disclosures about an issuer’s audit committee financial expert except:
A. An issuer is prohibited from disclosing that it does not have an audit committee financial expert if the board has determined that such an expert serves on the audit committee. B. If an issuer discloses that it has an audit committee financial expert, it also must disclose the expert's name. C. An issuer may disclose that it has an audit committee financial expert by virtue of the fact that the audit committee members collectively possess all of the attributes of such an expert. D. An issuer is required to disclose whether the person identified as the audit committee financial expert is independent of management.
At least one member of the audit committee should be a financial expert. All of the members together do not make a single expert that can be named and disclosed as the expert.
A5
An auditor is preparing a report on internal control over financial reporting for a governmental entity. If the auditor identified significant deficiencies and material weaknesses in the entity’s internal control over financial reporting, then the auditor should:
A. Report as findings the material weaknesses identified but not the significant weaknesses. B. Report as findings both the significant deficiencies and the material weaknesses. C. Report as findings the significant deficiencies identified but not the material weaknesses. D. Report as findings neither the significant deficiencies nor the material weaknesses identified.
The GAGAS require a written report on the auditor’s understanding of internal control. The auditor should report all significant deficiencies and material weaknesses in internal control.
A2
If an auditor is obtaining an understanding of an issuer’s information and communication component of internal control, which of the following factors should the auditor assess?
A. The integrity and ethical values of top management. B. The oversight responsibility over financial reporting and internal control by the board or audit committee. C. The philosophy and operating style of management to promote effective internal control over financial reporting. D. The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements.
The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when the auditor is obtaining an understanding of the information and communication component of internal control.
A4
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:
A. Sales order file. B. Shipping document file. C. Customer order file. D. Sales invoice file.
Shipping documents provide evidence that a sale occurred, and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale.
A4
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
A. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. B. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. C. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables. D. Merchandise received is not promptly reconciled to the outstanding purchase order file.
The function of cash receipts is part of the treasurer’s department and should be separate from the role of writing off receivables. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by writing off the related receivable balance.