Mini Exam 3 Wrong Answers Flashcards
Spring Town is evaluating whether it will need an audit under the Single Audit Act. The town will need to engage an auditor to fulfill the expanded requirements of a single audit if the town:
A. Expends more than $750,000 in federal financial assistance. B. Receives more than $750,000 in federal financial assistance. C. Expends more than $300,000 in federal financial assistance. D. Receives more than $300,000 in federal financial assistance.
Choice “A” is correct. Entities that expend more than $750,000 in federal financial assistance are required to receive an audit that complies with the provisions of the Single Audit Act.
Choice “B” is incorrect. The criteria used for requiring the Single Audit Act are based on expenditures and not receipts. The expenditure threshold is $750,000.
Choice “C” is incorrect. Entities that expend more than $750,000 in federal financial assistance are required to receive an audit that complies with the provisions of the Single Audit Act.
Choice “D” is incorrect. The criteria used for requiring the Single Audit Act are based on expenditures and not receipts. The expenditure threshold is $750,000.
Robbins Company uses an outside service organization called Payroll Plus to process its payroll. Matthews, CPA is the auditor of Payroll Plus, and Stevens, CPA is Robbins’ auditor. Stevens’ assessment of the risk of material misstatement may be based on the effective operation of controls surrounding payroll if:
A. Matthews provides a report on controls placed in operation and tests of operating effectiveness. B. Matthews provides a report on controls placed in operation. C. Matthews issues a standard, unmodified opinion on the financial statements of the service organization. D. Matthews’ audit report indicates that none of the significant deficiencies in internal control identified at Payroll Plus constitute material weaknesses in internal control.
Explanation
Choice “A” is correct. Stevens may assume controls are operating effectively if Matthews provides a report on controls placed in operation and tests of operating effectiveness, and if this report supports a reduction in the assessed level of control risk. A SOC 1® Type 2 report provides the user auditor with assurance about the design, implementation, and operating effectiveness of the service organization’s internal controls.
Choice “B” is incorrect. A report on controls placed in operation does not provide evidence about operating effectiveness and therefore cannot be used to support a reduction in the assessed level of control risk. A SOC 1® Type 1 report does not include the testing of the operating effectiveness of controls at a service organization and therefore cannot be used as a basis for assessing control risk below maximum.
Choice “C” is incorrect. An audit report on the financial statements of Payroll Plus does not indicate whether controls are operating effectively. It only indicates that the financial statements are fairly stated, and this could be the case regardless of how controls are functioning.
Choice “D” is incorrect. The fact that none of the significant deficiencies in internal control are serious enough to be material weaknesses is not sufficient to support a reduction in the assessed level of control risk.
Which of the following statements is true about required procedures in a review of annual financial statements?
A. Obtaining an understanding of the client's operations is not required, but corroboration of management's material estimates is required. B. Analytical review procedures are not required, but communication with the predecessor accountant is required. C. Assessment of fraud risk is not required, but obtaining a representation letter from management is required. D. Obtaining an understanding of internal control is not required, but confirmations of accounts receivable is required.
Choice “C” is correct. Assessment of fraud risk is not required, but obtaining a representation letter from management is required.
Choice “A” is incorrect. Obtaining an understanding of the client’s operations is required, and corroboration of management’s material estimates is an audit procedure that is not required in a review engagement.
Choice “B” is incorrect. Analytical review procedures are required, whereas communication with the predecessor accountant is not required.
Choice “D” is incorrect. While it is true that obtaining an understanding of internal control is not required in a review of annual financial statements, confirmation of accounts receivable is an audit procedure that is not required in a review engagement. Note: Obtaining an understanding of internal control is required in a review of interim financial statements (when the annual financial statements are audited).
An accountant’s standard report issued after compiling the financial statements of a nonissuer should state that:
A. I am not aware of any material modifications that should be made to the accompanying financial statements. B. A compilation consists principally of inquiries of company personnel and analytical procedures. C. The accountant was not required to perform any procedures to verify the accuracy or completeness of the information provided by management. D. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion.
Explanation
Choice “C” is correct. An accountant’s standard report issued after compiling the financial statements of a nonissuer should state that the accountant was not required to perform any procedures to verify the accuracy or completeness of informaiton provided by management.
Choice “A” is incorrect. A review report (and not a compilation report) states that, “I am not aware of any material modifications that should be made to the accompanying financial statements.”
Choice “B” is incorrect. A review report (and not a compilation report) states that a review “includes primarily applying analytical procedures to management’s financial data and making inquiries of company management.”
Choice “D” is incorrect. A review report (and not a compilation report) states that a review “is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinio
Min, CPA, is unable to perform necessary procedures in a review of the financial statements of a nonissuer. What will be the effect on Min’s review report?
A. Min should not issue a review report because the review is incomplete. B. Min should not issue a review report unless the scope restriction was caused by circumstance, rather than by action of the client. C. Min should issue a review report with an additional paragraph inserted before the final paragraph describing the situation, and a final paragraph that includes the words "except for." D. Min should issue a review report with an additional paragraph inserted before the final paragraph describing the situation.
Explanation
Choice “A” is correct. Accountants must be able to perform whatever procedures they deem necessary, and if those procedures are not accomplished, the review is incomplete. A review that is incomplete will prevent the issuance of a review report.
Choice “B” is incorrect. Regardless of the reason for the scope restriction, a review that is incomplete will prevent the issuance of a review report.
Choice “C” is incorrect. Adding an additional paragraph is not an appropriate response. If the review is incomplete, no review report should be issued.
Choice “D” is incorrect. Adding an additional paragraph is not an appropriate response. If the review is incomplete, no review report should be issued.
An accountant has been asked to issue a review report on the balance sheet of a nonissuer without reporting on the related statements of income, retained earnings, and cash flows. The accountant may issue the requested review report only if:
A. There have been no material changes during the year in the entity's accounting principles. B. The balance sheet is part of a comprehensive personal financial plan developed to assist the entity. C. The balance sheet is not to be used to obtain credit or distributed to the entity's creditors. D. The scope of the accountant's inquiry and analytical procedures has not been restricted.
Explanation
Choice “D” is correct. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited.
Choice “A” is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There is no requirement that accounting principles remain consistent during the year.
Choice “B” is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There is no requirement that the balance sheet be part of a comprehensive personal financial plan.
Choice “C” is incorrect. A review engagement may involve reporting on only one financial statement, provided the scope of the engagement was not limited. There are no requirements regarding the use of the balance sheet.
Plinth Industries, an issuer, employs several former employees of its auditor, Lawrence & Whitney, CPAs. Adams, CEO, began his career with L&W, but left ten years ago; Brooks, CFO, was with L&W until 18 months ago, and James, internal auditor, left L&W six months prior to the start of the current year’s audit. Which of the following properly describes the effect of these potential conflicts of interest?
A. L&W may not audit Plinth because the CEO and CFO are both former L&W employees. B. L&W may not audit Plinth due to the employment of Brooks within the two-year period preceding the audit. C. L&W may not audit Plinth due to the employment of James within the one-year period preceding the audit. D. L&W may audit Plinth.
Explanation
Choice “D” is correct. L&W may audit Plinth since none of the situations described presents a conflict of interest as described in SOX Title II.
Choices “A” and “B” are incorrect. Neither Adams nor Brooks was employed by L&W within the one-year period preceding the audit, so neither position poses a conflict of interest as described in SOX Title II.
Choice “C” is incorrect. The conflict of interest provisions of SOX Title II apply only to the issuer’s CEO, CFO, Controller, or Chief Accounting Officer (or to any person serving in an equivalent position), not to an internal auditor.
The accountant may report on agreed-upon procedures applied to specified elements, accounts, or items of financial statements:
A. But must be independent of the client company and provide limited assurance on the sufficiency of the agreed-upon procedures performed. B. Without being independent of the client company since no opinion or any other form of assurance is given on the sufficiency of agreed-upon procedures performed. C. But must be independent of the client company and give no opinion or any other form of assurance on the sufficiency of the agreed-upon procedures applied. D. As long as the accountant assumes responsibility for the adequacy of the agreed-upon procedures the accountant has agreed to perform.
Explanation
Choice “C” is correct. The accountant must be independent to perform an agreed-upon procedures engagement, and should not provide an opinion or any other form of assurance on the sufficiency of the procedures applied. The engaging party (often the client) is responsible for acknowledging the adequacy of the procedures.
Choice “A” is incorrect. The accountant should not provide an opinion or any other form of assurance on the sufficiency of the procedures applied. The engaging party (often the client) is responsible for acknowledging the adequacy of the procedures.
Choice “B” is incorrect. The accountant must be independent to perform an agreed-upon procedures engagement.
Choice “D” is incorrect. The engaging party (often the client) is responsible for the adequacy of the procedures.
Which of the following services require the accountant to comply with Statements on Standards for Accounting and Review Services?
A. Preparing financial statements in conjunction with litigation services that involve pending regulatory proceedings. B. Maintaining depreciation schedules. C. Processing payments in an accounting software system. D. Preparing financial statements prior to audit or review by another accountant.
Choice “D” is correct. Preparation of financial statements prior to audit or review by another accountant is an engagement that should be conducted in accordance with SSARS.
Choice “A” is incorrect. SSARS explicity excludes services involving preparing financial statements in conjunction with litigation services that involve regulatory proceedings.
Choices “C” and “B” are incorrect. Processing payments and maintaining depreciation schedules are bookkeeping services, and, therefore, do not require complying with SSARS.
Which of the following standards should a CPA firm apply in a review of Management Discussion and Analysis?
A. Statements on Standards for Consulting Services. B. Statements on Auditing Standards. C. Statements on Standards for Attestation Engagements. D. Statements on Standards for Accounting and Review Services.
Choice “C” is correct. A CPA should refer to Statements on Standards for Attestation Engagements (SSAE) for a review of Management and Discussion Analysis.
Choice “A” is incorrect. A CPA should refer to Statements on Standards for Consulting Services when performing consulting services.
Choice “B” is incorrect. A CPA should refer to Statements on Auditing Standards when performing an audit for a nonissuer.
Choice “D” is incorrect. A CPA should refer to Statements on Standards for Accounting and Review Services when performing a preparation, compilation, or review of historical financial statements for nonissuers. SSARS also applies to preparation and compilations of pro forma and prospective financial information.
Which of the following procedures generally would not be performed in a review of a public entity’s interim financial statements?
A. Inquire regarding significant deficiencies in internal control. B. Inquire of the client’s attorney. C. Compare the current quarter to the comparable quarter from the previous year. D. Read the minutes of stockholder meetings, directors’ meetings, etc.
Explanation
Choice “B” is correct. Inquiry of the client’s attorney generally is not required.
Choice “A” is incorrect. Inquiry should be made regarding significant deficiencies in internal control.
Choice “C” is incorrect. The accountant should perform analytical procedures, such as comparisons over time, with respect to interim financial information.
Choice “D” is incorrect. The accountant should read the minutes of stockholder meetings, directors’ meetings, etc.
Management’s written representation to the auditor in connection with a governmental audit would most likely include:
A. Negative assurance that the government has complied with compliance requirements. B. Representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist. C. A statement that management had identified and disclosed all material government programs to the auditor. D. A statement that management has disclosed any communications from grantors concerning possible noncompliance.
Explanation
Choice “D” is correct. The management letter will include a statement that management has disclosed any communications from grantors concerning possible noncompliance.
Choice “A” is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements. Management representations do not provide negative assurance.
Choice “B” is incorrect. Management will assert that they have disclosed all known noncompliance or positively state that there was no such noncompliance. Management representations do not provide negative assurance.
Choice “C” is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor. Management’s representation is not limited to only material government programs.
Question
A subsequent event occurred after the date of the auditor’s report on an integrated audit. What is the auditor’s responsibility regarding this subsequent event?
A. Revoke the audit report and issue an adverse opinion. B. Inquire of management and keep the documentation for the following year’s audit. C. Obtain information about the conditions that arose after the date of the auditor’s report to include in a letter written to management and to those charged with governance. D. There is no responsibility to stay informed of events that occur after the date of the auditor’s report.
Explanation
Choice “D” is correct. The auditor has no responsibility to stay informed with respect to events that occur after the date of the auditor’s report when performing an integrated audit. But if the auditor becomes aware of conditions that existed at the report date, appropriate action should be taken.
Choices “C”, “A”, and “B” are incorrect, based on the above explanati
An auditor provides positive assurance in all of the following reports except:
A. A report on other comprehensive basis of accounting financial statements. B. A report on compliance with contractual or regulatory requirements related to audited financial statements. C. A report on a specified account in a financial statement. D. A report on a financial presentation to comply with contractual agreements or regulatory requirements.
Explanation
Choice “B” is correct. Negative assurance is provided on compliance with contractual or regulatory requirements related to audited financial statements.
Choice “A” is incorrect. Positive assurance is provided in a report on other comprehensive basis of accounting financial statements.
Choice “C” is incorrect. Positive assurance is provided in a report on a specified account in a financial statement.
Choice “D” is incorrect. Positive assurance is provided in a report on a financial presentation to comply with contractual agreements or regulatory requirements.
An auditor provides positive assurance in all of the following reports except:
A. A report on other comprehensive basis of accounting financial statements. B. A report on compliance with contractual or regulatory requirements related to audited financial statements. C. A report on a specified account in a financial statement. D. A report on a financial presentation to comply with contractual agreements or regulatory requirements.
Explanation
Choice “B” is correct. Negative assurance is provided on compliance with contractual or regulatory requirements related to audited financial statements.
Choice “A” is incorrect. Positive assurance is provided in a report on other comprehensive basis of accounting financial statements.
Choice “C” is incorrect. Positive assurance is provided in a report on a specified account in a financial statement.
Choice “D” is incorrect. Positive assurance is provided in a report on a financial presentation to comply with contractual agreements or regulatory requirements.
