CPA AUDIT REVIEW #5

Question 1

Under which of the following circumstances is the use of the blank form of positive confirmation of accounts receivable most likely preferable?

Answer 1

The recipients are likely to sign the confirmations without devoting proper attention to them

Question 2

An auditor of the financial statements of an issuer has included an emphasis paragraph in the auditor’s report. In accordance with PCAOB auditing standards, an emphasis paragraph

Answer 2

Is never required.

Under PCAOB auditing standards for audits of issuers, an emphasis paragraph is (1) never required, (2) not a substitute for required critical matters, and (3) is not referred to in the opinion section.

Question 3

Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

Answer 3

The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel.

Question 4

Nature refers to:

Answer 4

1. Type of test performed
2. When the type of test changes that refers to nature

Question 5

What does operating effectiveness refer to?

Answer 5

Operating effectiveness relates to how and by whom the control (manual or automated) was applied and the consistency of application. A control that is not implemented, no matter how well designed, is ineffective absent the mitigating effect of compensating controls. Furthermore, the control risk is high for all other controls.

Question 6

What happens if the group auditor or engagement team is not involved in the component Auditor’s work?

Answer 6

Refer to the Component Auditor’s work if they meet the certain requirements.The reference to the Component Auditor is not a qualification.

Question 7

To assess the reasonableness (amounts) of dividend income from investments in issuers, the Auditor should

Answer 7

Check dividend records from publicly available sources which include amounts and payment dates.

Question 8

An objective of a PERFORMANCE AUDIT is to determine whether an entity’s

Answer 8

Specific operating units are functioning economically and efficiently.

Performance audits include economy and efficiency audits. The objectives of these audits are to determine (1) whether the entity is acquiring, protecting, and using its resources economically and efficiently; (2) the causes of any inefficiencies; and (3) whether the entity has complied with laws and regulations concerning matters of economy and efficiency.

Question 9

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if

Answer 9

The scope of Smith’s inquiry and analytical procedures is not restricted.

Question 10

Attestation engagements under Government Auditing Standards include

Answer 10

Reporting on the reliability of performance measures.

Question 11

What are examples of attestation engagements such as to examine, review or to perform agreed upon procedures?

Answer 11

(1) An entity’s internal control over financial reporting
(2) An entity’s compliance with requirements of specified laws, regulations, policies, contracts, or grants
(3) Management discussion and analysis (MD&A)
(4) Prospective financial or performance information
(5) The accuracy or reliability of performance measures
(6) Allowable, reasonable, or final contract cost
(7) The quantity, condition, or valuation of inventory or assets.

Question 12

Which of the following audit procedures is best for identifying unrecorded trade accounts payable?

Answer 12

Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Question 13

The search for unrecorded payables should

Answer 13

(1) include examining cash payments made after the balance sheet date and comparing them with the accounts payable trial balance, (2) sending confirmations to vendors with small and zero balances, and (3) reconciling payable balances with vendors’ documentation.

Question 14

Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit?

Answer 14

A loss contingency is not accrued unless it is probable and can be reasonably estimated.

Question 15

A practitioner has examined a client’s compliance with debt covenants associated with a bank loan and is ready to issue a report. Which of the following standards apply to the report?

Answer 15

Compliance attestation standards.

Question 16

A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that which of the following is met?

Answer 16

The prospective financial statements include a summary of significant assumptions.

Question 17

A Practitioner may accept an agree-upon procedures engagement based on what factors?

Answer 17

(1) The practitioner is independent

(2) The engaging party agrees to the procedures and takes responsibility for their sufficiency

(3) The statements include a summary of significant assumptions.

Question 18

The current file of an auditor’s audit documentation most likely would include a copy of the

Answer 18

Bank Reconciliation

Question 19

What does the current file include?

Answer 19

The current file of an auditor’s audit documentation includes all working papers applicable to the current year under audit. A bank reconciliation supports a specific amount on the audited year’s financial statements. Thus, it belongs in the current file.

Question 20

An auditor’s report on comparative financial statements should be dated as of the date of the

Answer 20

No earlier than completion of the auditor’s most recent audit.

The auditor’s report on comparative financial statements should be dated no earlier than the date the auditor obtained sufficient appropriate evidence for the opinion on the most recent audit.

Question 21

A cutoff test of sales complements the verification of

Answer 21

Accounts Receivable

Question 22

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the

Answer 22

Sample size

Question 23

The report on summary financial statements should indicate that the

Answer 23

Procedures performed included evaluating whether they are prepared in accordance with the applied criteria.

The report on the summary statements describes, among other things, the procedures performed. They primarily include (1) comparing the summary statements with the related information in the audited statements and (2) evaluating whether the summary statements are prepared in accordance with the criteria applied by management.

Question 24

Which of the following statements best serves as management’s assertion of consistency in an MD&A presentation?

Answer 24

Nonfinancial data have been accurately derived from related records.

Assertions are management representations in the MD&A presentation.
They relate to
(1) Occurrence
(2) Consistency with the financial statements
(3) Completeness
(4) Presentation and disclosure.

Assertions about consistency are whether
(1) Reported transactions, events, and explanations are consistent with the statements
(2) Historical financial amounts are accurately derived from the statements and related records
(3) Nonfinancial data have been accurately derived from related records.

Question 25

When an auditor is to conduct an audit of a service organization, what considerations should the auditor make in the planning stages regarding internal controls of the organization?

Answer 25

The auditor should determine whether management has adequately described complementary user controls.

Question 26

Comparing management’s cash budget with the year-end balance test the

Answer 26

Completeness Assertion

Question 27

Vouching a sample of recorded cash receipts to accounts receivable and customer orders test the

Answer 27

Occurrence Assertion

Question 28

Analytical Procedures applies to which assertion?

Answer 28

Completeness

Question 29

Inspection of documents applies to which assertion?

Answer 29

Existence

Question 30

Why do Auditors develop specialized audit software?

Answer 30

Auditors develop specialized audit software for the following reasons:
1. Unavailability of alternative software
2. Functional limitations of alternative software
3. Efficiency considerations
4.Increased understanding of systems
5. Opportunity for easy implementation
6. Increased auditor independence and prestige

Question 31

Confirmation of accounts receivable that have been categorized initially by an auditor as “exceptions” most likely could be due to

Answer 31

Payments mailed to the client that have not been recorded.

Exceptions are differences between the recorded balance and the amount confirmed by the debtor.

Question 32

A purchasing agent searches the inventory master file for what information relevant to a purchase?

Answer 32

The approved vendor and the economic order quantity.

The inventory master file includes the approved vendor, economic order quantity, costs, and any other relevant terms.

Question 33

As the acceptable level of audit risk decreases, an auditor may

Answer 33

Postpone the planned timing of substantive tests from interim dates to the year end. Substantive testing should be increased when the acceptable level of audit risk decreases.

Question 34

Generalized audit software is useful for

Answer 34

Test of controls and substantive procedures.

Generalized audit software is useful for both tests of controls and substantive procedures. It can be used to perform audit tasks such as (1) sampling and selecting items; (2) testing extensions, footings, and calculations; (3) examining records; (4) summarizing and sorting data; and (5) performing analytical procedures.

Question 35

When evaluating internal control of an entity that processes sales transactions on the Internet, an auditor would be most concerned about the

Answer 35

Potential for computer disruptions in recording sales.

Question 36

How is sampling interval calculated?

Answer 36

The tolerable misstatement is divided by the reliability factor to calculate the sampling interval.

Question 37

How is the sample size calculated?

Answer 37

Carrying amount / sampling interval

Question 38

An auditor’s decision concerning whether to dual date the audit report is based upon the auditor’s willingness to

Answer 38

Extend audit procedures

Question 39

Omission of significant assumptions requires which opinion?

Answer 39

Adverse opinion

Question 40

What is the advantage of a payroll computer system?

Answer 40

Direct deposit into employees’ accounts.

Question 41

A practitioner may report on a review of pro forma financial information (PFFI) if the related historical financial statements have been

Answer 41

Reviewed or Audited

Question 42

The guidance for a compilation of financial statements also applies to

Answer 42

AR-C 80, Compilation of Financial Statements, also applies to a compilation of (1) prospective, (2) pro forma, or (3) other historical financial information.

Question 43

The appropriate date for the client to specify as the effective date in the audit inquiry to legal counsel is

Answer 43

As close to the date of the auditor’s report as possible.

Question 44

An accountant is considering an engagement to compile the pro forma financial information (PFFI) of a nonissuer. The accountant may accept the engagement if

Answer 44

The underlying transaction or event was a change in capitalization.

PFFI shows the significant effects on historical information that might have resulted if an underlying transaction or event had occurred earlier. The following are examples of such transactions or events:
Business combination
Change in capitalization (e.g., an initial public offering of equity securities)
Disposition of a significant portion of a business
Change in the form of a business
Proposed sale of securities and the application of the proceeds

Question 45

As lower acceptable levels of the risk of incorrect acceptance and performance materiality are established, the auditor should plan more work on individual accounts to

Answer 45

Find smaller misstatements

A lower performance materiality means that the tolerable misstatement in an account is smaller. Accordingly, as the acceptable risk of incorrect acceptance decreases, the desired assurance increases, and the auditor decreases the tolerable misstatement.

Question 46

True or False

Answer 46

A matter can be emphasized without modifying the opinion.

True

Matters emphasized may include significant related party transactions.

Question 47

Which special purpose frameworks Auditor’s report include a description of the purpose of the statement or refer to a note with information?

Answer 47

Regulatory or contractual special purpose framework (the use of the report must be restricted).

Question 48

Financial forecasts and Financial Projections can be

Answer 48

Examined but not reviewed