BECKER FINAL AUDIT CARDS Flashcards
1
Q
Which of the following is true?
A
An integrated audit may be performed for a nonissuer, but it is not required
2
Q
Which of the following is true about the AICPA code of professional conduct?
A
It applies to compilations and reviews of the financial statements of nonissuers. The AICPA code of professional conduct governs any service that a member of the AICPA performs, including compilations and reviews.
3
Q
When obtaining an understanding of internal control, an auditor should concentrate on the substance of the procedures rather than their form because:
A
Management may establish appropriate procedures but not enforce compliance with them. The auditor should be more concerned with the effective functioning of controls than with their form
4
Q
A risk assessment based on the effective operation of internal control most likely would involve all of the following, except:
A
Performing more extensive substantive tests with larger sample sizes than originally planned. A risk assessment based on the effective operation of internal control increases allowable detection risk, which reduces the required extent of substantive testing.
5
Q
In assessing control risk, an auditor ordinarily selects from a variety of techniques, including:
A
Reperformance. Reperformance of a control by the auditor is used to evaluate the effectiveness of the operation of that control
6
Q
Which of the following procedures would an auditor be least likely to use in an effort to obtain evidence regarding subsequent events?
A
Investigating personnel changes which occurred after year-end. Personnel changes generally would not have financial statement implications.
7
Q
Which of the following subsequent events would most likely result in adjustment to the financial statements?
A
After the balance sheet date and before the financial statements are issued, the company settles litigation that had resulted in a liability as of the balance sheet date. Since the litigation existed at the balance sheet date, GAAP requires financial statement adjustment to reflect events that occurred after year-end, but before the financial statements were issued.
8
Q
Which of the following inquiries should be made of a predecessor auditor before accepting a new client engagement?
A
The predecessor’s understanding as to the reasons for the change of auditors. The successor auditor is required to make certain inquiries of the predecessor auditor before accepting an engagement, including the predecessor’s understanding as to the reasons for the change of auditors.
9
Q
Which of the following items is explicitly included in an audit report expressing an unmodified opinion?
A
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
The auditor’s responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements
10
Q
An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the report for:
A
Only a justified change in accounting principle would result in an unmodified opinion with an emphasis-of-matter paragraph. An unjustified change leads to a qualified or adverse opinion, and a change in estimate does not require an emphasis-of-matter paragraph.
11
Q
As the acceptable level of detection risk decreases, an auditor may change the:
A
Nature of substantive tests from a less effective to a more effective procedure. Better evidence must be obtained to achieve a lower level of detection risk.
12
Q
Which correctly describes the relationship between the PCAOB and the SEC?
A
The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers. The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers.
13
Q
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
A
Treasurer. The treasurer has no billing responsibility, resulting in a better segregation of duties
14
Q
Tracing shipping documents to entries in the sales journal provides evidence that:
A
Shipments to customers were properly recorded. Tracing forward is a test for completeness. A missing entry in the sales journal implies that a shipment wasn’t recorded and sales is not complete.
15
Q
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the check also:
A
Stamps, perforates or otherwise cancels supporting documents.
16
Q
Under which of the following circumstances would an adverse opinion be most appropriate?
A
The financial statements include property, plant, and equipment amounts at fair market value based on management’s position that fair market value better depicts true financial position and results of operations of the company. An adverse opinion is required when serious GAAP problems exist. (GAAP requires that property, plant, and equipment be stated at cost less accumulated depreciation.)
17
Q
The auditor would not express an unmodified opinion in which of the following situations?
A
There has been a justifiable change in accounting principle inseparable from a change in accounting estimate, which the client has accounted for as a change in principle. A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in estimate, not a change in principle. The client’s accounting constitutes a departure from GAAP.
18
Q
Before a predecessor auditor reissues the prior year’s audit report on the financial statements of a former client for inclusion with the successor auditor’s report on comparative financial statements, the predecessor does all of the following except:
A
Review the audit documentation of the successor auditor.
19
Q
The financial statements of Henley Co. contain a material departure from GAAP. Henley effectively argues that, due to unusual circumstances, the financial statements would have been misleading if they were prepared in conformity with GAAP. Based solely on this information, the auditor should:
A
Render an unmodified opinion with a separate paragraph explaining the unusual situation. An unmodified opinion with an emphasis-of-matter paragraph describing the situation should be used.
20
Q
Assuming no other material misstatements are found, an independent auditor determines that supplementary information is not fairly stated relative to the basic financial statements taken as a whole. In this instance, the independent auditor should:
A
Issue an unmodified opinion and add an other-matter paragraph to describe the auditor’s position on the supplementary information. Supplementary information is outside the basic financial statements, so problems with this information do not prevent the issuance of an unmodified opinion on the basic financial statements. The situation should, however, be disclosed in an other-matter paragraph to the auditor’s report.
21
Q
For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the:
A
Internal auditor.
22
Q
Which of the following most likely would be an internal control procedure designed to detect errors and irregularities concerning the custody of inventory?
A
Independent comparisons of finished goods records with counts of goods on hand. Independently comparing inventory records with physical inventory counts may detect discrepancies concerning the custody of inventory.
23
Q
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the:
A
Authorization of transactions from the custody of related assets. The hiring function provides authorization for payment. Distributing payroll is a custodial function
24
Q
A report issued on significant deficiencies in internal control noted during an audit should contain all of the following except:
A
A statement of compliance with laws and regulations. No statement of compliance with laws and regulations is required in the report
25
An auditor is considering internal control in an automated environment. Under these circumstances, the auditor would need to focus on automated controls for all of the following reasons except:
It is more efficient and cost-effective to focus on automated controls rather than manual controls. It is not necessarily more efficient or cost-effective to focus on automated controls rather than manual controls. Evaluation of efficiency and effectiveness must be performed on a client-by-client basis.
26
The auditor concluded that the disclosures made in the financial statements did not adequately inform financial statement users about the company's ability to continue as a going concern. Under these circumstances, the auditor should issue a(n):
Qualified (except for) or adverse opinion, depending on the level of materiality. Improper disclosure of a going concern situation is a GAAP violation, so a qualified or adverse opinion should be issued.
27
Which of the following properly describes the auditor's responsibilities as opposed to management's responsibilities?
Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement.
28
Louise, CPA is a registered accounting firm that is conducting the audit of Violin Industries, an issuer. Which of the following services may Louise provide?
Tax services.
29
Which of the following is not a principle of professional ethics for professional accountants under the International Code of Ethics for assurance engagements?
Training. The International Code of Ethics for assurance engagements includes the following fundamental principles of professional ethics: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior. Training is not one of the fundamental principles.
30
Who is responsible for the selection and appointment of the independent external auditor?
The audit committee of the board of directors. The audit committee of the client's board of directors is responsible for the selection and appointment of the independent external auditor.
31
A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when the client:
Does not make the minutes of the Board of Directors meetings available to the auditor. Failure to make the minutes available is a scope limitation sufficient to preclude an unmodified opinion
32
An auditor most likely would issue a disclaimer of opinion due to:
Management's refusal to furnish a client representation letter. A disclaimer results from scope limitations, such as management's refusal to furnish a client representation letter.
33
Which of the following are elements of a firm's quality control that should be considered in establishing its quality control policies and procedures?
Assigning personnel, client acceptance, and professional development. Assigning personnel to engagements and providing for professional development are part of the human resources element of quality control. Engagement/client acceptance and continuance is another element of quality control.
34
In planning the audit, the auditor should consider materiality for the financial statements as a whole in terms of:
The smallest aggregate level of misstatement that could be considered material to any one of the financial statements.
35
If control risk has increased in the current period as compared to the previous period, then:
The acceptable level of detection risk will decrease and more substantive testing will be required in the current period relative to the previous period. An increase in control risk increases the risk of material misstatement and requires a corresponding decrease in detection risk to maintain the same low level of overall audit risk. Detection risk is reduced by using more (or more effective) substantive testing.
36
Information gathered in the course of an independent audit is the property of the auditor. This information is not generally disclosed to outside parties. However, after discussion with legal counsel, the auditor may wish to disclose information about irregularities or noncompliance with laws and regulations to outside parties in which of the following circumstances?
Change of auditor, predecessor/successor communications, and subpoena. A duty to disclose such information outside the entity may exist when there is a change of auditor (reported to the SEC on Form 8-K), in response to a subpoena, and (with client permission) in response to a successor auditor’s inquiries.
37
Which of the following auditor concerns would be least likely to cause the auditor to withdraw from the engagement?
A material error was found in the depreciation calculation for the current period. Errors are unintentional and would not cause an auditor to withdraw from the engagement
38
The auditor may not issue a qualified opinion when:
The auditor is not independent with respect to the audited entity. When an auditor is not independent with respect to an entity, only a disclaimer of opinion may be issued.
39
Which of the following statements is a basic element of the independent auditor’s report?
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The auditor's responsibility paragraph of the unmodified opinion audit report explicitly states that an audit includes perform. The independent auditor’s report states that an audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements.
40
In designing written audit programs, an auditor should establish specific audit objectives that are based on:
Financial statement assertions. Audit objectives should be developed based on financial statement assertions.
41
Which of the following types of audit evidence is the least reliable?
Purchase order. A purchase order is internal documentation and as such, it is more easily manipulated by the client.
42
Which of the following is not required documentation in an audit in accordance with generally accepted auditing standards?
A narrative description of the internal control system.
43
Which of the following are considered internal control environment factors?
Management philosophy and personnel policies.
44
Which of the following statements regarding control risk is true?
If control risk is assessed at a high level, substantive testing is likely to be more heavily emphasized in the audit process. A high level of control risk results in an increased risk of material misstatement, which should be offset by a reduction in detection risk. This is accomplished by performing more (and/or more effective) substantive tests.
45
Hart, CPA, is performing a first year audit of Tesseract Industries. Tesseract's prior year financial statements were audited by McDonald, who issued an unmodified opinion. Based on review of the previous year's audit documentation, Hart believes that an unmodified opinion was inappropriate. What course of action should Hart take?
Ask Tesseract management to arrange a meeting among all three parties to resolve the situation.
46
The risk of incorrect rejection and the likelihood of assessing control risk too high relate to the:
Efficiency of the audit. Both incorrect rejection and assessing control risk too high will cause the auditor to perform more procedures than are necessary, which affects audit efficiency.
47
When assessing the competence of an entity’s internal auditor, an independent CPA should obtain information about all of the following except:
The organizational status of the internal auditor.
48
The purpose of applying analytical procedures in the overall review stage of an audit includes assisting the auditor in all of the following except:
Enhancing the understanding of the client's business.
49
Which of the following is not true about the Department of Labor's independence guidelines?
An immaterial direct financial interest in the plan does not impair independence. Under the Department of Labor's independence guidelines, any direct financial interest in the plan impairs independence
50
Which of the following is not assessed by the auditor as part of the decision regarding the acceptance of a new client?
The integrity of the audit firm.
51
The primary reason an auditor requests that letters of inquiry be sent to a client's attorney is to provide the auditor with:
Corroboration of information furnished by management about litigation, claims, and assessments. It is management's responsibility to identify and account for litigation, claims, and assessments. The letter of audit inquiry serves to corroborate information provided by management.
52
Which of the following statements is true about required procedures in a review of annual financial statements?
Assessment of fraud risk is not required, but obtaining a representation letter from management is required. Assessment of fraud risk is not required, but obtaining a representation letter from management is required.
53
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
A flowchart depicting the auditor’s understanding of the design of internal control.
54
Which of the following statements concerning the auditor’s use of the work of a specialist is correct?
The auditor may engage a specialist and use that specialist's work as audit evidence in performing substantive tests to evaluate material financial statement assertions.
55
Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?
Reading the minutes of the Board of Directors meetings to see if any material transactions were authorized. The auditor should review the minutes of meetings of the Board of Directors, since material related party transactions may be authorized or discussed during those meetings.
56
The basic content of a report on management's assertion on the effectiveness of a nonissuer's internal control includes all of the following items except:
A paragraph restricting use of the report only to management and specified third parties. A report on management's assertion on the effectiveness of internal control is not a restricted use report.
57
Min, CPA, is unable to perform necessary procedures in a review of the financial statements of a nonissuer. What will be the effect on Min's review report?
Min should not issue a review report because the review is incomplete. Accountants must be able to perform whatever procedures they deem necessary, and if those procedures are not accomplished, the review is incomplete. A review that is incomplete will prevent the issuance of a review report.
58
The AICPA Code of Professional Conduct's general standards include all of the following except:
Internal control. The AICPA Code of Professional Conduct's general standards include professional competence, due professional care, planning and supervision, and sufficient relevant data. Internal control is not one of the general standards.
59
Which of the following correctly describes the appropriate title for a report on a nonissuer's financial statements?
A review report should include the word "independent" in the title, but a compilation report need not include this word.
60
The accountant may report on agreed-upon procedures applied to specified elements, accounts, or items of financial statements:
But must be independent of the client company and give no opinion or any other form of assurance on the sufficiency of the agreed-upon procedures applied. The accountant must be independent to perform an agreed-upon procedures engagement, and should not provide an opinion or any other form of assurance on the sufficiency of the procedures applied. The specified party (often the client) is responsible for the sufficiency of the procedures.
61
An auditor selects a sample from the files of invoices to determine if shipping documents were prepared. This test is performed to support management's financial statement assertion of:
Existence. The auditor is testing for items that were billed, but perhaps not shipped. This test addresses the existence assertion: Did a valid sale (as evidenced by shipment of goods) really occur?
62
The Public Company Accounting Oversight Board consists of:
Exactly two CPAs. The PCAOB consists of exactly two CPAs and three non-CPAs.
63
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor would least likely:
Increase the assessed level of detection risk for the valuation assertion. The auditor would only increase detection risk in response to a decrease in inherent and/or control risks, which is not the case here. Additionally, confirmation relates to the existence assertion, not the valuation assertion.
64
Which of the following circumstances requires modification of the accountant's report on a review of interim financial information of a publicly held entity prepared on the basis of generally accepted accounting principles?
Lack of adherence to generally accepted accounting principles and lack of adequate disclosure. Departures from GAAP (including inadequate disclosure) require modification of the review report.
65
Under Government Auditing Standards (GAS), when reporting on compliance with laws and regulations in a financial statement audit, the auditor's report should include:
Relevant information regarding material illegal acts and fraud or irregularities found in the course of the audit. The auditor's report either asserts that there are no findings or references a separate schedule of findings, which includes disclosure of material instances of fraud and illegal acts.
66
With respect to a review of the financial statements of a nonissuer, the accountant is required to obtain:
A client representation letter. The accountant is required to obtain a representation letter from management for all financial statements and periods covered by the review report.
67
Which of the following statements is true regarding prospective financial statements?
All reports on prospective financial statements require a statement indicating that the prospective results may not be achieved.
68
Nissen, CPA, is a registered public accounting firm. Which situation is least likely to violate PCAOB independence standards?
Nissen provides non-audit services related to internal control to an audit client. Non-audit services related to internal control must be communicated to the audit committee in writing, but they are not prohibited. The potential effects of the services should be discussed with the audit committee.
69
An auditor performs a search for unrecorded liabilities to ascertain that all payables have been recorded in the proper period. The search may be performed in each of the following areas except:
Significant payments prior to the end of the period. The search for unrecorded liabilities focuses on identifying items that should have been but were not included in the year-end payable balance. Payments made prior to year-end reflect items that are no longer liabilities.
70
Determining that proper amounts of depreciation are expensed provides assurance about management's financial statement assertion(s) of:
Valuation and allocation.
71
Which of the following is not an attest standard?
Internal control evaluation. There is no internal control standard included in attestation standards, because internal control is not relevant to many attestation engagements.
72
Which of the following best describes the auditor’s responsibility with respect to Statements on Auditing Standards (SASs)?
The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions. The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions. There is no requirement that the audit documentation include SAS section and paragraph numbers.
73
How do auditing standards differ from auditing procedures?
Auditing standards apply to all audits, whereas auditing procedures may vary from one engagement to the next. Generally accepted auditing standards apply to all audits, whereas specific audit procedures will vary from one engagement to the next.
74
Which of the following is a required component of the independent auditor’s report expressing an unmodified opinion?
An auditor's responsibility paragraph including a reference to generally accepted auditing standards. An auditor's responsibility paragraph including a reference to generally accepted auditing standards is a required component of the auditor’s unmodified opinion.
75
Which of the following is true about quality control standards?
A firm that does not have an adequate system of quality control may still have complied with professional standards on a specific engagement.
76
Which of the following would not be considered an attest engagement subject to attestation standards?
An engagement to review the financial statements of a nonpublic company. Attest engagements covered under Statements on Standards for Attestation Engagements (SSAE) specifically exclude services performed in accordance with Statements on Standards for Accounting and Review Services (SSARS). Since a review of a nonpublic company’s financial statements is conducted under SSARS, it is not subject to attestation standards.
77
Which of the following is not true about those charged with governance of an organization?
Those charged with governance typically include management of the organization.
78
Which of the following are sanctions that may be imposed by the PCAOB?
The Board can impose any sanctions it approves, including financial penalties, suspension or revocation of PCAOB registration, and required CPE courses.
79
Which of the following best describes a difference between a compilation of prospective financial statements and an examination of prospective financial statements?
A compilation does not contemplate the auditor providing any form of assurance whereas an examination does include assurance. In an examination engagement, an auditor provides positive assurance regarding whether the statements are presented in conformity with AICPA guidelines, and whether the underlying assumptions provide a reasonable basis for the financial statements. In a compilation engagement, no assurance is provided.
80
An auditor has been asked to assess a client’s website to measure transaction integrity, information protection, and disclosure of business practices. This engagement is most likely a:
WebTrust engagement. A WebTrust engagement is one in which an auditor is asked to assess a client’s website to measure transaction integrity, information protection, and disclosure of business practices.
81
Which of the following is not true about the five components of internal control?
The auditor is required to classify relevant controls into one of the five component categories. The auditor is not required to classify relevant controls into one of the five component categories, but rather should use the component categories as a useful framework for identifying and evaluating controls.
82
Which of the following correctly matches a factor with the related internal control component?
The internal audit function is part of monitoring.
83
Which of the following represents an inappropriate segregation of duties?
The cash receipts clerk credits customer accounts when payment is received. The cash receipts clerk should not have both recordkeeping responsibilities and custody of assets.
84
When a client makes extensive use of information technology, the auditor should consider the effect this may have on internal control. Which of the following is least likely to be affected?
The audit objectives with respect to evaluating internal control. The client's extensive use of information technology generally would not affect the auditor's objectives, although it might affect how those objectives are achieved.
85
Which of the following is the most likely sequence of events an auditor might follow in considering internal control?
An auditor performs tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.
86
Which of the following are required as part of an auditor's planning process?
As part of planning, the auditor is required to obtain an understanding of the design of controls and determine whether they have been implemented, as well as to document this understanding. The auditor is not required to evaluate the operating effectiveness of controls during the planning process.
87
Which of the following is not true about the International Code of Ethics for assurance engagements?
It includes a set of specific rules designed to encourage compliance with the fundamental principles. The International Code of Ethics for assurance engagements is based on a conceptual framework approach, rather than a set of specific rules.
88
Which of the following is true about using analytical procedures as a substantive test?
Analytical procedures are not required to be used as a substantive test and are more likely to be used for accounts that are predictable.
89
An auditor wishes to test for overstatement of sales and understatement of expenses. Which of the following is true?
The auditor will test the existence assertion for sales and the completeness assertion for expenses.
90
Which of the following is not true about audit documentation?
Audit documentation should include a separate page for each material account balance or transaction class. There is no requirement that documentation related to each material account balance or transaction class be included on a separate page. In fact, it is common for related accounts to be audited and documented together.
91
Which of the following is not true about an audit of inventory?
Obtaining confirmation of inventory held at outside locations provides evidence about both the existence assertion and the valuation and allocation assertion.
92
An auditor provides positive assurance in all of the following reports except:
A report on compliance with contractual or regulatory requirements related to audited financial statements. Negative assurance is provided on compliance with contractual or regulatory requirements related to audited financial statements.
93
A special report on financial statements prepared on the cash basis of accounting should include:
A statement that the audit was conducted in accordance with generally accepted auditing standards. A special report on financial statements prepared on the cash basis of accounting should include, in the auditor's responsibility paragraph, a statement that the audit was conducted in accordance with generally accepted auditing standards.
94
Confidential client information may be disclosed by the accountant without the client's permission in all of the following circumstances except:
In response to an inquiry by a successor auditor.
95
Which of the following is a communication requirement with respect to registered audit firms?
Registered firms must report to the audit committee the critical accounting policies and practices used.
96
Management's written representation to the auditor in connection with a governmental audit would most likely include:
A statement that management has disclosed any communications from grantors concerning possible noncompliance.
97
In which case would an unmodified opinion not be appropriate?
A material related party transaction has occurred and has been accounted for appropriately, but it has not been adequately disclosed in the financial statements. Inadequate disclosure of a material related party transaction would result in a qualified or adverse opinion
98
An uncertainty may result in:
An uncertainty may result in an unmodified opinion if management's analysis is supported and properly recorded or disclosed. An uncertainty for which the auditor is unable to obtain sufficient audit evidence would result in either a qualified opinion or a disclaimer of opinion. If the financial statements are materially misstated due to improper accounting for the uncertainty, a qualified or adverse opinion would result
99
Which of the following is true about modifications to the independent auditor's unmodified opinion report?
An auditor would modify the same paragraphs when rendering either a qualified opinion due to a departure from GAAP or a qualified opinion due to a scope limitation. A qualified opinion due to a scope limitation and a qualified opinion due to a GAAP departure require a paragraph preceding the opinion paragraph titled "Basis for Qualified Opinion".
100
Which of the following would prevent an auditor from accepting a new client engagement?
Management has a reputation within the business community for materially overstating its revenues.
101
Which of the following is true about the timing of predecessor/successor communications?
They can occur both before and after the auditor accepts the engagement.
102
At a minimum, an understanding with a client should include:
The objectives and limitations of the engagement, as well as the responsibilities of management and of the auditor. At a minimum, an understanding with a client should include the objectives and limitations of the engagement, as well as the responsibilities of management and of the auditor.
103
Which of the following is not a circumstance that may impair independence, as described in the International Code of Ethics for assurance engagements?
Payment of fees for assurance services. Payment of fees for assurance services does not generally impair independence and is not listed in the International Code of Ethics for assurance engagements.
104
The auditor may choose to apply substantive tests to balance sheet accounts at an interim period:
When inherent risk and control risk are low. Applying substantive audit tests at interim increases detection risk, but this may be acceptable when the risk of material misstatement (comprised of inherent risk and control risk) is low.
105
An auditor decides not to perform tests of the operating effectiveness of controls surrounding receivables. Which one of the following is not likely to be a reason for this decision?
A very material error is noted in the accounts receivable account. An error in the receivables balance is not definitive evidence that controls are not working. The auditor would need to evaluate the situation surrounding the error to determine its cause.
106
Which of the following could be used to assess control risk surrounding the purchase of fixed assets?
Select a sample of fixed asset requisitions and inspect them for proper approval. Control activities should include proper authorization of purchase transactions before the commitment of resources.
107
An audit committee should pre-approve all of the following services except?
Non-audit services that do not exceed five percent of total revenues. Pre-approval is not required for non-audit services that do not exceed five percent of total revenues from the audit client during the fiscal year when services are provided, as long as the non-audit services are promptly brought to the attention of the audit committee and approved before the completion of the audit.
108
Which is true about accounts receivable confirmations?
Confirmations may be based on single transactions rather than entire customer balances. The auditor should consider the types of information respondents will be readily able to confirm. For example, it may be easier for certain respondents to confirm individual transactions rather than entire balances. In such cases, the auditor may choose to confirm based on invoice number (i.e., single transactions).
109
An auditor concerned with the completeness of dividend income would most likely:
Review dividend record books produced by outside service companies.
110
Which situation would constitute an improper segregation of duties related to payroll?
The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department.
111
Which of the following procedures is an auditor most likely to use to test the completeness assertion for fixed assets?
Review of large items charged to repairs and maintenance. When the auditor reviews large items charged to repairs and maintenance, he/she is looking for items that may have been erroneously expensed instead of capitalized. The completeness assertion focuses on just that -- items that should have been included in fixed assets but were not.
112
An auditor notes that retained earnings includes an amount appropriated in accordance with a loan covenant. Which procedures would the auditor use to audit retained earnings?
The auditor should analyze the retained earnings account since the last audit. Generally this is fairly easy to do, since there are not very many direct entries to retained earnings. Statement I is false because dividends should be approved by the board of directors, not by management. Statement III is false because appropriations represent restrictions on the amount that can be paid as dividends, not a segregation of actual cash funds, so the bank would be unable to confirm appropriation amounts.
113
Which should be the auditor’s primary focus when considering related party transactions?
The adequacy of the client’s disclosure of such transactions.
114
Which of the following ordinarily would not be included in the auditor’s responsibility regarding accounting estimates?
Establish a process for preparing accounting estimates.
115
Performance requirements related to a compilation of a nonpublic entity’s financial statements include:
Obtaining a general understanding of the client’s business.
116
Which of the following best describes a difference between an audit and a review of a nonpublic entity's annual financial statements?
"An audit requires an understanding of internal control, whereas a review does not. Auditing standards require that, during the planning stage, the accountant obtain a sufficient understanding of the entity and its environment, including its internal control. A review of annual financial statements does not contemplate obtaining an understanding of internal control. Note: An interim review (where the annual financial statements are audited) falls under SAS or PCAOB requirements for a nonissuer and issuer, respectively, and would require an understanding of internal control. "
117
Which of the following is true when comparing a compilation engagement and a review engagement for a nonissuer?
Both compilations and reviews require establishment of an understanding with the client.
118
Which of the following procedures generally would not be performed in a review of a public entity’s interim financial statements?
Inquire of the client’s attorney. Inquiry of the client’s attorney generally is not required.
119
After submitting the audit report, an auditor realizes that a critical step in the audit program was not completed. No other audit procedures already performed compensated for this omission. Which of the following would be the best response?
Perform the audit steps (or suitable alternative procedures), in an attempt to determine whether the results would have affected the previously issued opinion.
120
Which of the following procedures are required for a compilation engagement?
In a compilation engagement, the accountant is required to read the financial statements and to have a general understanding of the client's business and of the accounting principles and practices used by the client. There is no requirement that the accountant specifically assess fraud, although a discovery of fraud cannot be ignored.
121
Financial statement assertions include:
Valuation and allocation; accuracy; completeness; and understandability and classification are all financial statement assertions.
122
Which of the following is not true about the auditor's use of relevant assertions?
Each relevant assertion should have one (and only one) audit procedure associated with it.
123
Procedures performed by an internal auditor can be used to:
Internal auditors may assist the external auditor in obtaining an understanding of internal control or in performing tests of controls or substantive tests.
124
An auditor makes use of a specialist who has a contractual relationship with the client. Which of the following is true?
This is acceptable provided that the auditor evaluates the effect of the relationship on the specialist’s objectivity.
125
With respect to an auditor’s consideration of fraud risk, which of the following is not required?
Implementation of controls to detect fraud. It is management’s responsibility (not the auditor’s) to design and implement programs and controls to prevent, deter, and detect fraud
126
Which of the following constitutes a weakness in control related to the revenue cycle?
The cash receipts clerk prepares a credit memo. Allowing the cash receipts clerk to prepare a credit memo constitutes an inadequate segregation of duties, because the clerk can misappropriate cash and cover the theft by issuing a credit memo.
127
Which of the following documents should be sent to the accounts payable department?
The accounts payable department should receive the purchase order, receiving report, and vendor invoice, to assure that the goods received agree with what was ordered, and that the company is being billed only for what was received. Sales orders relate to the revenue cycle, and accounts payable would have no use for them. The treasurer should mail the signed check after it is signed; to send it to accounts payable (a recordkeeping department) would be an inappropriate segregation of duties.
128
Which of the following is least likely to be used as a substantive test relating to cash balances?
Verify that cash disbursements have been properly approved. Verifying that cash disbursements have been properly approved is a test of controls, not a substantive test.
129
Which of the following should be included in a management representation letter?
Acknowledgment of management's responsibility for the design, implementation, and maintenance of internal control. Specific representations should be obtained regarding management's responsibility for the design, implementation, and maintenance of internal control.
130
In which situations should disagreements with management and significant audit adjustments be communicated to those charged with governance?
The auditor should discuss with those charged with governance any significant disagreements with management, whether or not satisfactorily resolved. The auditor should also inform those charged with governance about significant adjustments arising from the audit, regardless of whether such adjustments were recorded by the client.
131
Which risk, when assessed at a high level, is most likely to result in an inappropriate opinion on financial statements which are not fairly stated?
The risk of incorrect acceptance. If there is a high risk of incorrect acceptance, this means that it is quite possible that the auditor will incorrectly accept a balance as fairly stated, when in fact it is not fairly stated.
132
Which of the following is least likely to explain an increase in inventory turnover from Year 1 to Year 2?
Direct labor charges were inadvertently applied twice to some inventory items during Year 2.
133
Which of the following ratios would most likely be used to evaluate an entity’s profitability?
Net income / net sales
134
Which of the following is true about comfort letters?
A review of interim financial information is required before a comfort letter may be issued.
135
Government auditing standards require:
A written report on internal control in every audit.
136
Which is not true about major programs?
Major programs are determined by the auditor using a “risk-based approach”, not by management.
137
Which of the following would be considered an analytical procedure?
\< \>'s ex pected net sales based on the entity's sales trend of prior years .
Developing the current year's expected net sales based on the entity's sales trend of prior years is an analytical procedure .
138
Which of the following events occurring after the issuance of the auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements?
\< \> New information regarding significant unrecorded transactions from the year under audit is discovered .
An example is new information discovered regarding significant unrecorded transactions from the year under audit. As a result, the auditor should make further inquiry to determine whether the information is reliable and whether the facts existed at the date of the report.
139
Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?
Recipients are likely to sign other types of positive confirmations without careful investigation
Blank confirmations should be used if recipients are likely to sign confirmations without careful investigation. Blank confirmations require the recipient to fill in the balance , so the recipient cannot simply sign off without checking the balance.
