Deck 3

Question 1

What procedure would best assist an auditor in identifying whether management has identified all material accounting financial estimates?

Answer 1

Read available minutes of stockholder and director meetings.

Question 2

In regards to evidence, the more effective the internal control structure, the more assurance it provides about the reliability of the accounting data and financial statements.

Answer 2

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Question 3

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the:

Efficiency of the audit OR
Effectiveness of the audit?

Answer 3

Efficiency of the audit

These two errors generally result in an auditor performing unnecessary additional procedures

-For risk of incorrect acceptance, this affects the effectiveness.

Question 4

What is an advantage of using statistical over nonstatistical sampling methods in tests of controls?

Answer 4

By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it to a level considered acceptable. It also makes greater use of mathematical methods in determining sample size.

• Also note, Statistical sampling does not afford greater assurance than a nonstatistical sample of the same size.
• AND it does not provide an advantage with respect to converting the test into a dual-purpose test.
• Also, neither statistical or nonstatistical sampling automatically provides a more representative sample than the other.

Question 5

What is the primary objective of using stratification as a sampling method in auditing?

Answer 5

To decrease the effect of variance in the total population

Question 6

What is GAAS a measure of?

Answer 6

The quality of the auditor’s performance.

Generally accepted auditing standards (“GAAS”) are measures of the quality of the auditor’s performance, and guide the auditor in the performance of a properly planned and executed audit.

Question 7

What would an auditor searching for unrecorded payables most likely do?

Answer 7

Compare subsequent bank statements with the AP listing

Question 8

What provides the best evidence supporting the existence of marketable securities included in the client’s FSs?

Answer 8

A custodial statement received and held by the client

Question 9

A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by?

Answer 9

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

If you’re being asked how a CPA firm can make sure to offer services that meet professional standards, the answer will be to have a quality control system.

Question 10

Which situation would not lead to the expressions of a disclaimer of opinion?

• The chief financial officer and the chief executive officer are unwilling to sign the management representation letter.
• The auditor is unable to determine the extent of or the amounts associated with a pervasive employee fraud scheme.
• Management refuses to produce documentation verifying the ownership of its equipment and production facilities.
• The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.

Answer 10

The company issues financial statements that purport to present financial position and results of operations, but refuses to include the related statement of cash flows.

Leaving out the cash flows is a significant departure from GAAP, which would result in an adverse opinion, not a disclaimer of opinion.

The other responses could all result in either a qualified or disclaimer of opinion.

Question 11

What is an example of a communication required with respect to registered audit firms?

Answer 11

Registered firms must report to the audit committee the critical accounting policies and practices used, a schedule of unadjusted audit differences, any alternative accounting treatments discussed with management, and a written statement regarding independence.

Key word here is AUDIT COMMITTEE, these things are not required to be reported to others.

Question 12

Which situation would constitute an improper segregation of duties related to payroll?

1. The payroll department, which computes and records payroll information, also prepares the paychecks.
2. The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department.

Answer 12

2. The department supervisor, who approves employee timesheets, distributes paychecks to the employees in his/her department.

Approving timesheets is an authorization function, which should be separated from custody of assets (i.e., the payroll checks).

In regards to 1, It is appropriate for the payroll department to compute and record payroll information (i.e., prepare the payroll register) as well as to prepare paychecks, as these functions are all part of recordkeeping. (Remember that the paychecks do not constitute cash until they are signed.)

Question 13

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.

Answer 13

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Question 14

Nissen, CPA, is a registered public accounting firm. Which situation is least likely to violate PCAOB independence Standards?

• Nissen provides tax services to the CEO of the audit client.
• Nissen provides non-audit services related to internal control to an audit client.
• Nissen accepts an engagement in which the engagement fee is dependent upon the results of the audit.
• Nissen provides tax services related to an aggressive tax transaction.

Answer 14

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.

Registered public accounting firms may not provide any tax services to corporate officers of the audit client OR any tax services to the client related to certain aggressive tax transactions. Also engagements in which the fee is dependent upon results of the audit is prohibited by the PCAOB independence standards.

Question 15

Which of the following are discreditable acts under the AICPA Code of Professional Conduct:

• Failure to return client records upon request
• Negligence in preparing client records
• Failure to file a personal tax return on a timely basis

Answer 15

All of these are considered to be acts discreditable to the profession.

Question 16

Disclosure of fraud to parties other than a client’s senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor’s responsibility. However, a duty to disclose irregularities to certain outside parties include the following:

The SEC when the client reports an auditor change.

A successor auditor when the successor makes appropriate inquiries.

A government funding agency from which the client receives financial assistance.

Answer 16

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Question 17

What is a situation where an emphasis-of-matter paragraph would need to be used?

Answer 17

When the FSs are prepared in accordance with a special purpose framework

Question 18

As compared to an unmodified opinion, an opinion qualified due to a material departure from GAAP would Indicate what?

Answer 18

Indicate that, except for the problem noted, the FSs are presented fairly

Question 19

Wat is an appropriate phrase to include in the opinion paragraph when expressing a QUALIFIED opinion due to a scope limitation?

Answer 19

Except for the possible effects of the matter described in the basis for qualified opinion paragraph

This is an appropriate phrase to include in the opinion paragraph when expressing a qualified opinion due to a scope limitation.

Question 20

What is a requirement when a group auditor decides to not assume responsibility for the work of the component auditor?

Answer 20

The Group auditor must obtain an understanding of the component auditor’s professional competence and independence.

Please note, The group auditor is ONLY required to obtain permission from the component to divide responsibility if the group decides to specifically name the component auditor as opposed to just referring to the component auditor as “other auditors” in the report, in which case the group does not need permission to do so.

Question 21

When planning a review of an audit client’s interim financial statements, what procedure should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?

Answer 21

To update knowledge on a client’s internal control, the auditor would review the results of audit procedures done. Analytical procedures don’t reveal anything about internal controls.

Question 22

For each of the following which statement is this talking about? management or those charged with governance?

1. The person(s) with responsibility for overseeing the strategic direction of the entity and the obligations related to the accountability of the entity
2. The person(s) with executive responsibility for the conduct of the entity’s operations.

Answer 22

1. Those charged with governance

2. Management

Question 23

Field is an employee of Gold enterprises. The CPA is asked to express an opinion on the employees profit participation in the company’s net income. The CPA may accept this engagement only if:

Answer 23

The CPA also audits Gold’s IS and BS

The engagement described is one to express an opinion on a specified element, account, or item of the financial statements. Since Field’s profit participation is based on Gold’s net income or stockholders’ equity, the CPA can accept the engagement only if the CPA also audits and expresses an opinion on the entity’s income statement and balance sheet.

Question 24

An auditor is engaged to report on compliance with aspects of a loan agreement in connection with the audit of the financial statements when an auditor expresses an adverse opinion on the FSs, the auditor should issue a report on compliance only if:

Answer 24

The auditor identifies instances of noncompliance

When an auditor has expressed an adverse opinion or disclaimer of opinion on the financial statements, the auditor should issue a report on compliance only when instances of noncompliance are identified. Negative assurance is not provided in this report.

Question 25

How do you calculate sample size?

Answer 25

Find Sampling interval first: Tolerable mistatements/ reliability factor

Then take your BV of the balance / Sampling interval = sample size

Question 26

In a situation where a CPA is compiling FS’s for the second year in a row and in the first year the FSs omitted substantially all disclosures required by GAAP, what should the CPA do in year 2?

Answer 26

Not issue a report on comparative FSs when statements for some, but not all, of the periods presented omit substantially all of the disclosures required by GAAP.

Compiled financial statements that omit substantially all GAAP disclosures are not comparable to financial statements including such disclosures. The accountant should not issue a report in this situation.

Question 27

What is the hierarchy of audit evidence from most reliable to least reliable?

1. An AR Confirm sent to the Auditor
2. Oral Statements from the client regarding a transaction
3. The results of an auditor’s physical inspection of the client’s original documents
4. A Monthly bank statement provided by the client

Answer 27

3. Auditor’s direct personal knowledge (auditor’s physical inspection of documents)
4. External evidence directly received by auditor (accounts receivable confirmations received by auditor)
5. External evidence received and held by client (a monthly bank statement)
6. Oral evidence (oral statements from a client regarding a transaction)

Question 28

What are some ways to identify related party transactions?

Answer 28

• Inquiring of management, or requesting a list of all related parties to the entity
• Reviewing Board Minutes
• Inspecting large, unusual transactions.
• Reviewing confirmations on large balances

Question 29

What type of engagement would have restrictive use language:

• Examination of financial forecast
• Report on compliance w/ regulatory requirements, assuming the report is prepared based on a FS audit of complete FSs
• Report on specific elements in a FS
• Report on FS prepared under Cash Basis

Answer 29

A report on a client’s compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language.

Question 30

Which of the following should an auditor do when control risk is assessed at the maximum level?

• Perform fewer substantive tests of details.
• Perform more tests of controls.
• Document the assessment.
• Document the control structure more extensively.

Answer 30

Document the assessment.

The auditor needs to document the control risk no matter what level it is assessed at. The other answers are not correct, they would not be performed if control risk is assessed at the maximum level