Performing Specific Procedures to Obtain Evidence -- External Confirmations Flashcards
A client uses a suspense account for unresolved questions whose final accounting has not been determined. If a balance remains in the suspense account at year end, the auditor would be most concerned about
A. Suspense debits that management believes will benefit future operations
B. Suspense debits that the auditor verifies will have realizable value to the client
C. Suspense credits that management believes should be classified as “Current liability”
D. Suspense credits that the auditor determines to be customer deposits
A.
Suspense debits that management believes will benefit future operations are assets. The auditor is most concerned that assets are not overstated and that liabilities are not understated. Suspense debits that the auditor verifies will have realizable value to the client are, insofar as the auditor knows, correct. Thus, for these items, there would be no overstatement. The other two answer options contain items that, if incorrect, would overstate liabilities.
Which of the following procedures most likely could assist an auditor in identifying related-party transactions?
A. Performing tests of controls concerning the segregation of duties
B. Evaluating the reasonableness of management’s accounting estimates
C. Reviewing confirmations of compensating balance arrangements
D. Scanning the accounting records for recurring transactions
C.
Business structure and operating style occasionally are designed deliberately to obscure relationships. Because compensating balance arrangements and non monetary transactions obscure the form of transactions,they are suspect. Compensating balance arrangements involve related parties more often than the other answer options. Segregation of duties applies whether the parties to a transaction are related or not. Reasonable and unreasonable accounting estimates both exist with and without related parties present. Entities frequently have recurring transactions with independent entities.
When an entity is required or permitted to disclose segment information in the financial statements
A. The auditor should obtain an understanding of the related industry standards as the applicable financial reporting framework may not include requirements for this level of presentation
B. The auditor is unlikely to perform analytical procedures on segment information
C. The auditor’s responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements as a whole
D. The auditor is required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a stand-alone basis
C.
The auditor’s responsibility regarding the presentation and disclosure of segment information is in relation to the financial statements as a whole. Accordingly(regarding incorrect answer d.), the auditor is not required to perform audit procedures that would be necessary to express an opinion on the segment information presented on a stand-alone basis.Regarding incorrect answer a., the applicable financial reporting framework (AFRF) is the likely source of guidance for management and the auditor. The AFRF may include requirements to disclose segment information; thus, the auditor should, rather than looking to industry standards, obtain an understanding of the methods used by management in determining segment information and evaluate whether such methods are likely to result in disclosure and presentation in accordance with the AFRF. When appropriate, the auditor should test the application methods and perform audit procedures. For example, when obtaining an understanding of management’s methods to determine segment information, the auditor may look at (1) the allocation of assets and costs among segments or (2) sales, transfers, and charges between segments and the elimination of inter segment amounts.Regarding incorrect answer b., the auditor may find it appropriate to perform analytical procedures or other audit procedures appropriate in the circumstances. Analytical procedures may help identify inconsistencies with prior period information.
According to the standards of the profession, which of the following events would require a CPA performing a consulting services engagement for a non-audit client to withdraw from the engagement?
I.The CPA has a conflict of interest that is disclosed to the client and the client consents to the CPA continuing the engagement.
II.The CPA fails to obtain a written understanding from the client concerning the scope of the engagement
A. I only
B. II only
C. Both I and II
D. Neither I nor II
The correct answer is (D).
According to the standards of the profession, a CPA is not required to be independent for consulting engagements with non-audit clients. The CPA need not withdraw from the engagement if there arises a conflict of interest that is fully disclosed to the client and the client consents to it. The understanding of the scope of the engagement may be written or oral.
Options (A), (B) and (C) are incorrect based on the above explanation.
According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services?
A. Examining a client’s prospective financial information
B. Preparing a client’s federal income tax return
C. Representing a client in an IRS examination of the client’s federal income tax return
D. Reviewing a client’s financial statements
C.
Rule 302 states that a member in public practice shall not offer or render services under an agreement whereby the fee is contingent upon the findings or results. Specified services include an audit or review of a financial statement, a compilation of a financial statement when the member reasonably might expect that a third party will use the statement, an examination of prospective financial information; or preparing an original or amended tax return or claim for a tax refund. Contingent fees in certain tax matters are permitted, including: a member representing a client in an examination by a revenue agent of the client’s federal or state income tax return; a member representing a client in connection with obtaining a private letter ruling, filing an amended return based on a tax issue that is the subject of a test case involving a different taxpayer or on which the taxing authority is developing a position.
In which of the following engagements would a practitioner provide limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date?
A. A compilation of a financial projection.
B. A review of pro-forma financial information.
C. An examination of Management’s Discussion and Analysis.
D. An audit of condensed interim financial information.
The correct answer is (B).
Pro-forma financial statements are used to demonstrate the effect of a future or hypothetical event by showing how it would have affected the historical financial statements if it had occurred during the period covered by those financial statements. The practitioner may either examine or review pro-forma financial statements and provide reasonable or limited assurance as to the assumptions and presentations of pro-forma data being reasonable. The practitioner providing limited assurance about the possible significant effects on the historical financial statements if a change in capitalization had occurred at an earlier date is a review of pro-forma financial information.
Which of the following statements is correct with regard to management use of a broker’s quotation to support a fair value estimate?
A. If the quotation is from the broker who initially sold the instrument, the evidence might be less objective and might need supplementation.
B. A broker’s quotation that is based on a cash flow methodology cannot be accepted.
C. The auditor is not required to obtain an understanding of the broker’s methodology for obtaining the fair value estimate.
D. A broker’s quotation that is based on a combination of methodologies cannot be accepted.
The correct answer is (A).
To audit management use of a broker’s quotation to support a fair value estimate auditor should obtain an understanding of how the broker developed the fair value, evaluate the degree of uncertainty associated with the fair value. The fair value must be reasonable and not subjective & susceptible to bias. A quotation from the broker who initially sold the instrument is less objective and must need supplementation.
A broker’s quotation that is based on a cash flow methodology can be accepted. The auditor is required to obtain an understanding of the broker’s methodology for obtaining the fair value estimate. A broker’s quotation that is based on a combination of methodologies can be accepted.
Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory?
A. Scanning perpetual inventory, production, and purchasing records
B. Examining paid vendor invoices
C. Tracing inventory items from the tag listing back to the physical inventory quantities
D. Performing cutoff procedures for shipping and receiving
D.
Performing cutoff procedures for shipping and receiving would be the best test for the completeness assertion as it applies to inventory. The completeness assertion means that all transactions that should have been recorded have been recorded. Many procedures test multiple assertions, so candidates must select the best answer—some of the other answers are better tests of other assertions. Scanning perpetual inventory, production, and purchasing records test accuracy. Examining paid vendor invoices tests accuracy and occurrence. Tracing inventory items from the tag listing back to the physical inventory quantities tests accuracy and existence.
Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?
A. Improvement of the audit trail for cash receipts and disbursements
B. Creation of self-monitoring access controls
C. Reduction of the frequency of data entry errors
D. Off-site storage of source documents for cash transactions
C.
With EDI, information is entered into a system once and transmitted to other parties. These other parties do not have to re-enter the information into their systems, eliminating an opportunity for errors to occur. Using EDI, audit trails typically are less clear, if anything. Creation of self-monitoring access controls and off-site storage of source documents for cash transactions could occur with or without EDI.
To measure how effectively an entity employs its resources, an auditor calculates inventory turnover by dividing average inventory into
A. Net sales
B. Cost of goods sold
C. Operating income
D. Gross sales
B.
The formula for inventory turnover is cost of goods sold divided by average inventory. Cost of goods sold includes only inventory related expenses and thus is the best value to use to compare to average inventory to calculate inventory turnover. Net sales, operating income, and gross sales are all based on the prices the entity charged the customers, not the actual costs to the company for the goods that were sold, and thus are not as closely related to the costs associated with inventory
When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant’s report and issue a(an)
A. Unqualified opinion with a separate explanatory paragraph
B. “Subject to” qualified opinion
C. “Except for” qualified opinion
D. Adverse opinion
D.
When a CPA examines a financial forecast that fails to disclose several assumptions that appear to be significant the CPA should describe the assumptions in the report and issue an adverse opinion.
Which of the following statements best explains why the CPA profession has found it essential to promulgate ethical standards and to establish means for ensuring their observance?
A. A distinguishing mark of a profession is its acceptance of responsibility to the public.
B. A requirement for a profession is to establish ethical standards that stress primary responsibility to clients and colleagues.
C. Ethical standards that emphasize excellence in performance over material rewards establish a reputation for competence and character.
D. Vigorous enforcement of an established code of ethics is the best way to prevent unscrupulous acts.
A.
The AICPA’s Code of Professional Conduct states that a distinguishing mark of a profession is its acceptance of responsibility to the general public.
Regarding a non-issuer’s compliance with laws and regulations, an auditor performing an audit of the entity’s financial statements is responsible for
A. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework
B. Preventing noncompliance with existing applicable laws and regulations that determine reported amounts and disclosures in the entity’s financial statements
C. Determining whether an act performed by the entity being audited constitutes noncompliance with existing applicable laws and regulations
D. Ensuring that the entity’s operations are conducted in accordance with the provisions of laws and regulations relevant to the entity’s financial statements
The correct answer is (A).
In the absence of identified or suspected non-compliance, the auditor is not required to perform audit procedures regarding the entity’s compliance with laws and regulations, But auditor should obtain a general understanding of the following:
Legal & regulatory framework applicable to the entity and its industry or sector
How the entity is complying with that framework
(B) is incorrect because the auditor is not responsible for preventing any non-compliance, but only for reporting any non-compliance, material misstatements, fraud, etc. Prevention is the duty of management and the internal audit team.
(C) is incorrect because the auditor is not responsible for determining whether an act performed by the entity being audited constitutes non-compliance with existing applicable laws and regulations.
(D) is incorrect because the auditor is not responsible for ensuring that the entity’s operations are conducted in accordance with the provisions of laws and regulations as the auditor is not required to perform audit procedures regarding the entity’s compliance with laws and regulations.
To provide assurance that each voucher is submitted and paid only once, an auditor most likely would examine a sample of paid vouchers and determine whether each voucher is
A. Stamped paid by the check signer
B. Returned to the vouchers payable department
C. Supported by a vendor’s invoice and purchase order
D. Prenumbered and accounted for
A.
The voucher and all supporting documents should be canceled (stamped paid) by the check signer to avoid duplicate payments. The return of the voucher to the vouchers payable department provides no control to prevent it from being paid more than once. Confirmation that each voucher is supported by a vendor’s invoice and purchase order provides evidence that the payment is based on a valid purchase, but would not stop a duplicate payment. Prenumbering and accounting for vouchers allows confirmation that all vouchers were recorded and should allow the discovery of a duplicate payment, but it would not prevent it.
When an auditor tests a computerized accounting system, which of the following is true of the test data approach?
A. Several transactions of each type must be tested.
B. Test data are processed by the client’s computer programs under the auditor’s control.
C. Test data must consist of all possible valid and invalid conditions.
D. The program tested is different from the program used throughout the year by the client.
B.
In the test data approach to testing a computerized accounting system, test data are processed by the client’s computer programs under the auditor’s control. The auditor will determine how many transactions and what types of transactions to test which may or may not include several transactions of each type. The auditor need not include test data for all possible valid and invalid conditions. The object is to test the client’s program that is used throughout the year and the auditor must take steps to make sure that the program being tested is the one that is actually used in routine processing; thus, a different program would not be tested.