Ch 4 - Quiz Flashcards
Regarding a nonissuer’s compliance with laws and regulations, an auditor performing an audit of the entity’s financial statements is responsible for
A.) Ensuring that the entity’s operations are conducted in accordance with the provisions of laws and regulations relevant to the entity’s financial statements.
B.) Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity’s financial statements.
C.) Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations.
D.) Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
D.) Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
In obtaining an understanding of the entity and its environment, the auditor should obtain an understanding of the entity’s applicable legal and regulatory framework as well as how the entity complies with that framework.
Which of the following information that comes to an auditor’s attention would be most likely to raise a question about the occurrence of illegal acts?
A.) The failure to develop adequate procedures that detect unauthorized purchases.
B.) The discovery of unexplained payments made to government employees.
C.) The presence of several difficult-to-audit transactions affecting expense accounts.
D.) The exchange of property for similar property in a nonmonetary transaction.
B.) The discovery of unexplained payments made to government employees.
Doesn’t this immediately raise questions?! Why would payments be made to government employees, especially unexplained payments? They sound like bribes.
An auditor who performed analytical procedures that compared current-year financial information to the comparable prior period noted a significant increase in net income. Given this result, which of the following expectations of recorded amounts would be unreasonable?
A.) A decrease in retained earnings.
B.) A decrease in costs of goods sold as a percentage of sales.
C.) A decrease in accounts payable.
D.) A decrease in notes payable.
A.) A decrease in retained earnings.
A significant increase in net income would result in an increase, not a decrease, in retained earnings.
Which of the following most likely would cause an auditor to consider whether a client’s financial statements contain material misstatements?
A.) Audit trails of computer-generated transactions exist only for a short time.
B.) The chief financial officer will not sign the management representation letter until the last day of the auditor’s fieldwork.
C.) The results of an analytical procedure disclose unexpected differences.
D.) Management did not disclose to the auditor that it consulted with other accountants about significant accounting matters.
C.) The results of an analytical procedure disclose unexpected differences.
Analytical procedures are a category of “substantive” audit procedures, and unexpected differences relative to the auditor’s expectations may direct the auditor’s attention to the possibility of a material misstatement.
Which of the following would not be considered an analytical procedure?
A.) Converting dollar amounts of income statement account balances to percentages of net sales for comparison with industry averages.
B.) Developing the current year’s expected net sales based on the sales trend of similar entities within the same industry.
C.) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.
D.) Estimating the current year’s expected expenses based on the prior year’s expenses and the current year’s budget.
C.) Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics.
Evaluating the characteristics of a population by means of applying statistical sampling techniques, specifically projecting a deviation or error rate, is likely to be performed as part of “test of controls,” not an analytical procedure.
Analytical procedures used in planning an audit should focus on identifying
A.) Material weaknesses in the internal control structure.
B.) The predictability of financial data from individual transactions.
C.) The various assertions that are embodied in the financial statements.
D.) Areas that may represent specific risks relevant to the audit.
D.) Areas that may represent specific risks relevant to the audit.
Analytical procedures utilize historical data and relationships to predict expected balances. Analytical procedures enable the auditor to gain an understanding of the client’s business and raise questions when current balances differ from expected balances. In this manner, the auditor is able to identify specific areas of risk that will need to be addressed during the audit.
What is the primary purpose of reviewing conflict-of-interest statements signed by members of management?
A.) To obtain an understanding of business processes.
B.) To assess control risk.
C.) To identify transactions with related parties.
D.) To consider limitations of internal control.
C.) To identify transactions with related parties.
Reviewing conflict-of-interest statements signed by management would provide the auditor with information about potential relationships with related parties that might warrant additional disclosure in the financial statements.
In auditing related party transactions, an auditor ordinarily places primary emphasis on
A.) The adequacy of the disclosure of the related party transactions.
B.) Confirming the existence of the related parties.
C.) The probability that related party transactions will recur.
D.) Verifying the valuation of the related party transactions.
A.) The adequacy of the disclosure of the related party transactions.
GAAP focuses on providing full disclosure of related party issues, so the auditor places primary emphasis on evaluating the adequacy of disclosure of such transactions.
Which of the following auditing procedures would be most likely to assist an auditor in identifying related party transactions?
A.) Vouching accounting records for recurring transactions recorded just after the balance sheet date.
B.) Reviewing confirmations of loans receivable and payable for indications of guarantees.
C.) Performing analytical procedures to seek indications of possible financial difficulties.
D.) Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.
B.) Reviewing confirmations of loans receivable and payable for indications of guarantees.
Reviewing confirmation of loans receivable and payable for indications of guarantees is one of the auditing procedures that will assist the auditor in identifying related party transactions.
Which of the following groups is considered a subgroup ordinarily charged with assisting the board of directors in fulfilling its oversight responsibilities?
A.) Secured creditors
B.) Internal auditors
C.) Audit committee
D.) Senior management
C.) Audit committee
An audit committee is a subset of the board of directors that is comprised of board members who are independent of the entity’s management.
Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?
A.) Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
B.) Communications related to independence may occur in any form prior to issuance for the financial statements.
C.) Prior to accepting the engagement, the firm should orally affirm its independence to the audit committee with all members present.
D.) The firm should address all independence impairment issues on the date of the audit opinion.
A.) Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
This answer is correct because the PCAOB requires that prior to accepting an initial engagement the CPA firm describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.
Which of the following outcomes is a likely benefit of information technology used for internal control?
A.) Recording of unauthorized transactions.
B.) Enhanced timeliness of information.
C.) Processing of unusual or nonrecurring transactions.
D.) Potential loss of data.
B.) Enhanced timeliness of information.
This answer is correct because IT may result in enhanced timeliness of information due to the speed of electronic processing.
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?
A.) Unaudited information from internal quarterly reports
B.) Comments in the prior-year’s management letter
C.) Various account assertions in the planning memorandum
D.) The control risk assessment relating to specific financial assertions
A.) Unaudited information from internal quarterly reports
For some entities, the auditor’s performance of analytical procedures may consist of reviewing changes in account balances from the prior to the current year using information from quarterly financial statements to develop expectations.
Which of the following comparisons would be most useful to an auditor in evaluating the results of an entity’s operations?
A.) Prior-year accounts payable to current-year accounts payable.
B.) Current-year revenue to budgeted current-year revenue.
C.) Current-year warranty expense to current-year contingent liabilities.
D.) Prior-year payroll expense to budgeted current-year payroll expense.
B.) Current-year revenue to budgeted current-year revenue.
A comparison of current-year revenue to budgeted revenue would be very useful to an auditor in evaluating the results of operations. It would tell the auditor how well the entity did compared to the plan. The comparison would also enable the auditor to predict the effects on other income statement accounts, such as related expense accounts.
Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of
A.) Existence.
B.) Presentation.
C.) Rights.
D.) Completeness.
D.) Completeness.
The completeness assertion deals with whether all transactions have been included in the proper period.
