Deck 1

Question 1

True or False

The auditor’s report on supplemental information under PCAOB auditing standards should include the following statement: “the methods of measurement and presentation have not changed from those used in the prior period”

Answer 1

False

This is focusing on Supplemental information. No such statement is made about the methods of measurement. MGMT is the one making the statement in the MGMT representation letter but the auditor doesn’t include that statement in the auditor’s report.

Question 2

when engaged to compile the F/S of a nonpublic entity What should an auditor do if the F/S contain many departures from GAAP because of inadequacies in the accounting records and the auditor believes that modification of the compilation report is not adequate to indicate the deficiencies?

Answer 2

Withdraw from the engagement and provide no further service concerning these financial statements

The big clue was the fact that the accountant believes that modifiying the report won’t do anything… So in that case, you have to completely withdraw from the engagement. It’s a lost cause buddy…

Question 3

MCQ

The tolerable rate of deviations for a test of a control is generally?

• Lower than the expected rate of errors in the related accounting records
• Higher than the expected rate of errors in the related accounting records
• Identical to the expected rate of errors in related accounting records.
• Unrelated to the expected rate of errors in the related accounting records.

Answer 3

Higher than the expected rate of errors in the related accounting records.

What they’re really asking is at what point do we decide to tests controls? A way to break down how to come up with the answer is the following:

You would test controls when you believe that controls are reliable. Ask yourself in what scenario would we rely on controls or what does controls being reliable mean. It means that the rate of error you expected in the accounting records is lower than the rate of error you can tolerate.

On the other hand, if you know you won’t rely on controls meaning that control risk is high, you won’t even bother testing the controls. You will go directly to substantive testing and you will increase substantive tests which will decrease the detection risk to offset control risk increase.

Question 4

MCQ

Which of the following would be an appropriate title for a statement of revenue and expenses prepared using a special purpose financial reporting framework other than GAAP?

• Statement of operations.
• Statement of income—regulatory basis.
• Income statement.
• Statement of activities.

Answer 4

Statement of income—regulatory basis.

All three other choices are literally the names you would use for F/S prepared according to GAAP

A key word to think about or a clue is the fact that they added “regulatory basis” to indicate that this is a framework other than GAAP

Question 5

MCQ

Which of the following material events occurring subsequent to the December 31, 20X5 balance sheet would not ordinarily result in an adjustment to the financial statements before they are issued on March 2, 20X6?

• Write-off of a receivable from a debtor who had suffered from deteriorating financial condition for the past 6 years. The debtor filed for bankruptcy on January 23, 20X6.
• Acquisition of a subsidiary on January 23, 20X6. Negotiations had begun in December of 20X5.
• Settlement of extended litigation on January 23, 20X6, in excess of the recorded year-end liability.
• A 3-for-5 reverse stock split consummated on January 23, 20X6.

Answer 5

Acquisition of a subsidiary on January 23, 20X6. Negotiations had begun in December of 20X5

They’re trying to throw you off with the second half of the answer saying that the negotiations begun in December 20X5 but realistically the event happened after Year end.

The stock split answer is incorrect because GAAP would have required retroactive adjustment. (It’s a good thing to know)

The other two answers have conditions that existed before year end and therefore would require adjustments

Question 6

A governmental performance audit may extend beyond an examination leading to the expression of an opinion on the fairness of financial presentation to include

• Program results
• Compliance
• Economy and efficiency
• All three

Answer 6

All three

You just gotta know this one buddy…

Question 7

MCQ

Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity’s expected financial position, results of operations, and changes in financial position. Such prospective financial statements are known as

• Pro forma financial statements.
• Financial projections.
• Partial presentations.
• Financial forecasts.

Answer 7

Financial projections

The key word here was one or more hypothetical assumptions

Financial Projections are prospective F/S that include one or more hypothetical assumptions

Question 8

MCQ

PCAOB standards applicable to an engagement quality review identify each of the following as examples of a “significant engagement deficiency,” except for when

• The engagement team concluded that management’s accounting estimates were unreasonable.
• The engagement team reached an inappropriate conclusion.
• The firm is not independent of its client.
• The engagement report is inappropriate.

Answer 8

The engagement team concluded that management’s accounting estimates were unreasonable.

Unreasonable accounting estimates from MGMT represent a GAAP departure which I believe is more severe than a significant deficiency

Question 9

MCQ

The Department of Labor (DOL) most frequently conducts financial and performance audits following

• Government Auditing Standards.
• Sarbanes-Oxley Requirements.
• Generally Accepted Auditing Standards.
• Financial Accounting Standards Board pronouncements.

Answer 9

Government Auditing Standards.

Another one you just gotta know

Question 10

MCQ

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

• An estimate of the standard deviation of the population’s recorded amounts is not required.
• The auditor rarely needs the assistance of a computer program to design an efficient sample.
• Inclusion of zero and negative balances generally does not require special design considerations.
• Any amount that is individually significant is automatically identified and selected.

Answer 10

Inclusion of zero and negative balances generally does not require special design considerations.

It might be a situation where including zeros and negatives will mess up the ratios in PPS. if you can’t remember, think of just PPS being some sort of ratio and the fact that you can’t divide things by zero

Question 11

MCQ

Which of the following is the primary reason that many auditors hesitate to use embedded audit modules?

• Embedded audit modules cannot be protected from computer viruses.
• Auditors are required to monitor embedded audit modules continuously to obtain valid results.
• Embedded audit modules can easily be modified through management tampering.
• Auditors are required to be involved in the system design of the application to be monitored.

Answer 11

Auditors are required to be involved in the system design of the application to be monitored.

Audit embedded module can be a pain because the auditor has to be involved in the system design. These modules continuously monitor transaction activity and collect data on auditor-designated transactions.
Auditors are required to monitor embedded audit modules but not to obtain valid results.

Question 12

MCQ

An auditor concludes that extreme doubt exists about the integrity of management and the representations obtained from management relating to the fairness of the financial statements and the completeness of the record of transactions. If the auditor retains the client, which audit report is most likely to be appropriate?

• Unmodified with emphasis-of-matter paragraph.
• Standard unmodified.
• Disclaimer.
• Adverse.

Answer 12

Disclaimer

The clue here was the fact that on top of doubts of MGMT integrity, auditor doubts MGMT provided him/her/they/them with complete records. This part represents a scope limitation. Therefore a Disclaimer of opinion is appropriate

Question 13

MCQ

During an examination of a publicly held company, the auditor should obtain written confirmation regarding debenture transactions from the

• Debenture holders.
• Client’s attorney.
• Internal auditors.
• Trustee.

Answer 13

Trustee

This question is focusing on debentures transactions which is another word for bonds transactions. Don’t be fooled by selecting debenture holders. These people won’t hold records on bond transactions. On the other hand, independent Trustees maintain records on the bond transactions during the year

Question 14

MCQ

What type of function is the payroll department?
- Authorization
- Custody
- Record keeping

Answer 14

Record keeping

The payroll department is a record keeping function. Therefore authorizing payroll rate is done by another department, the personnel department.

Question 15

MCQ

Suppose that management of an issuer makes an assertion in a footnote to the company’s financial statements that material transactions with related parties were conducted on terms equivalent to those prevailing in arm’s-length transactions. If evidence cannot be obtained to support this assertion and management declines to alter that footnote, what type of audit opinion would be appropriate?

• Unqualified with an explanatory paragraph.
• Qualified for a scope limitation.
• Qualified or adverse for a material misstatement.
• Disclaimer of opinion.

Answer 15

Qualified or adverse for a material misstatement.

I think due to the fact that the mistatements are material but could also be pervasive, Qualified or adverse is appropriate.

Question 16

MCQ

Which of the following controls would a company most likely use to safeguard marketable securities when an independent trust agent is not employed?

• The investment committee of the board of directors periodically reviews the investment decisions delegated to the treasurer.
• Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.
• The internal auditor and the controller independently trace all purchases and sales of marketable securities from the subsidiary ledgers to the general ledger.
• The chairman of the board verifies the marketable securities, which are kept in a bank safe-deposit box, each year on the balance sheet date.

Answer 16

Two company officials have joint control of marketable securities, which are kept in a bank safe-deposit box.

Look for the answer that refers to some sort of a combination of Bank-safe- deposit box and dual access.

Question 17

MCQ

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

• Direct access to securities in the safe-deposit box is limited to only one corporate officer.
• Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
• The purchase and sale of investments are executed on the specific authorization of the board of directors.
• The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe-deposit box by independent personnel.

Answer 17

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

This answer is basically will provide evidence that the recorded assets are those over which the company has custody.

Again when it comes to safeguarding cash with a safe-deposit box, you want access to be given to 2 individuals instead of one. So the first answer is not correct.

Question 18

MCQ

A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which of the following types of opinion should the practitioner issue?

• Unqualified.
• Qualified.
• Adverse.
• Disclaimer.

Answer 18

Adverse

The clue here is that we talk about the fact that the assumptions did not provide a reasonable basis for the F/S. We talk about something that is both material and pervasive (It affects several areas of the F/S) so this is so serious that we need to issue an adverse opinion

Question 19

Define structured data

Answer 19

Data organized as part of a specific system.
An example would be a database or spreadsheet in rows & columns
Ie: Excel, Access

Question 20

Define semi-structured data

Answer 20

The data is in a specific tagged format such as HTML, XBRL or XML
Ie: Emails or websites

Question 21

Define Unstructured data

Answer 21

Data in text format or video or audio format like social media

Question 22

MCQ

When an accountant is not independent of a client and is requested to prepare the client’s financial statements, the accountant

• Is precluded from accepting the engagement.
• May accept the engagement and must disclose the lack of independence in a financial statement preparation report.
• May accept the engagement and need not disclose the lack of independence.
• May accept the engagement and must disclose both the lack of independence and the reason for the lack of independence.

Answer 22

May accept the engagement and need not disclose the lack of independence.

Preparation is a non attest engagement. Independence isn’t required for non attest engagement. However, unlike compilations, the lack of independence isn’t required to be disclosed when an auditor is engaged in a preparation engagement.

Question 23

Weird MCQ lol

In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity.

The auditor should also consider the

I. Likely rate of deviations.

II. Allowable risk of assessing control risk too high.

• I only
• II only
• Both I and II
• Either I or II

Answer 23

I only

The auditor does not consider the allowable risk of assessing control risk too high in determining sample size. Only the Likely rate of deviations. You just gon have to know this one buddy

Question 24

True or false

We accrue for losses when it’s reasonably possible

Answer 24

False

The key word here is “reasonably possible” we won’t accrue in that case. We only accrue for losses when it is “probable” probable is more certain than reasonably possible. In the case of a reasonably possible loss, we would only disclose the loss. If it’s probablye AND estimable, then we accrue the loss.

Question 25

TBS

At the end of year 2, a major customer owing a significant A/R balance filed for bankruptcy. The normal estimation of uncollectibles was not intended to address accounts of this magnitude. What would be the adjustment entry, if any in this situation?

Answer 25

Db Operating Expense or Bad debt expense
Cr Allowance for doubtful accounts

I had thought that we would credit allowance for doubtful accounts and debit A/R but it makes no sense since at the time of the sales you would Db A/R and credit Sales. When a client goes bankrupt, you have to record some sort of expense. Bad debt expense. If you don’t see bad debt expense in the options offered, just know that bad debt expense is an operating expense account. And then you would credit allowance for doubtful accounts.

Question 26

MCQ

When performing a review of a nonpublic company, which is least likely to be included in the accountant’s inquiries of management members with responsibility for financial and accounting matters?

• Subsequent events.
• Significant journal entries and other adjustments.
• Communications with related parties.
• Unusual or complex situations affecting the financial statements.

Answer 26

Communications with related parties

All three other options are definitely part of an auditor’s inquiries in a review engagement except for related parties

Question 27

Which of the following types of sampling allows an auditor to quantify sampling risk?

• Stratified nonstatistical
• Haphazard
• Attribute
• Block

Answer 27

Attribute

Attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence (quantifiable)

Question 28

MCQ

To support professional skepticism, each of the following is a potential bias of which auditors must be aware in their own judgments of audit evidence except:

• Underestimation bias.
• Confirmation bias.
• Automation bias.
• Overconfidence bias.

Answer 28

Underestimation bias

This is the one you always get wrong. Don’t think of automation bias as being related to machines/computers. Automation bias is definitely part of the auditor’s bias defined in the AICPA’s auditing standards. Underestimation Bias is the right answer. Honestly you gon have to use a trick to remember this one. Think of the understatement of revenues. MGMT won’t likely understate their revenues so the auditor isn’t interested in understatement bias… I guess that would work for now lol

Question 29

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?

-“We believe that the possible liability to the company is nominal in amount.”

-“We believe that the action can be settled for less than the damages claimed.”
-“We believe that the plaintiff’s case against the company is without merit.”
“We believe that the company will be able to defend this action successfully.”

Answer 29

-“We believe that the action can be settled for less than the damages claimed.”

The term less than the damages claimed is so vague. The auditor would want to investigate more. Ask yourself “what damages” what are the amounts…

Question 30

The date of the management representation letter should coincide with the balance sheet date

Answer 30

False

The date of the MGMT rep letter should coincide with the date of the audit report