Mod 2 Engagement Planning MCQs

Question 1

1. During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client’s board of directors, but the board decided to take no action because the amounts involved were immaterial to the financial statements. Under these circumstances, the auditor should
   a) Add an explanatory paragraph emphasizing that certain matters, while not affecting the unqualified opinion, require disclosure.
   b) Report the illegal bribes to the municipal official at least one level above those persons who received the bribes.
   c) Consider withdrawing from the audit engagement and disassociating from future relationships with the client.
   d) Issue an “except for” qualified opinion or an adverse opinion with a separate paragraph that explains the circumstances.

Answer 1

c) Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

This answer is correct because the professional standards indicate that the auditor should consider the need to withdraw when the client does not take remedial action, even when the illegal act involved is immaterial.

Question 2

2. In developing an overall audit strategy, an auditor should consider
   a) Whether the allowance for sampling risk exceeds the achieved upper precision limit.
   b) Findings from substantive tests performed at interim dates.
   c) Whether the inquiry of the client’s attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.
   d) Reporting objectives of the engagement.

Answer 2

d) Reporting objectives of the engagement.

This answer is correct because an overall audit strategy involves (1) determining the scope of the audit, (2) determining the reporting objectives, and (3) considering various other important factors

Question 3

3. An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor
   a) Is required to disclose the contractual relationship in the auditor’s report.
   b) Should assess the risk that the actuary’s objectivity might be impaired.
   c) Is not permitted to rely on the actuary because of a lack of independence.
   d) Should communicate this matter to the audit committee as a significant deficiency.

Answer 3

b) Should assess the risk that the actuary’s objectivity might be impaired.

This answer is correct because when using the work of a specialist, the auditor must consider that specialist’s objectivity.

Question 4

4. As the acceptable level of detection risk decreases, the assurance directly provided from
   a) Substantive procedures should increase.
   b) Substantive procedures should decrease.
   c) Tests of controls should increase.
   d) Tests of controls should decrease.

Answer 4

a) Substantive procedures should increase.

This answer is correct because detection risk is restricted by the auditor’s substantive procedures. As the acceptable level of detection risk decreases, assurance provided by substantive procedures must increase. Increased assurance can be obtained by modifying the nature, timing and/or extent of the substantive procedures.

Question 5

5. Which of the following statements is correct concerning materiality in a financial statement audit?
   a) Analytical procedures performed during an audit’s review stage usually decrease materiality levels.
   b) If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests.
   c) The auditor’s materiality judgments generally involve quantitative, but not qualitative, considerations.
   d) Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

Answer 5

d) Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.

This answer is correct because quantitative materiality levels are generally considered in terms of the smallest misstatement that could be considered material to any of the financial statements.

Question 6

6. Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
   a) Senior financial management participates in the selection of accounting principles and the determination of significant estimates.
   b) Supporting accounting records and files that should be readily available are not produced promptly when requested.
   c) Related-party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm.
   d) Senior management has an excessive interest in upgrading the entity’s information technology capabilities.

Answer 6

b) Supporting accounting records and files that should be readily available are not produced promptly when requested.

This answer is correct because unavailability of records when requested might indicate fraudulent entries lacking proper support.

Question 7

7. Which of the following procedures would be most effective in reducing attestation risk?
   a) Discussion with responsible individuals.
   b) Examination of evidence.
   c) Inquiries of senior management.
   d) Analytical procedures.

Answer 7

b) Examination of evidence.

This answer is correct because basic to the attest engagement is the examination of evidence to form an opinion on the information.

Question 8

8. As generally conceived, the “audit committee” of a publicly held company should be made up of
   a) Representatives of the major equity interests (bonds, P/S, C/S).
   b) The audit partner, the chief financial officer, the legal counsel, & at least 1 outsider.
   c) Representatives from the client’s management, investors, suppliers, and customers.
   d) Members of the board of directors who are not officers or employees.

Answer 8

d) Members of the board of directors who are not officers or employees.

This answer is correct because the concept of an audit committee is to provide a means of control (or extending internal control) over the top operating employees of a business enterprise. Therefore an audit committee should not contain any top operating employees.

Question 9

9. Should an auditor communicate the following matters to an independent audit committee of a public entity?
   a) Significant audit adjustments recorded by the entity - Yes; Mgmt’s consultation w/ other accountants adjustments recorded about significant accntng matters - Yes
   b) Significant audit adjustments recorded by the entity - Yes; Mgmt’s consultation w/ other accountants adjustments recorded about significant accntng matters - No
   c) Significant audit adjustments recorded by the entity - No; Mgmt’s consultation w/ other accountants adjustments recorded about significant accntng matters - Yes
   d) Significant audit adjustments recorded by the entity - No; Mgmt’s consultation w/ other accountants adjustments recorded about significant accntng matters - No

Answer 9

a) Significant audit adjustments recorded by the entity - Yes; Mgmt’s consultation w/ other accountants adjustments recorded about significant accntng matters - Yes

This answer is correct because both significant audit adjustments and management’s consultation with other accountants about significant accounting matters should be communicated to an audit committee.

Question 10

10. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the
    a) Audit has been performed by persons having adequate technical training and proficiency as auditors.
    b) Auditor’s system of quality control has been maintained at a high level.
    c) Results are consistent with the conclusions to be presented in the auditor’s report.
    d) Audit procedures performed are approved in the professional standards.

Answer 10

c) Results are consistent with the conclusions to be presented in the auditor’s report.

This answer is correct because the work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the results are consistent with the conclusions to be presented in the auditor’s report.

Question 11

11. Early appointment of the independent auditor will enable
    a) A more thorough examination to be performed.
    b) A proper consideration of internal control to be performed.
    c) Sufficient appropriate audit evidence to be obtained.
    d) A more efficient audit to be planned.

Answer 11

d) A more efficient audit to be planned.

This answer is correct because the early appointment of the independent auditor enables the auditor to plan his/her work so that it may be done expeditiously and to determine the extent to which it can be done before the balance sheet date. Such preliminary work by the auditor permits the audit to be performed in a more efficient manner and to be completed at an early date after the year-end.

Question 12

12. Professional skepticism, when exercised during the consideration of the risk of misstatement due to fraud
    a) Should only be exercised during the planning stage of the audit.
    b) Is based on the notion that the client is dishonest.
    c) Is an attitude that includes a questioning mind.
    d) Ordinarily includes the use of an outside expert in most audits.

Answer 12

c) Is an attitude that includes a questioning mind.

This answer is correct because professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.

Question 13

13. An understanding with the client must include the objectives of the engagement, management’s responsibilities, and
    a) Auditor’s responsibilities - Yes; Limitations of the audit - Yes
    b) Auditor’s responsibilities - Yes; Limitations of the audit - No
    a) Auditor’s responsibilities - No; Limitations of the audit - Yes
    a) Auditor’s responsibilities - No; Limitations of the audit - No

Answer 13

a) Auditor’s responsibilities - Yes; Limitations of the audit - Yes

This answer is correct because the professional standards require that both the auditor’s responsibilities and limitations of the audit be communicated.

Question 14

14. A successor auditor’s inquiries of the predecessor auditor should include questions regarding
    a) The predecessor’s evaluation of audit risk and judgment about materiality.
    b) Subsequent events that occurred since the predecessor’s audit report was issued.
    c) The predecessor’s understanding as to the reasons for the change in auditors.
    d) The predecessor’s knowledge of accounting matters of continuing significance.

Answer 14

c) The predecessor’s understanding as to the reasons for the change in auditors.

This answer is correct because the predecessor’s inquiry, which occurs prior to final acceptance of an engagement, should be on the predecessor’s understanding of the reasons for the change, as well as to matters bearing as to management’s integrity, disagreements with management, communications with those charged with governance on fraud and illegal acts, and communications on significant deficiencies and material weaknesses.

Question 15

15. Which of the following procedures is least likely to be performed as a part of obtaining an understanding during an audit engagement of a new audit client previously audited by another CPA?
    a) Communication with the predecessor auditor.
    b) Performing analytical procedures.
    c) Obtaining confirmation of cash balances.
    d) Considering internal control.

Answer 15

c) Obtaining confirmation of cash balances.

This answer is correct because confirmation of cash balances is a substantive audit procedure which will be performed during the audit.

Question 16

16. Which of the following is most likely to be considered a “further audit procedure?”
    a) Communication with the predecessor auditor.
    b) Preparation of an engagement letter.
    c) Preparation of a flowchart of the sales function.
    d) Performance of tests of controls.

Answer 16

d) Performance of tests of controls.

This answer is correct because tests of controls and substantive procedures are further audit procedures.

Question 17

17. A client decides not to make an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentation?
    a) The financial statements are free from material misstatement, and no disclosure of the omitted proposed adjustments is required in the audit report.
    b) The financial statements do not conform with GAAP.
    c) The financial statements contain unadjusted misstatements that should result in a qualified opinion.
    d) The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.

Answer 17

a) The financial statements are free from material misstatement, and no disclosure of the omitted proposed adjustments is required in the audit report.

This answer is correct because material, not immaterial, departures require disclosure in the audit report.

Question 18

18. It would not be appropriate for the auditor to initiate discussion with the audit committee concerning
    a) The extent to which the work of internal auditors will influence the scope of the examination.
    b) Details of the procedures which the auditor intends to apply.
    c) The extent to which change in the company’s organization will influence the scope of the examination.
    d) Details of potential problems which the auditor believes might cause a qualified opinion.

Answer 18

b) Details of the procedures which the auditor intends to apply.

This answer is correct because while an auditor may reply to audit committee questions concerning the detailed procedures to be applied, initiating the discussion is generally not necessary.

Question 19

19. Which of the following is correct concerning requirements about auditor communications about fraud?
    a) All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee.
    b) Fraud that causes an immaterial misstatement of the financial statements need not be reported to the audit committee.
    c) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.
    d) The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

Answer 19

a) All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee.

This answer is correct because all fraud involving senior management and all other material fraud should be reported directly to the audit committee.

Question 20

20. Which of the following is an analytical procedure that an auditor most likely would perform when performing the risk assessment of an audit?
    a) Confirming bank balances with the financial institutions.
    b) Scanning accounts receivable for amounts over credit limits.
    c) Recalculating inventory extensions of physical inventory counts.
    d) Comparing the current year account balances for conformity with predictable patterns.

Answer 20

d) Comparing the current year account balances for conformity with predictable patterns.

This answer is correct because analytical procedures performed during risk assessment are ordinarily at a high level and comparing current year balances for conformity with predictable patterns is such a test.

Question 21

21. Which of the following statements is correct concerning an auditor’s use of the work of an actuary in assessing a client’s pension obligations?
    a) The auditor is required to understand the objectives and scope of the actuary’s work.
    b) The reasonableness of the actuary’s assumptions is strictly the auditor’s responsibility
    c) The client is required to consent to the auditor’s use of the actuary’s work.
    d) If the actuary has a relationship with the client, the auditor may not use the actuary’s work.

Answer 21

a) The auditor is required to understand the objectives and scope of the actuary’s work.

This answer is correct because an auditor should obtain an understanding of the nature of the work performed by the specialist, including the objectives and scope. The auditor should also understand the specialist’s relationship to the client, the methods or assumptions used (including a comparison with the preceding period), the appropriateness of using the specialist’s work, and the form and content of the specialist’s findings.

Question 22

22. Which of the following is not a specialist upon whose work an auditor may rely?

a) Actuary.
b) Appraiser.
c) Internal auditor.
d) Engineer.

Answer 22

c) Internal auditor.

This answer is correct because the professional standards relating to the work of a specialist do not apply to the work of an internal auditor.

Question 23

23. Which of the following has the lowest authoritative status but may be useful in assisting the auditor in applying the SASs?

a) Statements on Auditing Standards.
b) Auditing Statements of Position.
c) Journal of Accountancy articles.
d) Auditing Interpretations.

Answer 23

c) Journal of Accountancy articles.

This answer is correct because Journal of Accountancy articles have no authoritative status but may be useful in applying SASs.

Question 24

24. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?

a) Presumptive.
b) Judgmental.
c) Criticizing.
d) Questioning.

Answer 24

d) Questioning.

This answer is correct because auditors must maintain a questioning mind and exercise professional skepticism.

Question 25

25. Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?
    a) Disagreements regarding management’s judgment about accounting estimates for goodwill.
    b) Disagreements about the scope of the audit.
    c) Disagreements in the application of accounting principles relating to software development costs.
    d) Disagreement of the amount of LIFO inventory layer based on preliminary information.

Answer 25

d) Disagreement of the amount of LIFO inventory layer based on preliminary information.

This answer is correct because it is based only on preliminary information and may well be satisfactorily resolved.

Question 26

26. An independent auditor must have which of the following?
    a) A preexisting and well-informed point of view with respect to the audit.
    b) Technical training that is adequate to meet the requirements of a professional.
    c) A background in many different disciplines.
    d) Experience in taxation that is sufficient to comply w/ GAAS.

Answer 26

b) Technical training that is adequate to meet the requirements of a professional.

This answer is correct because GAAS require that an auditor have adequate technical training.

Question 27

27. Which of the following statements most likely would be included in an engagement letter from an auditor to a client?
    a) The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.
    b) The CPA firm is responsible for ensuring that the client complies with applicable laws.
    c) The CPA firm will involve information technology specialists in the performance of the audit.
    d) The CPA firm will adjust the financial statements to correct misstatements before issuing a report.

Answer 27

c) The CPA firm will involve information technology specialists in the performance of the audit.

This answer is correct because an engagement letter may include information on the anticipated use of specialists.

Question 28

28. The understanding w/ the client regarding a F/S audit generally includes which of the following matters?
    a) expected opinion to be issued.
    b) responsibilities of the auditor.
    c) contingency fee structure.
    d) preliminary judgment about materiality.

Answer 28

b) responsibilities of the auditor.

This is correct because the understanding must include auditor responsibilities (as well as management responsibilities).

Question 29

29. What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?
    a) Assess control risk at the minimum level.
    b) Perform both tests of controls and substantive tests on inventory.
    c) Perform only substantive tests on inventory.
    d) Perform only tests of controls on inventory.

Answer 29

c) Perform only substantive tests on inventory.

This answer is correct because in those circumstances performing tests of controls is not cost effective.

Question 30

30. Which of the following is a risk factor relating to the misappropriation of assets?
    a) Large amounts of cash on hand.
    b) High turnover of legal counsel.
    c) Inability to generate positive cash flows from operations.
    d) Overly complex organizational structure involving numerous legal entities.

Answer 30

a) Large amounts of cash on hand.

This answer is correct because the existence of large amounts of cash on hand may lead to the misappropriation of assets.

Question 31

31. Which of the following, if material, would be fraud as defined in Statements on Auditing Standards?
    a) Errors in the application of accounting principles.
    b) Errors in the accounting data underlying the financial statements.
    c) Misinterpretation of facts that existed when the financial statements were prepared.
    d) Misappropriation of assets.

Answer 31

d) Misappropriation of assets.

This answer is correct because the term “fraud” refers to intentional distortions of financial statements such as deliberate misrepresentations.

Question 32

32. Which of the following is a conceptual similarity between generally accepted auditing standards and the attestation standards?
    a) Both sets of standards require the CPA to report on the adequacy of disclosure in the financial statements.
    b) All of the standards of fieldwork in generally accepted auditing standards are included in the attestation standards.
    c) The requirement that the CPA be independent in mental attitude is included in both sets of standards.
    d) Both sets of standards are applicable to engagements regarding financial forecasts and projections.

Answer 32

c) The requirement that the CPA be independent in mental attitude is included in both sets of standards.

This answer is correct because both sets of standards require an independence in mental attitude.

Question 33

33. A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor’s
    a) Understanding of the reasons for the change in auditors.
    b) Methodology used in applying sampling techniques.
    c) Opinion on subsequent events that have occurred since the balance sheet date.
    d) Perception of the competency and reliance on the client’s internal audit function.

Answer 33

a) Understanding of the reasons for the change in auditors.

Inquiries ordinarily include questions on integrity of management, disagreements with management, and communications with the audit committee regarding fraud, illegal act, and internal control related matters.

Question 34

34. A predecessor auditor
    a) Must attempt communication w/ a successor auditor prior to accepting the engagement.
    b) Must attempt communication w/ a successor auditor after the engagement has been accepted.
    c) Must attempt communication w/ a successor auditor prior to acceptance of the engagement and may choose to attempt communication after the engagement has been accepted.
    d) Isn’t required to attempt communication w/ a successor since this is the successor’s responsibility.

Answer 34

d) Isn’t required to attempt communication w/ a successor since this is the successor’s responsibility.

This answer is correct because the successor auditor must attempt communication with the predecessor auditor either prior to accepting the engagement, or after the engagement has been accepted, or both. It is the successor’s responsibility, not the predecessor auditor’s responsibility.

Question 35

35. Holding all other factors constant, decreasing the extent of substantive audit procedures for accounts payable ordinarily has what effect on audit risk?

a) Increases.
b) Decreases.
c) No effect.
d) Indeterminate.

Answer 35

a) Increases.

Decreasing the extent of substantive audit procedures increases detection risk, and this will increase audit risk when all other factors remain constant.

Question 36

36. Which of the following is a definition of control risk?
    a) The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s system of internal control.
    b) The risk that the auditor will not detect a material misstatement.
    c) The risk that the auditor’s assessment of internal control will be at less than the maximum level.
    d) The susceptibility of material misstatement assuming there are no related internal control policies or procedures.

Answer 36

a) The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s system of internal control.

This answer is correct because control risk is the risk that material misstatement will not be prevented or detected on a timely basis by the client’s system of internal control.

Question 37

37. An auditor who uses the work of a specialist may refer to the specialist in the auditor’s report if the
    a) Auditor believes that the specialist’s findings are reasonable in the circumstances.
    b) Specialist’s findings support the related assertions in the financial statements.
    c) Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset.
    d) Specialist’s findings provide the auditor with greater assurance of reliability about management’s representations.

Answer 37

c) Auditor modifies the report because of the difference between the client’s and the specialist’s valuations of an asset.

This answer is correct because an auditor only refers to a specialist when that specialist’s findings do not support the related assertions in the financial statements—here valuation of an asset.

Question 38

38. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
    a) Timing of inventory observation procedures to be performed.
    b) Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
    c) Procedures to be undertaken to discover litigation, claims, and assessments.
    d) Pending legal matters to be included in the inquiry of the client’s attorney.

Answer 38

a) Timing of inventory observation procedures to be performed.

This answer is correct because the auditor will normally wish to observe the counting of inventory and there is therefore a need for coordination of timing between the auditor and the client.

Question 39

39. Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
    a) Make a preliminary judgment about materiality.
    b) Confirm a sample of the entity’s accounts payable with known creditors.
    c) Obtain written representations from management that there are no unrecorded transactions.
    d) Communicate management’s initial selection of accounting policies to the audit committee.

Answer 39

a) Make a preliminary judgment about materiality.

This is correct because when planning the audit the auditor should determine a materiality level for the financial statements when establishing the overall audit strategy for the audit.

Question 40

40. An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?

a) Checklists.
b) Working papers.
c) Analytical procedures.
d) F/Ss.

Answer 40

b) Working papers.

This answer is correct because an audit supervisor will review working papers to make such a determination.

Question 41

41. In using the work of a specialist, an auditor may refer to the specialist in the auditor’s report if, as a result of the specialist’s findings, the auditor
    a) Desires to disclose the specialist’s findings, which imply that a more thorough audit was performed.
    b) Makes suggestions to management that are likely to improve the entity’s internal control.
    c) Corroborates another specialist’s findings that were consistent with management’s assertions.
    d) Adds an explanatory paragraph to the auditor’s report to emphasize an unusually important subsequent event.

Answer 41

d) Adds an explanatory paragraph to the auditor’s report to emphasize an unusually important subsequent event.

This answer is correct because the specialist is only referred to when that report directly relates to a matter resulting in modification of the report—here an important subsequent event. It might also involve a case in which a specialist’s valuation differs from management’s valuation.

Question 42

42. Which of the following elements underlies the application of GAAS, particularly the standards of fieldwork &reporting?
    a) materiality and audit risk.
    b) internal control.
    c) corroborating evidence.
    d) reasonable assurance.

Answer 42

a) materiality and audit risk.

This answer is correct because the elements of materiality and audit risk underlie the application of all the standards, particularly the standards of fieldwork and reporting.

Question 43

43. An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?
    a) Send confirmations for all new customer balances incurred from the interim date to year-end.
    b) Resend confirmations for any significant customer balances remaining at year-end.
    c) Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.
    d) Review cash collections subsequent to the interim date and the year-end.

Answer 43

c) Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

This answer is correct because an auditor will review significant changes in balances.

Question 44

44. Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the
    a) Adequacy of the audit plan.
    b) Ability to establish consistency in application of accounting principles between years.
    c) Apparent scope limitation.
    d) Integrity of management.

Answer 44

d) Integrity of management.

This answer is correct since obtaining evidence relative to the integrity of management is one of the objectives to be accomplished during such a review.

Question 45

45. In which of the following instances would an auditor be least likely to require the assistance of a specialist?
    a) Assessing the valuation of inventories of artworks.
    b) Determining the quantities of materials stored in piles on the ground.
    c) Determining the value of unlisted securities.
    d) Ascertaining the assessed valuation of fixed assets.

Answer 45

d) Ascertaining the assessed valuation of fixed assets.

This answer is correct because it is unlikely that an auditor will be concerned with the assessed valuation of fixed assets. Historical cost of fixed assets would be of audit interest and generally available.

Question 46

46. An auditor reviews a client’s accounting policies and procedures when considering which of the following planning matters?
    a) Method of sampling to be used.
    b) Preliminary judgments about materiality levels.
    c) Nature of reports to be rendered.
    d) Understanding of the client’s operations & business.

Answer 46

d) Understanding of the client’s operations & business.

This answer is correct because such information provides overall guidance to help an auditor understand the client’s operations and business.

Question 47

47. Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?
    a) Use smaller, rather than larger, sample sizes.
    b) Perform substantive tests as of an interim date.
    c) Select more effective substantive tests.
    d) Select more effective substantive tests.

Answer 47

c) Select more effective substantive tests.

This is correct because a high risk of material misstatement requires that the auditor increase the scope of audit procedures through their nature (e.g., obtain more reliable evidence), timing (year-end testing) and/or extent (e.g., take larger sample sizes).

Question 48

48. An auditor is concerned about a policy of management override as a limitation of internal control. Which of the following tests would best assess the validity of the auditor’s concern?
    a) Matching purchase orders to accounts payable.
    b) Verifying that approved spending limits are not exceeded.
    c) Tracing sales orders to the revenue account.
    d) Reviewing minutes of board meetings.

Answer 48

b) Verifying that approved spending limits are not exceeded.

This answer is correct because management override often evidences itself through exceeding approved spending limits—thus, finding that those limits have not been exceeded provides some evidence that at least that form of management override did not occur.

Question 49

49. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining
    a) Whether the predecessor’s work should be utilized.
    b) Whether the company follows the policy of rotating its auditors.
    c) Whether in the predecessor’s opinion internal control of the company has been satisfactory.
    d) Whether the engagement should be accepted.

Answer 49

d) Whether the engagement should be accepted.

This answer is correct because the successor auditor is required to communicate with the predecessor auditor to obtain information concerning the client to help determine whether the engagement should be accepted.

Question 50

50. Which of the following types of services is most directly designed to improve the quality of information, or its context, for decision makers?

a) Assurance services
b) Attestation services
c) Audit services
d) Consulting services

Answer 50

a) Assurance services

This answer is correct because the Special Committee on Assurance Services (the Elliott Committee), defined assurance services as independent professional services that improve quality of information, or its context, for decision makers.

Question 51

51. Which of the following is correct concerning PCAOB guidance that uses the term “must”?
    a) The auditor must fulfill the responsibilities if relevant to the audit.
    b) The auditor must comply with requirements unless s/he demonstrates that alternative actions were sufficient to achieve the objectives of the standards.
    c) The auditor should consider the guidance; whether the auditor follows depends on exercise of professional judgment in the circumstances.
    d) The auditor has complete discretion as to whether to perform the procedure.

Answer 51

a) The auditor must fulfill the responsibilities if relevant to the audit.

This answer is correct because terms such as “must,” “shall,” and “is required to” are used to indicate that the auditor must fulfill the responsibilities if those responsibilities are relevant to the audit being performed.

Question 52

52. Individuals who commit fraud are ordinarily able to rationalize the act and have
    a) Incentive - Yes; Professional skepticism - Yes
    b) Incentive - Yes; Professional skepticism - No
    c) Incentive - No; Professional skepticism - Yes
    d) Incentive - No; Professional skepticism - No

Answer 52

b) Incentive - Yes; Professional skepticism - No

This answer is correct because the three conditions generally present when fraud occurs are that individuals have an (1) incentive or pressure, (2) opportunity, and (3) ability to rationalize.

Question 53

53. Which of the following professional services would be considered an attest engagement?
    a) A management consulting engagement to provide computerized advice to a client.
    b) An engagement to report on compliance with statutory requirements.
    c) An income tax engagement to prepare federal and state tax returns.
    d) An engagement to prepare the tax returns of the company’s CEO.

Answer 53

b) An engagement to report on compliance with statutory requirements.

This answer is correct because a report on compliance with statutory requirements might be structured as an attest engagement in which the required “written assertion” relates to such compliance.

Question 54

54. Which of the following is most likely to be an overall response to fraud risks identified in an audit?
    a) Supervise members of the audit team less closely and rely more upon judgment.
    b) Increase consideration of management’s selection and application of accounting principles.
    c) Use only accountants with multiple years of experience on the engagement.
    d) Increase emphasis on the audit of transactions in all areas of the audit.

Answer 54

b) Increase consideration of management’s selection and application of accounting principles.

This answer is correct because overall responses to the risk of material misstatement due to fraud include (1) assigning personnel with particular skills relating to the area and considering the necessary extent of supervision to the audit, (2) increasing the consideration of management’s selection and application of accounting principles, and (3) making audit procedures less predictable.

Question 55

55. An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should
    a) Engage financial experts familiar with the nature of the business entity.
    b) Obtain a knowledge of matters that relate to the nature of the entity’s business.
    c) Refer a substantial portion of the audit to another CPA who will act as the principal auditor.
    d) First inform management that an unqualified opinion cannot be issued.

Answer 55

b) Obtain a knowledge of matters that relate to the nature of the entity’s business.

This answer is correct because an auditor who accepts an engagement and does not possess sufficient industry expertise should attempt to obtain knowledge of the matters that relate to the nature of the entity’s business organization and its operating characteristics.

Question 56

56. The primary responsibility for the adequacy of disclosure in the F/Ss of a publicly held company rests w/ the
    a) Partner assigned to the audit engagement.
    b) Mgmt of the company.
    c) Auditor in charge of the fieldwork.
    d) SEC

Answer 56

b) Mgmt of the company.

This answer is correct because financial statements are the representations of management, and they have the responsibility for producing proper financial statements.

Question 57

57. An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes
    a) The auditor’s responsibility for determining the preliminary judgments about materiality and audit risk factors.
    b) Management’s responsibility for identifying mitigating factors when the auditor has doubt about the entity’s ability to continue as a going concern.
    c) The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor’s attention.
    d) Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

Answer 57

c) The auditor’s responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor’s attention.

This answer is correct because the auditor must report to the audit committee significant deficiencies, and accordingly, the auditor will include such information while establishing an understanding with a client.

Question 58

58. An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the
    a) Illegal act affects the auditor’s ability to rely on mgmt representations.
    b) Illegal act has material F/S implication.
    c) Illegal act has received widespread publicity.
    d) Auditor cannot reasonably estimate the effect of the illegal act on the F/Ss.

Answer 58

a) Illegal act affects the auditor’s ability to rely on mgmt representations.

This answer is correct because the auditor must consider the effects of illegal acts on his/her ability to rely on management’s representations and the possible effects of continuing his/her association with the client.

Question 59

59. When an auditor becomes aware of a possible client illegal act, the auditor should obtain an understanding of the nature of the act to
    a) Increase the assessed level of control risk.
    b) Recommend remedial actions to the audit committee.
    c) Evaluate the effect on the F/Ss.
    d) Determine the reliability of management’s representations.

Answer 59

c) Evaluate the effect on the F/Ss.

This answer is correct because when an auditor becomes aware of information concerning a possible illegal act, he or she should obtain an understanding of the nature of the act, the circumstances in which it occurred, and sufficient other information to evaluate its effect on the financial statements.

Question 60

60. What is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client?
    a) The successor auditor has no responsibility to contact the predecessor auditor.
    b) The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.
    c) The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.
    d) The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.

Answer 60

b) The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.

This answer is correct because permission must be obtained from the prospective client before contact with the predecessor is attempted. The successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is received.

Question 61

61. Before accepting an engagement to audit a new client that has previously been audited by another CPA firm, a CPA is required to obtain
    a) An assessment of fraud risk factors likely to cause material misstatements.
    b) An understanding of the prospective client’s industry and business.
    c) The prospective client’s signature to a written engagement letter.
    d) The prospective client’s consent to make inquiries of the predecessor.

Answer 61

d) The prospective client’s consent to make inquiries of the predecessor.

This answer is correct because a CPA must obtain the prospective client’s consent to make inquiries of the predecessor; ordinarily, such inquiries are then made.

Question 62

62. When establishing an understanding with an audit client, that understanding should be documented
    a) Through use of an engagement letter.
    b) Through a written communication with the client.
    c) Either orally or in writing with the client.
    d) In a manner completely based on the auditor’s seasoned professional judgment.

Answer 62

b) Through a written communication with the client.

This answer is correct because the professional standards state that the communication should be in writing.

Question 63

63. Which of the following procedures would a CPA most likely perform in the risk assessment stage of a financial statement audit?
    a) Obtain representations from management regarding the availability of all financial records.
    b) Communicate with the audit committee concerning the prior year’s audit adjustments.
    c) Make inquiries of the client’s attorney regarding pending and threatened litigation and assessments.
    d) Compare recorded financial information with anticipated results from budgets and forecasts.

Answer 63

d) Compare recorded financial information with anticipated results from budgets and forecasts.

This answer is correct because comparing recorded financial information with anticipated results from budgets and forecast is an analytical procedure often performed during risk assessment of the audit.

Question 64

64. Which of the following statements is correct regarding the auditor’s consideration of the possibility of illegal acts by clients?
    a) The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that no illegal acts have been committed by clients.
    b) The auditor’s training, experience, and understanding of the client should be used to provide a basis for the determination as to whether illegal acts have occurred.
    c) If specific information concerning an illegal act comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.
    d) If an illegal act has occurred, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole.

Answer 64

c) If specific information concerning an illegal act comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

This answer is correct because when specific information concerning an illegal act comes to the auditor’s attention, the auditor must follow up on it.

Question 65

65. When an outside specialist has assumed full responsibility for taking the client’s physical inventory, reliance on the specialist’s report is acceptable if:
    a) The auditor is satisfied through the application of appropriate procedures as to the reputation and competence of the specialist.
    b) Circumstances made it impracticable or impossible for the auditor either to do the work personally or observe the work done by the inventory firm.
    c) The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.
    d) The auditor’s report contains a reference to the assumption of full responsibility.

Answer 65

c) The auditor conducted the same audit tests and procedures as would have been applicable if the client employees took the physical inventory.

This answer is correct because when a CPA has conducted the same tests as s/he would have if client employees had taken the inventory, sufficient evidence will normally have been collected. In fact, in many such circumstances the CPA may reduce the extent of his/her work.

Question 66

66. Which of the following is not required when considering fraud in a financial statement audit?
    a) Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit.
    b) Conduct an audit team discussion of the risk of material misstatement due to fraud.
    c) Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor.
    d) Inquire of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

Answer 66

c) Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor.

This answer is correct because professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence—it does not assume that balances are incorrect until documented by the auditor.

Question 67

67. Detection risk differs from both control risk and inherent risk in that detection risk
    a) Exists independently of the financial statement audit.
    b) Can be changed at the auditor’s discretion.
    c) Arises from risk factors relating to fraud.
    d) Should be assessed in nonquantitative terms.

Answer 67

b) Can be changed at the auditor’s discretion.

This answer is correct because auditors determine an appropriate level of detection risk based on their assessment of the risk of material misstatement—composed of inherent risk and control risk.

Question 68

68. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatement arising from fraudulent financial reporting?
    a) There is a lack of interest by management in maintaining an earnings trend.
    b) Computer hardware is usually sold at a loss before being fully depreciated.
    c) Management had frequent disputes with the auditor on accounting matters.
    d) Monthly bank reconciliations usually include several large checks outstanding.

Answer 68

c) Management had frequent disputes with the auditor on accounting matters.

This answer is correct because disputes between management and the auditor on accounting matters represents a risky situation.

Question 69

69. In using the work of a specialist, an understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed by the specialist. Preferably, the understanding should be documented and would include all of the following except
    a) The objectives and scope of the specialist’s work.
    b) The specialist’s representations as to his relationship, if any, to the client.
    c) The specialist’s understanding of the auditor’s corroborative use of the specialist’s findings in relation to the representations in the financial statements.
    d) A statement that the methods or assumptions to be used are not inconsistent with those used by the client.

Answer 69

d) A statement that the methods or assumptions to be used are not inconsistent with those used by the client.

This answer is correct because the assumptions used by a specialist in certain circumstances may be inconsistent with those used by the client.

Question 70

70. If, during an audit, the successor auditor becomes aware of information that may indicate that financial statements reported on by the predecessor auditor may require revision, the successor auditor should
    a) Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.
    b) Notify the client and the predecessor auditor of the matter and ask them to attempt to resolve it.
    c) Notify the predecessor auditor who may be required to revise the previously issued financial statements and auditor’s report.
    d) Ask the predecessor auditor to arrange a meeting with the client to discuss and resolve the matter.

Answer 70

a) Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.

This answer is incorrect because this communication should not occur without the client’s permission.

Question 71

71. In which of the following circumstances is it least likely that the auditor will have a responsibility to disclose a fraudulent act to parties other than the client’s senior management and its audit committee?
    a) In response to a successor auditor.
    b) To comply with legal and regulatory requirements.
    c) In response to question raised by an analyst who follows the stock of the company.
    d) To a funding agency in accordance with requirement for audit of entities that receive governmental financial assistance.

Answer 71

c) In response to question raised by an analyst who follows the stock of the company.

This answer is correct because an auditor will not ordinarily disclose a fraudulent act in response to a question raised by an analyst.

Question 72

72. An auditor’s communication with the audit committee is required to include the
    a) Basis for the auditor’s preliminary judgment about materiality.
    b) Justification for the auditor’s selection of sampling methods.
    c) Discussion of disagreements with management about matters that significantly impact the entity’s financial statements.
    d) Assessment of the quality of the entity’s earnings as compared to the previous year.

Answer 72

c) Discussion of disagreements with management about matters that significantly impact the entity’s financial statements.

This answer is correct because a discussion of disagreements with management is required.

Question 73

73. A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by
    a) Establishing an understanding with each client concerning individual responsibilities in a signed engagement letter.
    b) Assessing the risk that errors and fraud may cause the financial statements to contain material misstatements.
    c) Developing specific audit objectives to support management’s assertions that are embodied in the financial statements.
    d) Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.

Answer 73

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

This is correct because the purpose of a system of quality control is to assure a CPA firm that it complies with professional standards and applicable regulatory and legal requirements, and that the firm or engagement partners issue reports that are appropriate in the circumstances.

Question 74

74. During an audit there is ordinarily a presumption of overstatements relating to

a) Payroll.
b) Revenue.
c) Purchasing.
d) Inventory.

Answer 74

b) Revenue.

This answer is correct because the professional standards suggest that there is a presumption that improper revenue recognition is a fraud risk.

Question 75

75. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
    a) There are significant related-party transactions that management claims occurred in the ordinary course of business.
    b) Internal control activities requiring the segregation of duties are subject to management override.
    c) Management continues to employ an inefficient system of information technology to record financial transactions.
    d) It is unlikely that sufficient appropriate evidence is available to support an opinion on the F/Ss.

Answer 75

d) It is unlikely that sufficient appropriate evidence is available to support an opinion on the F/Ss.

This answer is correct because the lack of sufficient appropriate evidence ordinarily negates the purpose of an audit, which is to have the CPA form an opinion on the financial statements.

Question 76

76. Which of the following is least likely to be included in the auditor’s risk assessment process to identify and assess the risks of material misstatement?
    a) Identify risks.
    b) Relate risks to what can go wrong at the relevant assertion level.
    c) Consider whether risks are of a magnitude that could result in a misstatement that could be material.
    d) Consider the likelihood that risks could result in misstatements of an amount which is less than material.

Answer 76

d) Consider the likelihood that risks could result in misstatements of an amount which is less than material.

This answer is correct because an auditor must consider the likelihood of risks of material misstatements, not misstatements less than material.

Question 77

77. Which of the following information that comes to an auditor’s attention most likely would raise a question about the occurrence of illegal acts?
    a) The exchange of property for similar property in a nonmonetary transaction.
    b) The discovery of unexplained payments made to government employees.
    c) The presence of several difficult-to-audit transactions affecting expense accounts.
    d) The failure to develop adequate procedures that detect unauthorized purchases.

Answer 77

b) The discovery of unexplained payments made to government employees.

This answer is correct because unexplained payments made to government employees may well not be legal (e.g., they may be illegal bribes).

Question 78

78. Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets?
    a) A large number of bearer bonds on hand.
    b) A large number of inventory items with low sales prices.
    c) A large number of transactions processed in a short period of time.
    d) A large number of fixed assets with easily identifiable serial numbers.

Answer 78

a) A large number of bearer bonds on hand.

This is correct because bearer bonds may be sold by anyone—thus, if stolen, those bonds can be easily converted into cash that may be stolen.

Question 79

79. According to the AICPA Statements on Standards for Attestation Engagements, a public accounting firm should establish quality control policies to provide assurance about which of the following matters related to agreed-upon procedures engagements?
    a) Use of the report is not restricted.
    b) The public accounting firm takes responsibility for the sufficiency of procedures.
    c) The practitioner is independent from the client and other specified parties.
    d) The practitioner sets the criteria to be used in the determination of findings.

Answer 79

c) The practitioner is independent from the client and other specified parties.

This is correct because the quality control standards require compliance with relevant ethical requirements, including independence for all attestation engagements.

Question 80

80. Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
    a) A high turnover of senior management.
    b) A lack of independent checks.
    c) A strained relationship between management and the predecessor auditor.
    d) An inability to generate cash flow from operations.

Answer 80

b) A lack of independent checks.

This answer is correct because a lack of independent checks makes possible misappropriation of assets.

Question 81

81. In performing an attestation engagement, a CPA typically
    a) Supplies litigation support services.
    b) Assesses control risk at a low level.
    c) Expresses a conclusion about the assertion on the subject matter.
    d) Provides management consulting advice.

Answer 81

c) Expresses a conclusion about the assertion on the subject matter.

This answer is correct because, when performing an attest engagement, a CPA expresses a conclusion about the assertion on the subject matter.

Question 82

82. Following the Professional Standards which of the following is not one of the assertions made by management for account balances?
    a) Completeness.
    b) Existence.
    c) Valuation and allocation.
    d) Relevance and reliability.

Answer 82

d) Relevance and reliability.

This answer is correct because relevance and reliability is not included in the professional standards as an account balance assertion.

Question 83

83. Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
    a) Staff will need to be rescheduled to cover this new client.
    b) There will be a client-imposed scope limitation.
    c) The firm will have to hire a specialist in one audit area.
    d) The client’s financial reporting system has been in place for 10 years.

Answer 83

b) There will be a client-imposed scope limitation.

This answer is correct because management is responsible for making all financial records and related information available to the auditor—a client-imposed scope limitation is likely to present significant problems in that it raises questions as to why management would restrict the scope of the audit.

Question 84

84. An auditor’s engagement letter most likely would include a statement that
    a) Lists potential significant deficiencies discovered during the prior year’s audit.
    b) Explains the analytical procedures that the auditor expects to apply.
    c) Describes the auditor’s responsibility to evaluate going-concern issues.
    d) Limits the auditor’s responsibility to detect errors and fraud.

Answer 84

d) Limits the auditor’s responsibility to detect errors and fraud.

This answer is correct because essential to an engagement letter is identifying the limits on an auditor’s responsibility for detecting errors and fraud.

Question 85

85. In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
    a) The internal audit department’s objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee.
    b) The risk that the internal control system will not detect a material misstatement of a financial statement assertion.
    c) The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion.
    d) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

Answer 85

d) The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

This answer is correct since it in essence states the definition of inherent risk.

Question 86

86. An auditor’s engagement letter most likely would include a statement regarding
    a) Management’s responsibility to provide certain written representations to the auditor.
    b) Conditions under which the auditor may modify the preliminary judgment about materiality.
    c) Internal control activities that would reduce the auditor’s assessment of control risk.
    d) Materiality matters that could modify the auditor’s preliminary assessment of fraud risk.

Answer 86

a) Management’s responsibility to provide certain written representations to the auditor.

This answer is correct because the professional standards state that information on management’s responsibility to provide certain written representations is ordinarily included in the understanding an auditor obtains with management through inclusion in an engagement letter.

Question 87

87. An auditor gathers information necessary to identify risks of material misstatement due to fraud by
    a) Inquiry of management - Yes; Considering fraud risk factors - Yes
    b) Inquiry of management - Yes; Considering fraud risk factors - No
    c) Inquiry of management - No; Considering fraud risk factors - Yes
    d) Inquiry of management - No; Considering fraud risk factors - No

Answer 87

a) Inquiry of management - Yes; Considering fraud risk factors - Yes

This answer is correct because, when obtaining information needed to identify risks of material misstatement due to fraud, the professional standards require inquiries of management, consideration of results of analytical procedures, consideration of fraud risk factors, and consideration of certain other information. In addition, a discussion among engagement personnel regarding the risks of material misstatement due to fraud is required.

Question 88

88. Which of the following is least likely to include a reference to the use of a specialist?

a) Unqualified opinion.
b) Adverse opinion.
c) Qualified opinion.
d) Disclaimer of opinion.

Answer 88

a) Unqualified opinion.

This answer is correct because when issuing an unqualified opinion, the auditor should not refer to the work or findings of the specialist. When an auditor decides to modify the audit opinion as a result of the report or findings of the specialist, reference to and identification of the specialist may be made in the auditor’s report if the auditor believes such reference will facilitate understanding.

Question 89

89. Which of the following is an example of fraudulent financial reporting?
    a) Company management improperly records as revenue the proceeds of a loan.
    b) The treasurer diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses.
    c) An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.
    d) An employee bills his company for products not received, using the name of a fictitious supplier.

Answer 89

a) Company management improperly records as revenue the proceeds of a loan.

This answer is correct because fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users and improperly recording the revenue results in such misstatements.

Question 90

90. As a lower acceptable level of materiality is established, the auditor should plan more work on individual accounts to
    a) Find smaller misstatements.
    b) Find larger misstatements.
    c) Increase the tolerable misstatement in the accounts.
    d) Decrease the risk of assessing control risk too low.

Answer 90

a) Find smaller misstatements.

This answer is correct because a decrease in acceptable levels of materiality requires the auditor to do one or more of the following: (1) select a more effective auditing procedure, (2) perform auditing procedures closer to the balance sheet date, or (3) increase the extent of a particular auditing procedure. By increasing the extent of a procedure concerning an individual account and/or selecting a more effective procedure, the auditor will find the smaller misstatements that in aggregate might exceed his preliminary judgments about materiality. The auditor, therefore, must plan to find smaller misstatements as a lower acceptable level of materiality is established.

Question 91

91. Which of the following need not be documented in relation to the auditor’s consideration of fraud?
    a) Nature of communications about fraud made to management.
    b) Procedures performed to obtain information to identify and assess risks of material misstatement due to fraud.
    c) Specific risks of material misstatement due to fraud that were identified.
    d) The assessed level of the risk of management override of controls.

Answer 91

d) The assessed level of the risk of management override of controls.

This answer is correct because while auditors must consider the risk of management override of controls, no such assessment need be made as part of an audit.

Question 92

92. Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?
    a) Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of acceptance of the engagement.
    b) Assessment of control risk below the maximum level.
    c) Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.
    d) Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

Answer 92

d) Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

This answer is correct because if the auditor is able to remedy (reduce) the effects of the limitation, acceptance may be appropriate.

Question 93

93. Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
    a) The details of most recorded transactions are not available after a specified period of time.
    b) Internal control activities requiring the segregation of duties are subject to management override.
    c) It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
    d) Management has a reputation for consulting with several accounting firms about significant accounting issues.

Answer 93

c) It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

This answer is correct because the objective of an audit of financial statements is the expression of an opinion on the financial statements; accordingly, when sufficient appropriate evidence is not available it is unlikely that an audit will be performed.

Question 94

94. Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?
    a) Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.
    b) The firm must address all independence impairment issues on the date of the audit opinion.
    c) Communications related to independence may occur in any form prior to issuance for the financial statements.
    d) Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be though to bear on independence.

Answer 94

d) Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be though to bear on independence.

This answer is correct because the PCAOB requires that prior to accepting an initial engagement the CPA firm describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

Question 95

95. With respect to planning of a year-end audit, which of the following statements is always true?
    a) An engagement should not be accepted after the fiscal year-end.
    b) An inventory count must be observed at the balance sheet date.
    c) The client’s audit committee should not be told of the specific audit procedures which will be performed.
    d) It is an acceptable practice to carry out substantial parts of the examination at interim dates.

Answer 95

d) It is an acceptable practice to carry out substantial parts of the examination at interim dates.

This answer is correct because it is an acceptable practice for the auditor to carry out substantial parts of the examination at interim dates.

Question 96

96. The auditor may refer to and identify a specialist in the auditor’s report if the auditor
    a) Expresses an unmodified (unqualified) opinion.
    b) Believes it will facilitate an understanding of the reason for modification of the report.
    c) Wishes to indicate a division of responsibility.
    d) Wishes to emphasize the thoroughness of the audit.

Answer 96

b) Believes it will facilitate an understanding of the reason for modification of the report.

This answer is correct because such reference is appropriate only when a report modification is being made as a result of the report or findings of the specialist.

Question 97

97. Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time?
    a) The specific matters to be included in the communication with the audit committee.
    b) The minimum amount of misstatements that may be considered to be significant deficiencies.
    c) The schedules and analyses that the client’s staff should prepare.
    d) The effects that inadequate controls may have over the safeguarding of assets.

Answer 97

c) The schedules and analyses that the client’s staff should prepare.

This answer is correct because at this early point in the audit process the auditor will discuss client assistance in the audit, including schedules and analyses to be prepared by the client’s staff.

Question 98

98. Which of the following is correct concerning a “fraud risk factor?”
    a) Its presence indicates that the risk of fraud is high.
    b) It has been observed in circumstances where frauds have occurred.
    c) It requires modification of planned audit procedures.
    d) It is also a material weakness in internal control.

Answer 98

b) It has been observed in circumstances where frauds have occurred.

This answer is correct because while fraud risk factors do not necessarily indicate the existence of fraud, they often have been observed in circumstances where frauds have occurred.

Question 99

99. Which of the following is not a likely response when an auditor has determined that a misstatement is, or may be, the result of fraud, and has determined that the effect on the financial statements may be material?
    a) Consider the implications for other aspects of the audit.
    b) Discuss the matter and approach to further investigation with an appropriate level of management.
    c) Attempt to obtain additional evidential matter to determine whether material fraud has occurred or is likely to have occurred.
    d) Suggest that the client contact a local law enforcement authority to report the possible fraud.

Answer 99

d) Suggest that the client contact a local law enforcement authority to report the possible fraud.

This answer is correct because in most circumstances of fraud it is unlikely that a CPA would suggest to a client that a local law enforcement authority be contacted.

Question 100

100. Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
     a) Obtaining a written representation letter from the client’s management.
     b) Examining documents to detect illegal acts having a material effect on the financial statements.
     c) Considering whether the client’s accounting estimates are reasonable in the circumstances.
     d) Determining the extent of involvement of the client’s internal auditors.

Answer 100

d) Determining the extent of involvement of the client’s internal auditors.

This answer is correct because the professional standards require determining the extent of involvement of the client’s internal auditors.

Question 101

101. Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and fraud?
     a) The auditor is responsible for the failure to detect material errors and fraud only when such failure results from the nonapplication of generally accepted accounting principles.
     b) Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the existence of fraud risk factors.
     c) The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to confirm receivables or observe inventories.
     d) Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and fraud may exist.

Answer 101

b) Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the existence of fraud risk factors.

This answer is correct because when fraud risk factors exist, the auditor should consider whether already designed procedures adequately consider the existence of fraud. When they do not, audit procedures must be extended.

Question 102

102. Which of the following activities would most likely be considered an attestation engagement?
     a) Consulting with management representatives of a firm to provide advice.
     b) Issuing a report about a firm’s compliance with laws and regulations.
     c) Advocating a client’s position on tax matters that are being reviewed by the IRS.
     d) Preparing a client’s tax returns

Answer 102

b) Issuing a report about a firm’s compliance with laws and regulations.

This answer is correct because the attest standards provide for issuance of a report about a firm’s compliance with laws and regulations.

Question 103

103. As guidance for measuring the quality of the performance of an auditor, the auditor should refer to
     a) Statements of the Financial Accounting Standards Board.
     b) GAAS
     c) Interpretations of the Statements on Auditing Standards.
     d) Statements on Quality Control Standards.

Answer 103

b) GAAS

This answer is correct because auditors are responsible for compliance with generally accepted auditing standards and comparison of their performance against these standards is appropriate.

Question 104

104. Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following matters do the auditor and management agree upon at this time?
     a) The appropriateness of the entity’s plans for dealing with adverse economic conditions.
     b) The determination of the fraud risk factors that exist within the client’s operations.
     c) The control weaknesses to be included in the communication with the audit committee.
     d) The coordination of the assistance of the client’s personnel in data preparation.

Answer 104

d) The coordination of the assistance of the client’s personnel in data preparation.

This answer is correct because very early in the engagement the auditor must determine how much assistance is needed of the client’s personnel, and must coordinate that assistance.