GLEIM ALL MCQ 1 Flashcards
Analytical procedures used in planning an audit should focus on
Enhancing the auditor’s understanding of the client’s business.
Analytical procedures may be applied as risk assessment procedures (analytical procedures used in planning an audit). They are performed to obtain an understanding of the entity and its environment, including its internal control. The understanding addresses (1) relevant external factors (including the financial reporting framework); (2) the nature of the entity (operations, governance, investments, structure, and financing to understand transaction classes, balances, and disclosures); (3) accounting policies; (4) objectives, strategies, and business risks; and (5) measurement and review of financial performance.
When a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence to determine whether certain client acts are illegal, (s)he would most likely express
The auditor may be unable to determine the legality of certain acts or the amounts associated with them because of an inability to gather sufficient appropriate evidence; e.g., the internal control may have been circumvented, resulting in failure to record or properly document the acts, or client’s legal counsel may have refused to give advice. In these circumstances, the scope limitation requires a qualified opinion or a disclaimer, although a client-imposed scope limitation ordinarily results in a disclaimer.
Which of the following statements is correct concerning an auditor’s responsibility to report fraud?
The disclosure of fraudulent activities to parties other than the client’s senior management and its audit committee is not ordinarily part of the auditor’s responsibility.
Answer (C) is correct.
The auditor should obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error. However, if noncompliance or fraud is found, disclosure of these acts to outside parties ordinarily is not the auditor’s responsibility and would violate the duty of confidentiality (AU-C 240).
The audit risk against which the auditor and those who rely on his or her opinion require reasonable protection is a combination of two separate risks at the assertion level. The first risk (consisting of inherent risk and control risk) is that balances, classes of transactions, or disclosures contain material misstatements. The second is that
Material misstatements that occur will not be detected by the audit.
Audit risk is a function of the risks of material misstatement and detection risk. Detection risk is the risk that the procedures performed to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material individually or combined with other misstatements. The auditor assesses the risk of material misstatement after obtaining an understanding of the entity and its environment, including its internal control. It exists at the overall financial statement level and assertion level. The RMM at the assertion level consists of inherent risk and control risk. Some auditors use a mathematical model based on the relationships of the components of audit risk to arrive at an acceptable level of detection risk. For example, it reflects that the acceptable detection risk has an inverse relationship with the RMMs at the assertion level (AU-C 200 and AS No. 8).
If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?
A. Disclaim an opinion due to a scope limitation.
B. Withdraw from the engagement.
C. Discuss the matter with the client’s legal counsel.
D. Review the risk assessment of the opening balances of the financial statements.
Answer (D) is correct.
When the prior period statements were audited by a predecessor auditor, the auditor should request management to authorize the predecessor to (1) allow a review of audit documentation and (2) respond fully to inquiries by the auditor. Thus, the auditor is provided with information to assist in planning and performing the engagement. The predecessor ordinarily permits the auditor to review audit documentation, including documentation of (1) planning, (2) risk assessment procedures, (3) further audit procedures, (4) audit results, and (5) other matters of continuing accounting and auditing significance. But the predecessor’s denial or limitation of access may affect (1) the auditor’s assessment of risk regarding the opening balances or (2) the nature, timing, and extent of the auditor’s procedures with respect to the opening balances and consistency of accounting principles.
The most likely reason the audit cannot reasonably be expected to bring all noncompliance with laws and regulations by the client to the auditor’s attention is that
A. The information and communication component of the client’s internal control may be so effective that the auditor performs only minimal substantive testing.
B. Noncompliance is perpetrated by management override of the information and communication component of internal control.
C. Noncompliance may be attributed to the only person in the client’s organization with access to both assets and the accounting records.
D. Noncompliance by clients often relates to operating aspects rather than accounting aspects.
Some noncompliance, such as violations of tax law, has a direct effect on the financial statements. Other noncompliance, such as violations of environmental protection laws, relates more to an entity’s operating aspects than to its financial and accounting aspects, and their financial statement effect is indirect. An audit in accordance with GAAS usually does not include audit procedures specifically designed to detect noncompliance that has such indirect effects. Thus, no assurance is provided that such noncompliance will be detected or that resulting contingent liabilities will be disclosed. However, an audit should be designed to provide reasonable assurance that noncompliance having a direct and material effect on the financial statements will be detected.
Miller Retailing, Inc., maintains a staff of three full-time internal auditors. The independent auditor has found that they are competent and objective. Moreover, the work of the internal auditors is relevant to the audit, and it is efficient to consider how that work may affect the audit. The independent auditor most likely will
A. Nevertheless need to make direct tests of assertions about material financial statement amounts for which the risks of material misstatement are high.
B. Decrease the extent of the tests of controls needed to restrict audit risk to the acceptable level.
C. Not evaluate and test the work performed by the internal auditors.
D. Increase the extent of the procedures needed to reduce control risk to an acceptable level.
Answer (A) is correct.
The auditor has the sole reporting responsibility and makes all judgments about matters affecting the report. When amounts are material and the risks of material misstatement are high or the evaluation of the evidence is highly subjective, the consideration of the internal auditors’ work cannot alone reduce audit risk to an acceptable level. Thus, direct testing of those assertions by the auditor cannot be eliminated (AU-C 610).
To which of the following parties may a CPA partnership provide its audit documentation, without being lawfully subpoenaed or without the client’s consent?
A. A CPA before purchasing a partnership interest in the firm.
B. The IRS.
C. The FASB.
D. Any surviving partner(s) on the death of a partner.
Audit documentation may be disclosed to another partner of the accounting firm without the client’s consent because such information has not been communicated to outsiders. A partner of the CPA has a fiduciary obligation to the client not to disclose confidential information without consent.
Which of the following is an element of a CPA firm’s quality control system that should be considered in establishing its quality control policies and procedures?
A. Using statistical sampling techniques.
B. Managing human resources.
C. Complying with laws and regulations.
D. Considering audit risk and materiality.
The quality control element of human resources requires establishment of policies and procedures to provide reasonable assurance that only qualified persons with the required technical training and proficiency perform the work.
An auditor’s independence is most likely considered impaired if the auditor has
A. A joint, closely held business investment with the client that is material to the auditor’s net worth.
B. An immaterial, indirect financial interest in a client.
C. A cousin as the CFO of a client.
D. An automobile loan from a client bank, collateralized by the automobile.
Answer (A) is correct.
A joint, closely held investment is an investment in an entity or property by a member and client that gives them control. Independence is impaired if the covered member has a material joint, closely held investment during the period of the engagement.
According to AU-C 315, Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, not all controls are relevant to a financial statement audit. Which one of the following would most likely be considered in an audit?
A. Maintenance of control over unused checks.
B. Maintenance of statistical production analyses.
C. Timely reporting and review of quality control results.
D. Marketing analysis of sales generated by advertising projects.
Answer (A) is correct.
Ordinarily, controls that are relevant to a financial statement audit pertain to the entity’s objective of preparing financial statements that are fairly presented in accordance with the applicable reporting framework, including managing the risks of material misstatements. Maintenance of control over unused checks is an example of a relevant control because the objective is to provide assurance about the existence assertion for cash.
Incorrect–
Timely reporting and review of quality control results, marketing analysis, and maintenance of statistical production analyses concern the effectiveness, economy, and efficiency of management decision processes that ordinarily do not relate to an entity’s ability to present fair financial statements.
Based on observations made during an audit, the auditor should discuss with management the effectiveness of the company’s controls that protect against the purchase of
A. Inventory items acquired based on an economic order quantity (EOQ) inventory management concept.
B. Supplies individually ordered, without considering possible volume discounts.
C. Required supplies provided by a vendor who offers no trade or cash discounts.
D. New equipment that is needed but does not qualify for an accelerated write-off under the class life rules.
Answer (B) is correct.
An auditor should communicate to management and those charged with governance significant deficiencies and material weaknesses observed during an audit (AU-C 265). (S)he should discuss procedures that permit the avoidable loss of assets. Thus, an auditor should determine whether the failure to consider possible volume discounts is due to fraud or error.
Answer (A) is incorrect.
Inventory management is appropriately based on economic order quantity (EOQ) concepts. It minimizes the sum of inventory ordering costs and inventory carrying costs.
Answer (C) incorrect.
The entity may consider other factors such as quality and service, not just whether a discount is offered on the required supplies.
Answer (D) is incorrect.
Equipment acquisition should be based on need for the equipment, not on whether the purchase qualifies for preferential tax treatment.
For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve
A. Cash disbursements.
B. Employee overtime wages.
C. Credit granted to customers.
D. Write-offs of customer accounts.
Answer (D) is correct.
An employee who authorizes a transaction, such as the write-off of a receivable, ordinarily should not be responsible for recording the same transaction. Segregating the functions of authorization, recordkeeping, and custody of assets reduces the possibility that an employee may be able to perpetrate and conceal fraud or error in the normal course of his or her duties.
Answer (C) is incorrect.
An employee who approves credit and maintains the accounts receivable ledger should not be able to perpetrate and conceal a fraud.
Answer (A) is incorrect.
Authorization of cash disbursements is not related to receivables, which are reduced by cash receipts, not disbursements.
An auditor strives to achieve independence in appearance to
A. Become independent in fact.
B. Comply with GAAP.
C. Maintain an unbiased mental attitude.
D. Maintain public confidence in the profession.
Answer (D) is correct.
Third parties depend on the CPA’s report because (s)he is viewed as possessing the necessary impartiality. Public confidence is impaired if such objectivity even appeared to be lacking. The auditor must guard against the presumption of a loss of independence in addition to maintaining independence of mind.
Which of the following control activities is not usually performed with regard to vouchers payable in the accounting department?
A. Matching the receiving report with the purchase order.
B. Controlling the mailing of the check and remittance advice.
C. Determining the mathematical accuracy of the vendor’s invoice.
D. Having an authorized person approve the voucher.
Answer (B) is correct.
The cash disbursements department, which is responsible to the CFO, has an asset custody function that should be segregated from the recording function of the accounting department. Consequently, checks for disbursements should be signed by a responsible person in that department after necessary supporting evidence has been examined. This individual also should be responsible for canceling the supporting documentation and mailing the signed checks and remittance advices. The documentation typically consists of a payment voucher, requisition, purchase order, receiving report, and vendor invoice.
All the other choices the accounting dept should do
