Questions Flashcards
In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement?
for recurring transactions that do not involve a lot of judgment. Note that automated controls may be developed over all these options, but ordinarily they are easier to develop for high-volume and recurring type transactions.
A computer-assisted audit technique that is most likely to be effective in a continuous auditing environment is
Embedded audit modules.
The PCAOB has the authority to enforce SOX Title III, Section 303, in which type of proceedings?
The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in CIVIL proceedings.
An accountant’s standard report on a review of the financial statements of a nonissuer should state that the accountant:
A standard review report states that the accountant is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP (or the applicable financial reporting framework). This statement provides limited, not reasonable, assurance that the financial statements are free of material misstatement.A standard compilation report states that the accountant does not express an opinion or any form of assurance on the financial statements.An audit includes examining evidence, on a test basis, supporting the amounts and disclosures in the financial statements. A standard auditor’s report states that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement.
An accountant should perform analytical procedures during an engagement to:
Analytical and inquiry procedures are performed as part of a review engagement that allows the accountant to provide limited assurance on the reviewed financial statements. A compilation engagement provides no assurance on the compiled financial statements, thus no analytical procedures are performed.
In the standard report on condensed financial statements that is derived from an issuer’s audited financial statements, a CPA should indicate that the:
The standard report expressing an opinion on condensed financial statements (derived from audited financial statements) includes statements that: Example The CPA has audited (in accordance with GAAS) and expressed an opinion on the complete financial statements, noting the:• audit report date• type of opinionThe information presented in the condensed financial statements is fairly presented in all material respects in relation to the complete financial statements from which it was derived (which are presented in conformity with generally accepted accounting principles). The auditor does not express any assurance, limited or otherwise, concerning the condensed financial statements, except as stated above in relation to the complete financial statements.Just because the financial statements are condensed does not mean they were prepared in conformity with another comprehensive basis of accounting.
The members of the audit team, including the auditor with final responsibility for the audit, should discuss:
An engagement team discussion with the audit team is primarily to give guidance to the staff regarding the susceptibility of the entity’s financial statements to material misstatement. This conference is the first step in the supervision of the audit—instructing and directing assistants in the performance of the fieldwork.Staff suggestions concerning time budgets are discussed, and the need for using the work of specialists and internal auditors is established during the audit planning. Staff disagreements regarding technical issues are discussed, documented, and resolved when such disagreements arise during the course of the fieldwork.AU 314.14
Which of the following best describes the reason an auditor performs a walkthrough of transactions from inception through financial statement presentation?I. To ensure that the single transaction type involved in a walkthrough is properly recorded in the general ledgerII. To determine if a necessary control is missing or ineffectiveIII. To determine the different types of significant transactions handled by the process
While an auditor performing a walkthrough of transactions from inception through financial statement presentation could provide the auditor with all of the above, the nature of the walkthrough is meant to help the auditor to understand the full process (item III) and determine the effectiveness of controls (item II).An auditor is not expected to perform a walkthrough of each and every transaction type unless all controls are deemed ineffective (and as such, control risk is high).During a walkthrough, the auditor questions the company’s personnel about their understanding of what is required by the company’s prescribed procedures and controls. These probing questions, combined with the other walkthrough procedures, allow the auditor to gain a sufficient understanding of the process and to be able to identify important points at which a necessary control is missing or not designed effectively. Additionally, probing questions that go beyond a narrow focus on the single transaction used as the basis for the walkthrough allow the auditor to gain an understanding of the different types of significant transactions handled by the process.PCAOB Auditing Standard 5, paragraph 38
Which of the following is a management control method that most likely could improve management’s ability to supervise company activities effectively?
Establishing budgets and forecasts to identify variances from expectations
The problem asks which management control method could most likely improve management’s ability to supervise company activities effectively. This goal requires a control technique that communicates and monitors management’s expectations regarding all of the company’s activities.Monitoring compliance with internal controls imposed by regulatory bodies could improve the effectiveness in that particular area but it would not enhance management’s ability to supervise the company’s activities. Limiting direct access to assets would improve control over assets but this also would not improve management’s ability to supervise the company’s activities. Supporting employees with necessary resources would certainly aid in the accomplishment of company activities but would do nothing to help management’s ability to supervise those activities. Of all the answers provided, using budgets and forecasts and monitoring variances from them is the only management control method that could most likely improve management’s ability to supervise company activities effectively.
Section 408 of SOX Title IV, “Enhanced Review of Periodic Disclosures by Issuers,” dictates that:
Section 408 of the Sarbanes-Oxley Act (SOX) dictates that the SEC will review disclosures made by issuers. Special attention will be paid to the disclosures of issuers:• who have issued material restatements of financial statements,• who experienced significant volatility in their stock price,• have the largest market capitalization,• are emerging companies with disparities in price to earnings ratios, and• with operations that significantly affect any material sector of the economy.
Which of the following are examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement?I. Intercompany transactionsII. Large revenue transactions at the end of a periodIII. Large returns in the middle of a period
Intercompany transactions and large revenue transactions at period-end are examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement.
Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer’s bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero’s balance sheet date, but one month before the issuance of the financial statements and the auditor’s report. Under these circumstances:I. the financial statements should be adjusted.II. the event requires financial statement disclosure, but no adjustment.III. the auditor’s report should be modified for a lack of consistency.
Only financial statement disclosure is required when a material loss occurs after the balance sheet date but before the issuance of the auditor’s report. No adjustment is required since the condition (the customer’s bankruptcy due to a natural disaster) did not exist at the balance sheet date. Disclosure is required to keep the financial statements from being misleading. Consistency in the application of generally accepted accounting principles is not affected.
During an engagement to review the financial statements of a nonissuer, an accountant becomes aware that several leases that should be capitalized are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should:
If an accountant who is engaged to review financial statements becomes aware of a departure from GAAP, the accountant should disclose the departure in a separate paragraph of the review report. The effects of the departure on the financial statements (if the effects have been determined by management or are known as the result of the accountant’s procedures) should be disclosed as well. The accountant is not required to determine the effects of a departure if management has not done so, provided that the accountant states in the report that such determination has not been made.
If an auditor finds illegal acts throughout the audit, which of the following would be an appropriate reaction?
It may be necessary for the auditor to modify the audit opinion based on illegal acts:• The auditor should issue a qualified opinion if the auditor determines that an illegal act has a material effect on the financial statements and the act has not been properly accounted for or disclosed. Depending on materiality, the auditor may decide to issue an adverse opinion on the financial statements as a whole.• The auditor should disclaim an opinion if precluded by the client from obtaining sufficient appropriate audit evidence to evaluate whether an illegal act that could be material to the financial statements has, or is likely to have, occurred.• The auditor should withdraw from the engagement if the client refuses to accept the auditor’s report as modified for the circumstances described above. The auditor should indicate the reasons for withdrawal, in writing, to those charged with governance.
in regards to review and compliations.
AR 400.03 states that “a successor accountant is not required to communicate with a predecessor accountant in connection with acceptance of a compilation or review engagement, but he or she may believe it is beneficial to obtain information that will assist in determining whether to accept the engagement.”
What is the most likely source of the following question?“If a difference of opinion on a practice problem existed between engagement personnel and a specialist or other consultant, was the difference resolved in accordance with firm policy and appropriately documented?”
AU 311.32 requires that “the auditor with final responsibility for the audit and assistants should be aware of the procedures to be followed when differences of opinion concerning accounting and auditing issues exist among firm personnel involved in the audit.” A partner’s engagement review program would include a statement concerning a difference of opinion between engagement personnel and specialists or consultants.
The auditor determines that there is a low assessed risk of material misstatement concerning litigation, claims, and assessments. As a result, the auditor elects not to send a letter of inquiry to lawyers under which set of standards?I. U.S. PCAOB Auditing StandardsII. U.S. Auditing Standards under the AICPAIII. International Standards on Auditing (ISAs)
Notes: International standards only require an attorney’s letter when an auditor assesses a risk of material misstatement. U.S. auditing standards have a presumptive requirement to send a letter of audit inquiry to lawyers.
In making risk assessments, the auditor should identify and document the controls that are likely to prevent or detect and correct material misstatements in specific relevant assertions. Controls can either be directly or indirectly related to an assertion in which of the following ways?
In making risk assessments, the auditor should identify and document the controls that are likely to prevent or detect and correct material misstatements in specific relevant assertions. Controls can either be directly or indirectly related to an assertion. The more indirect the relationship, the less effective that control may be in preventing `or detecting and correcting misstatements in that assertion.
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
“The auditor should perform tests of controls when…substantive procedures alone do not provide sufficient appropriate audit evidence at the relevant assertion level.” (AU 318.23)Increasing the sample size in the substantive procedure (when substantive tests are not appropriate for the assertion), adjusting the materiality level, or applying analytical procedures (which are also substantive procedures) would not assist with lowering the overall audit risk.
The fourth standard of reporting requires the auditor’s report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent:
Correct Answer: misinterpretations regarding the degree of responsibility the auditor is assuming.
Notes: The fourth standard of reporting requires that the report contain an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed (with reasons why it cannot be expressed). The objective of the fourth standard is to prevent misunderstanding the degree of responsibility the auditor is assuming when the auditor’s name is associated with financial statements.
Two assertions for which confirmation of accounts receivable balances provides primary evidence are:
AU 326.15 states that (1) assertions about existence deal with whether assets (receivables are assets) exist at a particular date and that (2) assertions about rights and obligations deal with whether assets are the rights of the entity at a particular date. Confirmation of receivables verifies both the existence of the receivable and the rights of the entity to be paid the amount owed by the debtor.Confirmations do not provide primary evidence of completeness (whether all assets are included) or valuation (whether the accounts will actually be paid).
A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:
When an auditor is unable to count securities held by a bank on the balance sheet date, the auditor should request that the client have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date. The objective of a security count is to obtain evidence regarding management’s assertion of the existence of the securities. Evidence obtained directly by the auditor through physical examination is more convincing than that obtained indirectly, such as having the bank confirm the contents of the safe-deposit box or that securities were added or removed subsequent to the balance sheet date. Examining supporting evidence for transactions during the year does not verify existence of the securities at the balance sheet date.
An auditor is required to reach a conclusion in every audit regarding whether there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the auditor decides to mention the going concern problem in his or her report, he or she is precluded from:
Some auditors issue reports in which the auditor’s conclusions about the entity’s ability to continue as a going concern is unclear because of the use of conditional terminology, such as, “If the company is unable to obtain refinancing, there may be substantial doubt about the company’s ability to continue as a going concern.” Such language is precluded by SAS 59 (as amended by SAS 77), The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.
Which of the following phrases would an auditor most likely include in the auditor’s report when expressing a qualified opinion because of inadequate disclosure?
Correct Answer: Except for the omission of the information discussed in the preceding paragraph
Notes: When expressing a qualified opinion due to inadequate disclosure, an auditor would most likely begin the opinion paragraph with the following phrase:“In our opinion, except for the omission of the information in the preceding paragraph, the aforementioned financial statements present fairly….”
When a practitioner presents the results of applying agreed-upon procedures to specific subject matter in an attestation engagement, they should be presented:
Correct Answer: in the form of findings related to each procedure performed.
Notes: A practitioner should present the results of applying agreed-upon procedures to specified subject matter in the form of findings (AT 201.24).
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:
an adverse opinion.
In order for a firm to designate itself as “Members of the AICPA”:
Based on Rule 505 of the AICPA’s Code of Professional Conduct, a firm may only designate itself as “Members of the AICPA” when all CPA owners are members.
In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:
In evaluating the reasonableness of an accounting estimate, the auditor focuses on the key factors and assumptions that are deviations from historical patterns. Also of concern to the auditor are key factors and assumptions that are “significant, sensitive to variations, and subjective and susceptible to misstatement and bias” (AU 342.09). Estimates are more likely to be reasonable if they are consistent with prior periods, similar to industry guidelines, and objective and not susceptible to bias.
