Auditing Chapters 1-7 Midterm Practice

Question 1

An independent Audit adds value to the communication of financial information because the audit

a. confirms the exact accuracy of management financial representations

b. lends credibility to the financial statements

c. guarantees that financial data are fairly presented.

d. Assured the readers of financial statements that any fraudulent activity has been corrected.

Answer 1

b

Question 2

Which of the following best describes the reason why an independent auditor is often retained to report on financial statements?

a. Management fraud may exist, and it is more likely to be detected by independent auditors than by internal auditors.

b. Different interests may exist between the entity preparing the statements and the persons using the statements, and thus outside assurance is needed to enhance the credibility of the statements.

c. A misstatement of account balances may exist, and all misstatements are generally corrected as a result of the independent auditor’s work.

d. An entity may have a poorly designed internal control system, and an independent auditor is required to detect deficiencies in internal control

Answer 2

b

Question 3

Which of the following best describes relationships among auditing, attest, and assurance services?

a. Attest is a type of auditing service.

b. Auditing and attest services represent two distinctly different types of services-there is no overlap.

c. Auditing is a type of assurance service.

d. Assurance is a type of attest service.

Answer 3

c

Question 4

Which of the following statements relating to attest and assurance services is not correct?

a. Independence is an important attribute of assurance service providers.

b. Assurance services can be performed to improve the quality or context of information for decision makers.

c. Financial statement auditing is a form of attest service but it is not an assurance service.

d. In performing an attest service, the CPA determines the correspondence of the subject matter (or an assertion about the subject matter) against criteria that are suitable and available to users

Answer 4

c

Question 5

For what primary purpose does the auditor obtain an understanding of the entity and its environment?

a. To determine the audit fee

b. To decide which facts about the entity to include in the audit report

c. To plan the audit and determine the nature, timing, and extent of audit procedures to be performed

d. To limit audit risk to an appropriately high level

Answer 5

c

Question 6

Which of the following statements best describes the role of materiality in a financial statement audit?

a. Materiality refers to the “material” from which audit evidence is developed.

b. The higher the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

c. The lower the level at which the auditor assesses materiality, the greater the amount of evidence the auditor must gather.

d. The level of materiality has no bearing on the amount of evidence the auditor must gather.

Answer 6

c

Question 7

Which of the following is the most important reason for an auditor to gain an understanding of an audit client’s system of internal control over financial reporting?

a. Understanding a client’s system of internal control can help the auditor assess risk and identify areas where financial statement misstatements might be more likely.

b. Understanding a client’s system of internal control can help the auditor make valuable recommendations to management at the end of the engagement.

c. Understanding a client’s system of internal control can help the auditor sell consulting services to the client.

d. Understanding a client’s system of internal control is not a required part of the audit process.

Answer 7

a

Question 8

Preliminary engagement activities include

a. Understanding the client’s operations and industry

b. Determining audit engagement team requirements

c. Ensuring the independence of the audit team and audit firm

d. All of the above

Answer 8

d

Question 9

Which of the following statements best describes what is meant by an unqualified audit opinion?

a. Issuance of an unqualified auditor’s report indicates that in the auditor’s opinion the client’s financial statements are not fairly enough presented in accordance with agreed upon criteria to qualify for a clean opinion.

b. Issuance of an unqualified auditor’s report indicates that the auditor is not qualified to express an opinion that the client’s financial statements are fairly presented in accordance with agreed-upon criteria.

c. Issuance of an unqualified auditor’s report indicates that the auditor is expressing different opinions on each of the basic financial statements regarding whether the client’s financial statements are fairly presented in accordance with agreed-upon criteria.

d. Issuance of a standard unqualified auditor’s report indicates that in the auditor’s opinion the client’s financial statements are fairly presented in accordance with agreed-upon criteria, with no need for the inclusion of qualifying phrases

Answer 9

d

Question 10

The auditing standards that are used to guide the conduct of the audit are

a. Implicitly referred to in the key audit matters section of the auditor’s standard report

b. Explicitly referred to in the key audit matters section of the auditor’s standard report

c. Implicitly referred to in the basis for opinion section of the auditor’s standard report

d. Explicitly referred to in the basis for opinion section of the auditor’s standard report

Answer 10

d

Question 11

A client has used an inappropriate method of accounting for its pension liability on the balance sheet. The resulting misstatement is material, but the auditor does not consider its effect to be pervasive. The auditor is unable to convince the client to alter its accounting treatment. The rest of the financial statements are fairly stated in the auditor’s opinion. Which kind of audit report should the auditor issue under these circumstances?

a. Standard unqualified opinion

b. Qualified opinion due to departure from GAAP

c. Adverse opinion

d. No opinion at all

Answer 11

b

Question 12

2-13 Which of the following is not a part of the role of internal auditors?

a. Assisting the external auditors

b. Providing reports on the reliability of financial statements to investors and creditors

c. Consulting activities

d. Operational audits

Answer 12

b

Question 13

2-14 Operational auditing is oriented primarily toward

a. Efficiency, effectiveness, and future improvements to accomplish the goals of management

b. The accuracy of data reflected in management’s financial records

c. Verification that an entity’s financial statements are fairly presented

d. Past protection against errors and fraud provided by existing internal controls

Answer 13

a

Question 14

2-15 Which of the following would not be considered an attest assurance service engagement?

I. Expressing an opinion about the reliability of an entity’s financial statements

II. Reporting that a company’s sustainability metrics are complete and accurate

a. I only

b. Both I and II

c. II only

d. Neither I nor II

Answer 14

d

Question 15

2-16 Which of the following best puts the events of the past decade in proper sequence?

a. C-SOX, increased consulting services to auditees, Enron and other scandals, prohibition of most consulting work for auditees, establishment of CPАВ

b. Increased consulting services to auditees, C-SOX, Enron and other scandals, prohibition of most consulting work for auditees, establishment of CPAB

c. Enron and other scandals, C-SOX, increased consulting services to auditees, prohibition of most consulting work for auditees, establishment of CPAB

d. Increased consulting services to auditees. Enron and other scandals, C-SOX, prohibition of most consulting work for auditees, establishment of CPAВ

Answer 15

d

Question 16

2-17 Which of the following statements best describes management’s and the external auditor’s ‘s respective levels of responsibility for a public company’s financial statements?

a. Management and the external auditor share equal responsibility for the fairness of the entity’s financial statements in accordance with IFRS.

b. Neither management nor the external auditor has significant responsibility for the fairness of the entity’s financial statements in accordance with IFRS.

c. Management has the primary responsibility to ensure that the company’s financial statements are prepared in accordance with IFRS, and the auditor provides reasonable assurance that the statements are free of material misstatement.

d. Management has the primary responsibility to ensure that the company’s financial statements are prepared in accordance with IFRS, and the auditor provides a guarantee that the statements are free of material misstatement.

Answer 16

C

Question 17

2-18 Which of the following best describes the relationship between an entity’s objectives, strategies, processes, controls, and transactions?

a. To achieve its objectives, an entity formulates strategies and implements processes, which are carried out through transactions. The entity’s information and internal control systems must be designed to ensure that the transactions are properly executed, captured, and processed.

b. To achieve its strategies, entity formulates objectives and implements processes, which are carried out through the entity’s information and internal control systems. Transactions are conducted to ensure that the processes are properly executed, captured, and processed.

c. To achieve its objectives, an entity formulates strategies to implement its transactions, which are carried out through processes. The entity’s information and internal control systems must be designed to ensure that the processes are properly executed, captured, and processed.

d. To achieve its processes, an entity formulates objectives, which are carried out through the entity’s strategies. The entity’s information and internal control systems must be designed to ensure that the entity’s strategies are properly executed, captured, and processed

Answer 17

A

Question 18

2-19 The Canadian Public Accountability Board

a. Is an organization that has legal authority to set auditing standards for audits of public companies

b. Is an organization that has the authority to review audit practices for auditors of publicly accountable enterprises

c. Is a quasi-governmental organization that has a policy to review public comment and input in the process of setting auditing standards

d. Is an organization that is dependent on Securities Commissions in setting auditing standards

Answer 18

B

Question 19

3-16

Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s

a. Awareness of the consistency in the application of generally accepted accounting principles between periods

b. Evaluation of all matters of continuing accounting significance

c. Opinion of any subsequent events occurring since the predecessor’s audit report was issued

d. Understanding as to the reasons for the change of auditors

Answer 19

D

Question 20

3-17 A written understanding between the auditor and the entity concerning the auditor’s responsibility for fraud is usually set forth in a(n)

a. Internal control letter

b. Letter of audit inquiry

c. Management letter

d. Engagement letter

Answer 20

D

Question 21

3-18 If the independent auditors decide that it is efficient to consider how the work performed by the internal auditors may affect the nature, timing, and extent of audit procedures, they should assess the internal auditors

a. Competence and objectivity

b. Efficiency and experience

c. Independence and review skills

d. Training and supervisory skills

Answer 21

A

Question 22

3-19 During the initial planning phase of an audit, a CPA most likely would

a. Identify specific internal control activities that are likely to prevent fraud

b. Evaluate the reasonableness of the entity’s accounting estimates

c. Discuss the timing of the audit procedures with the entity’s management

d. Inquire of the entity’s attorney if it is probable that any unrecorded claims will be asserted

Answer 22

C

Question 23

3-20

As generally conceived, the audit committee of a publicly held company should be made up of

a. Representatives of the major equity interests (preferred shares, common shares)

b. The audit partner, the chief financial officer, the legal counsel, and at least one outsider

c. Representatives from the entity’s management, investors, suppliers, and customers

d. Members of the board of directors who are not officers or employees

Answer 23

D

Question 24

3-21 When planning an audit, an auditor should

a. Consider whether the extent of substantive procedures may be reduced based on the results of tests of controls

b. Determine overall materiality for audit purposes

e. Conclude whether changes in compliance with prescribed internal controls justify reliance on them

d. Evaluate detected misstatements

Answer 24

B

Question 25

3-22 Which of these statements concerning fraud by clients is correct?

a. An auditor’s responsibility to detect fraudulent acts that have a direct and material effect on the financial statements is the same as that for errors.

b. An audit in accordance with auditing standards normally includes audit procedures specifically designed to detect fraudulent acts that have an indirect but material effect on the financial statements.

c. An auditor considers fraudulent acts from the perspective of the reliability of management’s representations rather than their relation to audit objectives derived from financial statement assertions.

d. An auditor has no responsibility to detect fraudulent acts by clients that have an indirect effect on the financial statements

Answer 25

A

Question 26

3-23 The engagement partner and manager review the work of engagement team members to evaluate which of the following?

The work was properly performed and documented.

b. The objectives of the procedures were achieved.

c. The results of the work support the conclusions reached.

d. All of the above are correct.

Answer 26

D

Question 27

3-24 Tolerable misstatement is

a. The amount of misstatement that management is willing to tolerate in the financial statements

b. Materiality for the balance sheet as a whole

Materiality for the income statement as a whole

Materiality used to establish a scope for the audit procedures for the individual account balance or disclosures

Answer 27

D

Question 28

3-25
Which of the following would an auditor most likely use in determining overall materiality when planning the audit?

The anticipated sample size of the planned substantive tests

The entity’s income before taxes for the period to-date (eg. 6 months)

The results of tests of controls

d. The contents of the engagement letter

Answer 28

B

Question 29

4-13 Which of the following concepts are pervasive in the application of auditing standards?

a. Internal control

b. Expected misstatement

c. Control risk

d. Materiality and audit risk

Answer 29

D

Question 30

4-14 The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor

a. Obtains reasonable assurance about whether the financial statements are free of material misstatement

b. Assesses the accounting principles used and evaluates the overall financial statement presentation

c. Realizes that some matters, either individually or in the aggregate, are important, while other matters are not important

d. Is responsible for expressing an opinion on the financial statements, which are the responsibility of management

Answer 30

A

Question 31

4-15 Risk of material misstatement refers to a combination of which two components of the audit risk model?

a. Audit risk and inherent risk

b. Audit risk and control risk

c. Inherent risk and control risk

d. Control risk and detection risk

Answer 31

C

Question 32

4-16 As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to

a. Find smaller errors

b. Find larger errors

c. Increase the tolerable misstatements in the accounts

d. Decrease the risk of overreliance

Answer 32

A

Question 33

4-17 Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?

a. Turnover of senior accounting personnel is low

b. Insiders recently purchased additional shares of the entity’s shares

c. Management places substantial emphasis on meeting earnings projections

d. The rate of change in the entity’s industry is slow

Answer 33

C

Question 34

4-18

Which of the following is a misappropriation of assets?

a. Classifying inventory held for resale as supplies

b. Investing cash and earning at a 3 percent rate of return as opposed to paying off a loan with an interest rate of 7 percent

c. An employee of a consumer electronics store steals 12 CD players

d. Management estimates bad debt expense as 2 percent of sales when it actually expects bad debts equal to 10 percent of sales

Answer 34

C

Question 35

4-19 Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?

a. Whether management has ever intentionally violated the securities laws

b. Whether management has any knowledge of fraud that has been perpetrated on or within the entity

c. Management’s attitudes toward regulatory authorities

d. Management’s attitude about hiring ethical employees

Answer 35

B

Question 36

4-20 Which of the following is an example of fraudulent financial reporting?

a. Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

b. An employee diverts customer payments to personal use, concealing their actions by debiting an expense account, thus overstating expenses.

c. An employee steals inventory, and the shrinkage is recorded as a cost of goods sold.

d. An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense.

Answer 36

A

Question 37

4-21

When is a duty to disclose fraud to parties other than the entity’s senior management and its audit committee most likely to exist?

a. When the amount is material

b. When the fraud results from misappropriation of assets rather than fraudulent financial reporting

c. In response to inquiries from a successor auditor

d. When a line manager rather than a lower-level employee commits the fraudulent act

Answer 37

C

Question 38

4-22 Which of the following is correct concerning required auditor communications about fraud?

a. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

b. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Canadian Securities Administrators.

c. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.

d. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgement in determining communication responsibilities

Answer 38

A

Question 39

5-17

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?

a. Reviewing standard bank confirmations for indications of cash manipulations

b. Comparing a sample of shipping documents to related sales invoices

c. Observing the entity’s distribution of payroll cheques

d. Confirming a sample of recorded receivables by direct communication with the debtors

Answer 39

B

Question 40

5-18 In testing the existence assertion for an asset, an auditor ordinarily works from the

a. Financial statements to the potentially unrecorded items

b. Potentially unrecorded items to the financial statements

c. Accounting records to the supporting documents

d. Supporting documents to the accounting records

Answer 40

C

Question 41

5-19 Which of the following statements concerning audit evidence is correct?

a. To be appropriate, audit evidence should be either persuasive or relevant but need not be both.

b. The measure of the reliability of audit evidence lies in the auditor’s judgement.

c. The difficulty and expense of obtaining audit evidence concerning an account balance are a valid basis for omitting the test.

d. An entity’s general ledger may be sufficient audit evidence to support the financial statements

Answer 41

B

Question 42

5-20 Which of the following presumptions is least likely to relate to the reliability of audit evidence?

a. The more effective the internal control, the more assurance it provides about the accounting data and financial statements.

b. An auditor’s opinion is formed within a reasonable time to achieve a balance between benefit and cost.

c. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.

d. The independent auditor’s direct personal knowledge obtained through observation and inspection is more persuasive than information obtained indirectly

Answer 42

B

Question 43

5-21 Which of the following types of audit evidence is the least reliable?

a. Prenumbered purchase order forms prepared by the entity

b. Bank statements obtained from the entity

c. Test counts of inventory performed by the auditor

d. Correspondence from the entity’s attorney about litigation

Answer 43

A

Question 44

5-22 Audit evidence can come in different forms with different degrees of reliability. Which of the following is the
most persuasive type of evidence?

a. Bank statements obtained from the entity

b. Computations made by the auditor

c. Prenumbered entity sales invoices

d. Vendors invoices included in the entity’s files

Answer 44

B

Question 45

5-23 An auditor would be least likely to use confirmations in connection with the examination of

a. Inventory held in a third-party warehouse

b. Refundable income taxes

e. Long-term debt

d. Shareholders’ equity

Answer 45

B

Question 46

56-5-24 The assurance bucket is filled with all of the following except

a. Test of controls

b. The audit report

c. Substantive analytical procedures

d. Tests of details

Answer 46

B

Question 47

5-26 The permanent file section of the working papers that is kept for each audit client most likely contains

a. Review notes pertaining to questions and comments regarding the audit work performed

b. A schedule of time spent on the engagement by each individual auditor

c. Correspondence with the entity’s legal counsel concerning pending litigation

d. Narrative descriptions of the entity’s accounting system and control procedures

Answer 47

D

Question 48

5-25

The current file of the auditor’s working papers should generally include

a. A flowchart of the accounting system

b. Organization charts

c. A copy of the financhst statements

d. Copies of bond and note indentures

Answer 48

C

Question 49

5-27 An audit document that reflects the major components of an amount reported in the financial statements is referred to as a(n)

a. Lead schedule

b. Supporting schedule

c. Audit control account

d. Working trial balance

Answer 49

A

Question 50

5-28 The primary objective of final analytical procedures is to

a. Obtain evidence from details tested to corroborate particular assertions

b. Identify areas that represent specific risks relevant to the audit

c. Assist the auditor in assessing the validity of the conclusions reached on the audit

d. Satisfy doubts when questions arise about an entity’s ability to continue in existence

Answer 50

C

Question 51

5-29 The substantive analytical procedure known as trend analysis is best described by

a. The comparison, across time or to a benchmark, of relationships between financial statement accounts or between an account and nonfinancial data

b. Development of a model to form an expectation using financial data, nonfinancial data, or both to test account balances or changes in account balances between accounting periods

c. The examination of changes in an account over time

d. The comparison of common-size financial statements over time

Answer 51

C

Question 52

6-12 An auditor’s primary consideration regarding an entity’s internal controls is whether they

a. Prevent management override

b. Relate to the control environment

c. Reflect management’s philosophy and operating style

d. Affect the financial statement assertions

Answer 52

D

Question 53

6-13 Which of the following statements about internal control is correct?

a. A properly maintained internal control system reasonably ensures that collusion among employees cannot occur

b. The establishment and maintenance of internal control is an important responsibility of the internal auditor

c. An exceptionally strong internal control system is enough for the auditor to eliminate substantive procedures on a significant account balance

d. The cost-benefit relationship is a primary criterion that should be considered in designing an internal control system

Answer 53

D

Question 54

6-14 Internal control is a process designed to provide reasonable assurance regarding the achievement of which objective?

a. Effectiveness and efficiency of operations

b. Reliability of financial reporting

c. Compliance with applicable laws and regulations

d. All of the above are correct

Answer 54

D

Question 55

6-15 Monitoring is a major component of the COSO Internal Control-Integrated Framework. Which of the following is not correct in how the company can implement the monitoring component?

a. Monitoring can be an ongoing process.

b. Monitoring can be conducted as a separate evaluation

c. Monitoring and other audit work conducted by internal audit staff can reduce external audit costs.

d. The independent auditor can serve as part of the entity’s control environment and continuous monitoring

Answer 55

D

Question 56

6-16 After obtaining an understanding of an entity’s internal control system, an auditor may set control risk at high for some assertions because the auditor

a. Believes the internal controls are unlikely to be effective

b. Determines that the pertinent internal control components are not well documented

c. Performs tests of controls to restrict detection risk to an acceptable level

d. Identifies internal controls that are likely to prevent material misstatements

Answer 56

A

Question 57

6-17 Regardless of the assessed level of control risk, an auditor would perform some

a. Tests of controls to determine the effectiveness of internal controls

b. Analytical procedures to verify the design of internal controls

c. Substantive procedures to restrict detection risk for significant transaction classes

d. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk

Answer 57

C

Question 58

6-18 Assessing control risk below high involves all of the following except

a. Identifying specific controls to rely on

b. Concluding that controls are ineffective

c. Performing tests of controls

d. Analyzing the achieved level of control risk after performing tests of controls

Answer 58

B

Question 59

6-19 Which of the following audit techniques would most likely provide an auditor with the least assurance about the effectiveness of the operation of a control?

a. Inquiry of entity personnel

b. Reperformance of the control by the auditor

c. Observation of entity personnel

d. Walkthrough

Answer 59

A

Question 60

6-20 The highest-quality and most reliable audit evidence that segregation of duties is properly implemented is obtained by

a. Inspection of documents prepared by a third party but which contain the initials of those applying entity controls

b. Observation by the auditor of the employees performing control activities

c. Inspection of a flowchart of duties performed and available personnel

d. Inquiries of employees who apply control activities

Answer 60

B

Question 61

6-21 Type 2 reports issued by the service organization’s auditor typically

a. Provide reasonable assurance that their financial statements are free of material misstatements

b. Ensure that the entity will not have any misstatements in areas related to the service organization’s activities

c. Ensure that the entity is billed correctly

d. Assess whether the service organization’s controls are suitably designed and operating effectively

Answer 61

D

Question 62

6-22

Significant deficiencies are matters that come to an auditor’s attention that should be communicated to an entity’s audit commee because they represent

a. Disclosures of information that significantly contradict the auditor’s going concern assumption

b. Material fraud or illegal acts perpetrated by high-level management

c. Significant deficiencies in the design or operation of the internal control

d. Manipulation or falsification of accounting records or documents from which financial statements are prepared

Answer 62

C

Question 63

6-23 An auditor anticipates assessing control risk at a low level in an IT environment. Under these circumstances, on which of the following controls would the auditor initially focus?

a. Data capture controls

b. Application controls

c. Output controls

d. General controls

Answer 63

D

Question 64

6-24 An auditor’s flowchart of an entity’s accounting system is a diagrammatic representation that depicts the auditor’s

a. Program for tests of controls

b. Understanding of the system

c. Understanding of the types of fraud that are probable, given the present system

d. Documentation of the study and evaluation of the system

Answer 64

B

Question 65

7-19

A control deviation caused by an employee performing a control procedure that they are not authorized to perform is always considered a

a. Deficiency in design

b. Deficiency in operation

c. Significant deficiency

d. Material weakness

Answer 65

B

Question 66

7-20

Which of the following is not a factor that might affect the likelihood that a control deficiency could result in a misstatement in an account balance?

a. The susceptibility of the relared assets or liability to loss or fraud

b. The interaction or relationship of the control with other controls

c. The financial statement amounts exposed to the deficiency

d. The nature of the financial statement accounts, disclosures, and assertions involved

Answer 66

C

Question 67

7-21 Entity-level controls can have a pervasive effect on the entity’s ability to meet the control criteria. Which one of the following is not an entity-level control?

a. Controls to monitor results of operations

b. Management’s risk assessment process

c. Controls to monitor the inventory-taking process

d. The period-end financial reporting process

Answer 67

C

Question 68

7-22 Which of the following controls would most likely be tested during an interim period?

a. Controls over nonroutine transactions

b. Controls over the period-end financial reporting process

c. Controls that operate on a continuous basis

d. Controls over transactions that involve a high degree of subjectivity

Answer 68

C

Question 69

7-23

If the financial reporting risks for a location are low and the entity has good entity-level controls, management may rely on which of the following for its assessment?

a. Documentation and test controls over specific risks

b. Self-assessment processes in conjunction with entity-level controls

c. Documentation and test entity-level controls over the entire entity

d. Selective control test at that location

Answer 69

B

Question 70

7-24 A walkthrough is one procedure used by an auditor as part of the internal control audit. A walkthrough requires an auditor to

a. Tour the organization’s facilities and locations before beginning any audit work

b. Trace a transaction from every class of transactions from origination through the entity’s information system

c. Trace a transaction from each major class of transactions from origination through the entity’s information system

d. Trace a transaction from each major class of transactions from origination through the entity’s information system until it is reflected in the entity’s financial reports

Answer 70

D

Question 71

7-25

When auditors report on the effectiveness of internal control “as of” a specific date and obtain evidence about the operating effectiveness of controls at an interim date, which of the following items would be the least helpful in evaluating the additional evidence to gather for the remaining period?

a. Any significant changes that occurred in internal control subsequent to the interim date

b. The length of the remaining period

c. The specific controls tested prior to the “as of” date and the results of those tests

d. The walkthrough of the control system conducted åt interim

Answer 71

D

Question 72

7-26 Which of the following statements concerning control deficiencies is true?

a. The auditor should communicate to management, in writing, all control deficiencies in internal control identified during the audit.

b. All significant deficiencies are material weaknesses.

c. All control deficiencies are significant deficiencies.

d. An auditor must immediately report material weaknesses and significant deficiencies discovered during an audit to the CPAB

Answer 72

A

Question 73

7-27 Which of the following most likely represents a weakness in internal control of an IT system?

a. The systems analyst reviews output and controls the distribution of output from the IT department.

b. The accounts payable clerk prepares data for computer processing and enters the data into the computer.

c. The systems programmer designs theloperating and control functions of programs and participates in testing operating systems.

d. The control clerk establishes control over data received by the IT department and reconciles control totals after processing.

Answer 73

A

Question 74

7-28 A primary advantage of using generalized audit software packages to audit the financial statements of an entity that uses an IT system is that the auditor may

a. Consider increasing the use of substantive tests of transactions in place of analytical procedures

b. Substantiate the accuracy of data through self-checking digits and hash totals

c. Reduce the level of required tests of controls to a relatively small amount

d. Access information stored on computer files while having a limited understanding of the entity’s hardware and software features

Answer 74

D

Question 75

7-29 The Sarbanes-Oxley Act of 2002 requires management of public companies listed on U.S. stock exchanges, including cross-listed Canadian companies to include a report on the effectiveness of ICFR in the entity’s annual report. It also requires auditors to report on the effectiveness of ICFR. Which of the following statements concerning these requirements is false?

a. The auditor should evaluate whether internal controls over financial reporting are designed and operating effectively.

b. Management’s report should state its responsibility for establishing and maintaining an adequate internal control system.

c. Management should identify material weaknesses in its report.

d. The auditor should provide recommendations for improving internal control in the audit report

Answer 75

D

Question 76

7-30

AnnaLisa, an auditor for N. M. Neal & Associates, is prevented by the management of Jones Company from auditing controls over inventory. Jones is a public company. Management explains that controls over inventory were recently implemented by a highly regarded public accounting firm that the entity hired as a consultant and insists that it is a waste of time for AnnaLisa to evaluate these controls. Inventory is a material account, but procedures performed as part of the financial statement audit indicate the account is fairly stated. AnnaLisa found no material weaknesses in any other area of the entity’s internal control relating to financial reporting. What kind of report should AnnaLisa issue on the effectiveness of Jones’s internal control?

a. An unqualified report

b. An adverse report

c. A disclaimer of opinion

d. An exculpatory opinion

Answer 76

C

Question 77

7-31 In auditing a public company, Natalie, an auditor for N. M. Neal & Associates, identifies four deficiencies in ICFR. Three of the deficiencies are unlikely to result in financial misstatements that are material. One of the deficiencies is reasonably likely to result in misstatements that are not material but significant. What type of ICFR audit report should Natalie issue?

a. An unqualified report

b. An adverse report

c. A disclaimer of opinion

d. An exculpatory opinion

Answer 77

A

Question 78

7-32 In auditing ICFR, to issue an ICFR report for a public company, Emily finds that the entity has a significant subsidiary located in a foreign country. Emily’s accounting firm has no offices in that country. and the entity has thus engaged another reputable firm to conduct the audit of internal control for that subsidiary. The other auditor’s report indicates that there are no material weaknesses in the foreign subsidiary’s ICFR. What should Emily do?

a. Disclaim an opinion because they cannot rely on the opinion of another auditor in dealing with a significant subsidiary

b. Accept the other auditor’s opinion and express an unqualified opinion, making no reference to the other auditor’s report in their audit opinion

c. Accept the other auditor’s opinion after evaluating the auditor’s work and make reference to the other auditor’s report in their audit opinion

d. Qualify the opinion because they are unable to conduct the testing themselves, and this constitutes a significant scope limitation

Answer 78

C

Question 79

7-33

Significant deficiencies and material weaknesses must be communicated to an entity’s audit committee because they represent

a. Material fraud or illegal-acts perpetrated by high-level management

b. Disclosures of information that significantly contradict the auditor’s going concern assumption

c. Significant deficiencies in the design or operation of internal control

d. Potential manipulation or falsification of accounting records

Answer 79

C