GLEIM MCQ 2 Flashcards
For effective internal control, which of the following functions should not be the responsibility of the CFO’s department?
A. Data processing.
B. Custody of securities.
C. Handling of cash.
D. Establishing credit policies.
Answer (A) is correct. The CFO (chief financial officer) performs the custodianship function. For a proper separation of functions, the CFO should not perform a recording function such as data processing.
A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year’s audited financial statements. This separate paragraph should indicate
A. The type of opinion expressed previously.
B. That the CPA did not update the assessment of the risks of material misstatement.
C. That the auditor’s report should no longer be relied on.
D. The reasons for the change from an audit to a review
Answer (A) is correct.
The separate paragraph is added to the current period’s review report when the prior-period report is not reissued. The separate paragraph should indicate (1) that the prior-period statements were audited, (2) the date of the previous report, (3) the type of opinion expressed, (4) the substantive reasons if the opinion was not unmodified, and (5) that no audit procedures were performed after the date of the previous report.
A U.S. entity prepares its financial statements in accordance with a financial reporting framework generally accepted in another country. These financial statements will be included in the consolidated financial statements of its non-U.S. parent. Before reporting on the financial statements of the U.S. entity, the auditor practicing in the U.S. should
A. Notify management of the U.S. entity that the auditor is required to disclaim an opinion on the financial statements.
B. Communicate with the auditor of the non-U.S. parent regarding the level of assurance to be provided.
C. Obtain an understanding of the purpose of the financial statements and the intended users.
D. Receive a waiver to report on the U.S. entity from the appropriate accountancy authority in the other country.
Answer (C) is correct.
An auditor practicing in the U.S. may report on the financial statements of a U.S. entity prepared in accordance with a financial reporting framework generally accepted in another country for use outside the U.S. The auditor should understand (1) the purpose of the statements, (2) the intended users, and (3) the steps by management to determine that the financial reporting framework is acceptable. If the statements are for general use and the report form and content of the foreign country will be used, the auditor should consider any additional legal responsibilities.
An auditor tests an entity’s policy of obtaining credit approval before shipping goods to customers in support of management’s financial statement assertion of
A. Rights and obligations.
B. Occurrence.
C. Completeness.
D. Valuation.
Answer (D) is correct.
The proper approval of credit provides assurance that the account receivable is collectible. Thus, it is related to the valuation assertion that balances are reported at appropriate amounts, e.g., accounts receivable at net realizable value.
After performing a compliance audit of an entity that received federal funds, what conclusion would the auditor draw if the entity does not have adequate documentation to support $5 million in operating expenses paid from federal program funds?
A. The entity spent $5 million of government funds for services that were not required.
B. The entity spent $5 million in operating expenses that were not approved.
C. Questioned costs of $5 million for operating expenses have been identified.
D. The entity submitted unauthorized invoices for expenses.
Answer (C) is correct.
Under the Single Audit Act, the auditor must report a schedule of findings and questioned costs. Questioned costs result from an audit finding of (1) a violation or possible violation of a law, regulation, contract, grant, or agreement or document governing the use of federal funds, including matching funds; (2) inadequate documentation of costs at the time of the audit; or (3) costs that appear unreasonable and do not reflect the actions a prudent person would take in the circumstances.
An accountant began an audit of the financial statements of a nonissuer and was asked to change the engagement to a review because of a restriction on the scope of the audit. If the change is reasonably justified, the accountant’s review report should refer to the
- Auditing Procedures that May Have Been Performed
- Reason for the Change
A. No No
B.
No Yes
C.Yes Yes
D. Yes No
Answer (A) is correct.
The accountant may conclude, based upon his or her professional judgment, that changing the engagement is reasonably justified. If (s)he then complies with the standards applicable to the changed engagement, (s)he should issue an appropriate review report. The report should not refer to (1) the original engagement, (2) any auditing procedures that may have been performed, or (3) scope limitations that resulted in the changed engagement (AR-C 90).
On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by
A. Examining paid checks returned with the bank statement of the next accounting period after year end.
B. Preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year end.
C. Examining the composition of deposits in both bank A and B subsequent to year end.
D. Comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year end.
Answer (A) is correct.
Because the check used to make the bank transfer is not recorded in the current period, the check is not listed as outstanding on the reconciliation of the bank account on which it was drawn. The auditor detects kiting by comparing paid checks, returned in the next period and dated prior to year end, with the checks listed as outstanding on the related bank reconciliation. In other words, the auditor searches for checks that should have been listed as outstanding but were not.
An accountant compiles the financial statements of a nonissuer and issues the compilation report. Although not specifically stated in this report, it is implied that
A. Substantially all disclosures required by GAAP are included in the financial statements.
B. The financial statements should not be used to obtain credit.
C. The compilation is limited to presenting information that is the representation of management.
D. The accountant has not audited or reviewed the financial statements.
Answer (A) is correct.
An accountant may compile financial statements that omit substantially all disclosures required by an applicable reporting framework if the omission is not, to his or her knowledge, made to mislead users of the statements. When reporting on such statements, the accountant should include in the compilation report a paragraph with the following statements: (1) Management has elected to omit substantially all disclosures; (2) if the omitted disclosures were included, they might influence the user’s conclusions; and (3) the statements are not designed for those who are not informed about such matters. Accordingly, the compilation report implies that substantially all disclosures required by GAAP are included in the financial statements because it does not mention disclosures.
An auditor’s analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by
A. The investee’s decision to reduce cash dividends declared per share of its common stock.
B. A substantial fluctuation in the price of the investee’s common stock on a national stock exchange.
C. An error in recording amortization of the excess of the investor’s cost over the investment’s underlying carrying amount.
D. An error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities.
Answer (C) is correct.
The transaction to record the amortization is a recurring entry that, if miscalculated, could result in a lower return than expected.
The work of internal auditors may affect the independent auditor’s
Procedures performed in obtaining an understanding of internal control
Procedures performed in assessing the risks of material misstatement
Substantive procedures performed in gathering direct evidence
A. I and II only.
B. I and III only.
C. II and III only.
D. I, II, and III.
Answer (D) is correct.
The internal audit function is part of the client’s internal control. The auditor should obtain an understanding of this function when obtaining an understanding of internal control. The auditor also may use the internal auditors to provide direct assistance under certain conditions. A primary purpose of internal auditors is to review, assess, and monitor internal control. Thus, their work is relevant to the understanding of internal control and the assessment of risk. Moreover, some procedures performed by internal auditors, such as confirmations, may provide direct evidence about material misstatements.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor considers whether assumptions are significant. These are most likely to be
A. Objective and not susceptible to bias.
B. Similar to industry guidelines.
C. Stable and not sensitive to variation.
D. Deviations from past experience.
Answer (D) is correct.
An assumption is significant if a reasonable variation materially affects the measurement of the estimate. The auditor’s considerations in evaluating assumptions include whether they are consistent with (1) economic conditions, (2) management’s selection of the assumptions of market participants and resulting modifications of its own assumptions, (3) the entity’s plans, (4) past experience, (5) prior-period assumptions, and (6) many other factors.
Under the ethical standards of the profession, which of the following is a “permitted loan” regardless of the date it was obtained? A. Student loan. B. Home mortgage loan. C. Personal loan. D. Secured automobile loan.
Answer (D) is correct.
Independence is generally impaired if a covered member has loans to or from a client. However, certain exceptions apply. One such exception is for an automobile loan collateralized by the vehicle.
According to the Sarbanes-Oxley Act of 2002, which of the following non-audit services can be provided by a registered public accounting firm to the client contemporaneously with the audit when preapproval is granted by audit committee action?
A. Actuarial services related to the audit.
B. Tax services.
C. Advice on financial information system design.
D. Internal audit outsourcing services.
Answer (B) is correct.
The Sarbanes-Oxley Act of 2002 prohibits a registered public accounting firm from performing the following nonaudit services for an issuer: (1) bookkeeping or other services related to the accounting records or financial statements of the audit client; (2) design and implementation of financial information systems; (3) appraisal or valuation services, fairness opinions, or contribution-in-kind reports; (4) actuarial services; (5) internal audit outsourcing services; (6) management functions or human resource services; (7) broker or dealer, investment adviser, or investment banking services; (8) legal services and expert services unrelated to the audit; and (9) any other service that the Board determines is impermissible. But a registered public accounting firm may engage in any nonaudit service, including tax services other than those listed, if the activity is approved in advance by the audit committee of the issuer.
Audit planning for an initial audit most likely includes
A. Selecting a sample of invoices for comparison with shipping reports.
B. Performing procedures involving opening balances.
C. Obtaining an engagement letter prepared by the auditee.
D. Determining the opinion to be expressed.
Answer (B) is correct.
First-year audits involve additional planning considerations. Examples are (1) communication with the predecessor auditor, (2) audit procedures regarding opening balances, (3) assignment of firm personnel with appropriate qualifications, and (4) procedures required by the firm’s system of quality control for initial engagements.
An auditor who uses the work of an auditor’s external specialist may refer to the specialist in the auditor’s report if the
A. Specialist’s findings provide the auditor greater assurance of reliability about management’s representations.
B. The specialist’s findings fully corroborate management’s financial statement assertions.
C. Auditor’s use of the specialist’s findings is different from that of prior years.
D. Reference is needed for an understanding of a modification of the opinion.
Answer (D) is correct.
The auditor may refer to an auditor’s external specialist only if the opinion is modified. A modified opinion is a qualified opinion, adverse opinion, or a disclaimer of opinion. The reference is made because it is relevant to understanding the modification. An auditor’s report with such a reference should state that it does not reduce the auditor’s responsibility (AU-C 620).
