Questions Wrong on EQ testing

Question 1

An auditor’s purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management’s assertions about?

A. Existence or Occurance
B. Presentation or Disclosure
C. Completeness
D. Valuation or Allocation

Answer 1

B. Presentation and Disclosure - A note payable that is renewed after the balance sheet date would be examined by the auditor in order to ensure that it was properly presented at the balance sheet date and that related disclosures were adequate. This would provide the auditor with evidence for the presentation and disclosure assertions.

The wrong answer I keep choosing is completeness.. It is not completeness because This would provide the auditor with evidence for the presentation and disclosure assertions. It would not provide strong evidence for the completeness assertion, which addresses whether all notes payable have been properly included in the account at the balance sheet date

Question 2

Which of the following items should be included in an auditor’s report for financial statements prepared in conformity with an other comprehensive basis of accounting (OCBOA)?

A. A sentence stating that the auditor is responsible for the financial statements.
B. A title that includes the word “independent.”
C. The signature of the company controller.
D. A paragraph stating that the audit was conducted in accordance with OCBOA.

Answer 2

B. A title that includes the word “ independent

The auditor’s report should include the word “independent,” regardless of the financial reporting framework used in preparing the entity’s financial statements.

Wrong answer I chose was D. A paragraph stating that the audit was conducted in accordance with OCBOA
OCBOA refers to an accounting framework, other than GAAP, used in preparing the entity’s financial statements. An audit is never conducted in accordance with OCBOA. The term OCBOA has been replaced with special purpose framework.

Question 3

Which of the following types of evidence would an auditor most likely examine to determine whether internal control structure policies and procedures are operating as designed?

A. Confirmations of receivables verifying account balances.
B. Letters of representations corroborating inventory pricing.
C. Attorneys’ responses to the auditor’s inquiries.
D. Client records documenting the use of EDP programs.

Answer 3

D. Client records documenting the use of EDP Programs.

Confirmation of receivables, representation letters, and attorneys’ responses are examples of evidence collected as a result of the performance of substantive procedures. Evidence collected to determine whether internal controls are operating as designed would result from the performance of tests of controls. The only test of control listed is the examination of client records documenting the use of EDP programs.

Question 4

To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would

A. Inspect the stock certificates evidencing the investment.
B. Examine the audited financial statements of the investee company.
C. Review the broker’s advice or canceled check for the investment’s acquisition.
D. Obtain market quotations from financial newspapers or periodicals.

Answer 4

B. Examine the audited financial statements of the investee company.

The equity method requires that the investment be valued by reflecting changes in the investee’s equity. As a result, the auditor must examine copies of the audited financial statements of the investee company.

Wrong answer I chose is D. This is wrong because Obtaining market quotations from financial newspapers or periodicals would provide evidence as to the current market value, not the value on the books.

Question 5

Park, CPA, was engaged to audit the financial statements of Tech Co., a new client, for the year ended December 31, 20x1. Park obtained sufficient audit evidence for all of Tech’s financial statement items except Tech’s opening inventory. Due to inadequate financial records, Park could not verify Tech’s January 1, 20x1, inventory balances.

Park’s opinion on Tech’s 20x1 financial statements most likely will be on the

     Balance sheet  	  Income statement  
A.   Disclaimer 	 Disclaimer 
B.   Unmodified 	 Disclaimer 
C.   Disclaimer 	 Adverse 
D.    Unmodified 	 Adverse

Answer 5

B. The inability to verify the beginning inventory makes the auditor unable to express an opinion on any financial statement in which inventory is a material component. Beginning inventory is material to cost of goods sold and net income. As a result, the auditor is unable to express an opinion and must disclaim on the income and retained earnings statements and the statement of cash flows. The auditor will, however, be able to render an unmodified opinion on the balance sheet.

Question 6

Tracing bills of lading to sales invoices provides evidence that
A. Shipments to customers were recorded as sales.
B. Recorded sales were shipped.
C. Invoiced sales were shipped.
D. Shipments to customers were invoiced.

Answer 6

D. Tracing bills of lading to sales invoices provides evidence that shipments to customers were invoiced. This is a test of the completeness of the sales process.

The wrong Answer I chose was A.

To verify that shipments to customers were recorded as sales, the sales invoices would need to be traced to the sales journal.

Question 7

Which of the following procedures would an auditor most likely include in the planning phase of a financial statement audit?

A. Obtain an understanding of the entity’s risk assessment process.

B. Identify specific internal control activities designed to prevent fraud.

C. Evaluate the reasonableness of the entity’s accounting estimates.

D. Perform cutoff tests of the entity’s sales and purchases.

Answer 7

The auditor is required to obtain an understanding of the A. entity’s environment, including internal control sufficient to plan the audit. Risk assessment is one of the five components of the internal control structure. Obtaining an understanding of the entity’s risk assessment process would be part of obtaining an understanding of internal control.

Wrong Answer I chose was B.

Identifying specific internal control activities designed to prevent fraud would not be necessary to obtain an understanding of internal control. Evaluating the risk of fraud occurring and then considering the specific internal control activities designed to prevent fraud from occurring are, however, required to be performed in an audit. They are not necessarily part of the planning phase.

Question 8

A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when management

A. Is unable to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary.

B. Refuses to disclose in the notes to the financial statements related party transactions authorized by the board of directors.

C. Does not sign an engagement letter specifying the responsibilities of both the entity and the auditor.

D. Fails to correct a significant deficiency communicated to the audit committee after the prior year’s audit.

Answer 8

A. If management is unable to obtain audited financial statements supporting the entity’s investment in a foreign subsidiary, the resultant scope limitation may warrant a qualified opinion or a disclaimer.

The wrong answer I chose was B. This is wrong because Management’s refusal to provide adequate note disclosure regarding related party transactions is a GAAP departure, not a scope limitation.

Question 9

A weakness in internal control over recording retirements of equipment may cause an auditor to?

A. Inspect certain items of equipment in the plant and trace those items to the accounting records.

B. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year.

C. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used.

D. Select certain items of equipment from the accounting records and locate them in the plant.

Answer 9

D. Select certain items of equipment from the accounting records and locate them in the plant.

A weakness in internal control over recording equipment retirements may cause retirements to fail to be recorded. This means that the equipment records contain equipment items that should have been removed. The auditor then must try to identify equipment that is likely to have been retired and to attempt to locate such equipment in the plant. By selecting certain items of equipment from the accounting records (most likely based on age) and then trying to locate them in the plant, the auditor can determine whether unrecorded retirements exist.

The wrong Answer I chose was A. A weakness in internal control over recording equipment retirements may cause retirements to fail to be recorded. This means that the equipment records contain equipment items which should have been removed. The auditor then must try to identify equipment which is likely to have been retired and to attempt to locate such equipment in the plant. Tracing from the equipment in the plant to the accounting records will not enable the auditor to detect unrecorded retirements. This step would aid the auditor in verifying the recording of new additions or alternatively, the completeness of the equipment records.

Question 10

Hill has decided to use (PPS) sampling, sometimes called dollar-unit sampling, in the audit of a client’s accounts receivable balances. Hill plans to use the following PPS sampling table:

Reliability Factors for Errors of Overstatement
Risk of Incorrect Acceptance
Number of Overstatements 1% 5% 10% 15% 20%
0 4.61 3.00 2.31 1.90 1.61
1 6.64 4.75 3.89 3.38 3.00
2 8.41 6.30 5.33 4.72 4.28
3 10.05 7.76 6.69 6.02 5.52
4 11.61 9.16 8.00 7.27 6.73

ADDITIONAL INFORMATION

Tolerable misstatement (net of the
effect of expected misstatements) $ 24,000
Risk of incorrect acceptance 20%
Number of misstatements allowed 1
Recorded amount of accounts receivable $240,000
Number of accounts 360

What sample size should Hill use?
	A.  120
	B.  108
	C.  60
	D.  30

Answer 10

n = Reliability factor (from tables) × Book value /
Tolerable misstatement, net of expected misstatements

3 × $240,000/24000 = 30

Answer is D. 30

Question 11

Which of the following is true?
A. Clients have the right to veto any outsourcing by a CPA firm.
B. Clients must be informed in writing before any professional services are outsourced.
C. If the client objects to outsourcing of professional services, then the member should either not outsource the work or decline to provide the service altogether.
D. All three choices provided.
Because two of the answers were incorrect, this is not the correct answer.

Answer 11

C. The outsourcing of professional services requires notification and client approval.

I wrongly chose D. This is incorrect because A & B are wrong

Question 12

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 12

A. A large number of bearer bonds on hand.
Risk factors associated with opportunities to misappropriate assets include easily convertible assets, such as bearer bonds.

Wrong answer I chose was C. A large number of transactions processed in a short period of time.

Having inadequate internal control over assets may increase the risk of misappropriation of those assets. However, the volume of transactions processed in a short time does not necessarily increase the exposure to risk of theft.

Question 13

Which of the following would not be considered an analytical procedure?

A. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.
B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.
C. Computing accounts receivable turnover by dividing credit sales by the average net receivables.
D. Developing the expected current-year sales based on the sales trend of the prior five years.

Answer 13

B. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.
This answer can be selected by a process of elimination. Analytical procedures involve the comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics does NOT involve a comparison between an auditor expectation and a recorded balance, and would not be considered an analytical procedure. If you considered the error rate to be part of a test of control effort, then clearly it is not an analytical procedure. If you considered the error rate to be part of a substantive procedure intended to verify the validity of an account balance then it would be classified as a substantive test of details, not an analytical procedure.

The wrong answer I chose was D. Developing the expected current-year sales based on the sales trend of the prior five years.

You have to be careful here because they are looking for the procedure which is NOT an analytical procedure. Analytical procedures involve the comparison of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Developing a current year sales number based on the five-year sales trend is an auditor expectation that may then be compared to the recorded amount and, thus, is considered to be an analytical procedure.

Question 14

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Answer 14

D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

The use of negative accounts receivable confirmations requires:

1) a low risk of material misstatement;
2) a large number of small balances; and
3) an expected very low exception rate;
4) no reason to believe that the recipients of the confirmations would not review them properly. Having a small number of accounts in dispute and an accounts receivable balance arising from sales to many customers with small balances meets two of the four criteria and would be more likely to justify the use of negative confirmations.

The wrong Answer I chose is B. Because I clearly am not reading the answer choices thoroughly enough.. This answer is wrong because A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
The use of negative accounts receivable confirmations requires:
1) a low risk of material misstatement;
2) a large number of small balances; and
3) an expected very low exception rate;
4) no reason to believe that the recipients of the confirmations would not review them properly. If a substantial number of accounts are in dispute and the accounts receivable balance arises from sales to many customers with small balances, only the second criterion for negative confirmations is met.

Question 15

An auditor testing long-term investments would ordinarily use analytical procedures to ascertain the reasonableness of the

A. Existence of unrealized gains or losses in the portfolio.

B. Completeness of recorded investment income.

C. Classification between current and non-current portfolios.

D. Valuation of marketable equity securities.

Answer 15

B. Completeness of recorded investment income.
Analytical procedures would be effective and efficient in evaluating the completeness of recorded investment income. For example, notes receivable could be multiplied by an average interest rate to determine the amount of interest income that should have been recorded for the year.

Wrong Answer I chose was A. Existence of unrealized gains or losses in the portfolio.
The existence of unrealized gains or losses in the portfolio would be discovered more readily through the determination of the proper current valuation of the securities. Analytical procedures would not be the most effective means of determining current values.

Question 16

Regardless of the assessed level of control risk, an auditor would perform some

A. Tests of controls to determine the effectiveness of internal control policies.
Tests of controls are not required to be performed. If control risk is assessed at maximum, no tests of controls would be performed.
B. Analytical procedures to verify the design of internal control procedures.
C. Substantive tests to restrict detection risk for significant transaction classes.
D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk.

Answer 16

C. Substantive tests to restrict detection risk for significant transaction classes.
An auditor must always perform substantive tests for significant account balances and transaction classes. Although a lowered control risk assessment allows the auditor to reduce substantive testing, it cannot be used to eliminate substantive testing.

Wrong Answer I chose was A. Tests of controls to determine the effectiveness of internal control policies.
Tests of controls are not required to be performed. If control risk is assessed at maximum, no tests of controls would be performed.

Question 17

For which of the following audit tests would a CPA most likely use attribute sampling?

A. Identifying entries posted to incorrect accounts.
B. Estimating the amount in an expense account.
C. Evaluating the reasonableness of depreciation expense.
D. Selecting receivables for confirmation of account balances.

Answer 17

A. Identifying entries posted to incorrect accounts.

Attributes sampling is used to estimate the proportion of a characteristic in a population. As a result, it is typically used for tests of controls and substantive tests of transactions. Identifying entries posted to incorrect accounts is a substantive test of transaction in which attribute sampling could be utilized.

Wrong Answer I chose was D. Selecting receivables for confirmation of account balances.

Attribute sampling is used to estimate the rate of occurrence of a given characteristic in a population. It would not be used select receivables for confirmation. Confirmation of account balances would more likely utilize classical variables sampling or PPS sampling.

Question 18

The authority to accept incoming goods in receiving should be based on a(an)

A.  Vendor's invoice.
B.  Materials requisition.
C.  Bill of lading.
D.  Approved purchase order.

Answer 18

D. Approved purchase order.
A copy of the approved purchase order should be sent to receiving and used as the basis for receiving goods. This will prevent the erroneous acceptance of goods never ordered.

Wrong Answer I keep choosing is

B. Materials requisition.
The materials requisition indicates the goods that are needed. It does not indicate the goods that were actually ordered, which may differ. The approved purchase order should be used to authorize goods received as it ensures that only goods ordered are accepted.

Question 19

Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the entity?

A. Review the audit documentation and the audit programs of the component auditor.
B. Visit the component auditor and discuss the results of the other CPA’s audit procedures.
C. Make inquiries about the professional reputation and independence of the component auditor.
D. Determine that the component auditor has a sufficient understanding of the subsidiary’s internal control.

Answer 19

C. Make inquiries about the professional reputation and independence of the component auditor.
When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor.

Wrong Answer I chose was A. Review the audit documentation and the audit programs of the component auditor.
A review of the audit documentation and audit programs of the component auditor would be more likely to be performed when the group engagement partner does NOT plan to make reference to the component auditor.

Question 20

In planning a new engagement, which of the following is not a factor that affects the auditor’s judgment as to the quantity, type, and content of audit documentation?

A. The type of report to be issued by the auditor.
B. The content of the client’s representation letter.
In planning a new engagement, an auditor would consider:
C. The auditor’s estimated occurrence rate of attributes.
D. The auditor’s preliminary evaluations of risk based on discussions with the client.

Answer 20

B. The content of the client’s representation letter.
In planning a new engagement, an auditor would consider:
the nature of the engagement;
the type of report to be issued;
the nature of the financial statements, schedules, or other information on which the auditor is reporting;
the nature and condition of the client’s records;
the assessed level of control risk (including the estimated occurrence rate of attributes); and
the needs in the particular circumstances for supervision and review of the work.
The auditor would NOT consider the content of the management representation letter obtained at the end of the engagement.

Wrong Answer I chose was C. The auditor’s estimated occurrence rate of attributes.
In planning a new engagement, an auditor would consider:
the nature of the engagement;
the type of report to be issued;
the nature of the financial statements, schedules, or other information on which the auditor is reporting;
the nature and condition of the client’s records;
the assessed level of control risk (including the estimated occurrence rate of attributes); and
the needs in the particular circumstances for supervision and review of the work.

Question 21

Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually

A. May be applied to populations where many monetary errors are expected to occur.
B. Produces an estimate that has a desired level of precision with a smaller sample size.
C. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.
D. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

Answer 21

B. Produces an estimate that has a desired level of precision with a smaller sample size.

Stratification of the population enables the auditor to separate the population into size-related classes. For example, all transactions over $50,000 may be grouped into a class. Applying MPU sampling to these strata or classes will then result in a higher level of precision for a smaller sample size.

Wrong Answer I chose was C. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.

Stratified MPU sampling REDUCES the variability among items in a stratum by grouping together sampling units with similar characteristics.

Question 22

Interpretive publications include all of the following, except for

A. Appendices to Statements on Auditing Standards.

B. Articles in the AICPA’s Journal of Accountancy.

C. Auditing guidance included in AICPA Audit and Accounting Guides.

D. Auditing interpretations of the Statements on Auditing Standards.

Answer 22

B. Articles in the AICPA’s Journal of Accountancy.

Articles in the Journal of Accountancy have no authoritative status, and would be classified as other auditing publications.

Wrong answer I chose was A. Appendices to Statements on Auditing Standards.

Appendices to Statements on Auditing Standards are included among interpretive publications.

Question 23

How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements?

Examination of evidence Consistent application of accounting principles
Explicitly Explicitly
Implicitly Implicitly
Implicitly Explicitly
Explicitly Implicitly
The standard auditor’s report on comparative financial statements states explicitly that evidence is obtained (and therefore examined) and implies that accounting principles have been consistently applied. Such application is assumed unless the report indicates otherwise.

Answer 23

Explicitly Implicitly

The standard auditor’s report on comparative financial statements states explicitly that evidence is obtained (and therefore examined) and implies that accounting principles have been consistently applied. Such application is assumed unless the report indicates otherwise.

Question 24

Which of the following would a successor auditor ask the predecessor auditor to provide after accepting an audit engagement?

A. Disagreements between the predecessor auditor and management as to significant accounting policies and principles.
B. The predecessor auditor’s understanding of the reasons for the change of auditors.
C. Facts known to the predecessor auditor that might bear on the integrity of management.
D. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

Answer 24

D. Matters that may facilitate the evaluation of financial reporting consistency between the current and prior years.

The auditor may inquire of the predecessor auditor about issues related to the consistency of financial reporting over time, but that is not something that the auditor is required to inquire about prior to accepting the audit engagement.

Wrong answer is B. The predecessor auditor’s understanding of the reasons for the change of auditors.
The auditor should inquire of the predecessor auditor about the predecessor’s understanding of the reasons for the change in auditors before accepting the audit engagement.

Question 25

The permanent file of an auditor’s documentation generally would not include

A. Bond indenture agreements.
B. Lease agreements.
C. Working trial balance.
D. Flowchart of internal control structure.

Answer 25

C. Working trial balance.
The working trial balance would NOT appear in the permanent file. It is normally included in the current year audit documentation.

Wrong answer
D. Flowchart of internal control structure.
Internal controls do not typically change radically from one period to the next. As a result, flowcharts of internal controls WOULD be included in the permanent file.

Question 26

Which of the following computer-assisted auditing techniques processes client input data on a controlled program under the auditor’s control to test controls in the computer system?

A. Test data.
B. Review of program logic.
C. Integrated test facility.
D. Parallel simulation.

Answer 26

D. Parallel simulation.
Parallel simulation is a computer-assisted auditing technique in which an auditor-written or auditor-controlled program is used to process client data. The results are then compared to those obtained using the client’s program and differences are investigated. This technique enables the auditor to test controls in and processing performed by a client program.

Wrong Answer
C. Integrated test facility.
An integrated test facility uses auditor data and the client’s program. It involves the processing of fictitious records into a fictitious division, branch, supplier, etc. in the client’s master files. Testing can be performed without the knowledge of company employees, as dummy and actual records are processed concurrently.

Question 27

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following?

A. The planned level of control risk.

B. Management’s assertions that internal controls exist and are operating efficiently.

C. The effectiveness of internal controls.

D. The planned level of assurance at the relevant assertion level.

Answer 27

D. The planned level of assurance at the relevant assertion level.

The auditor should consider whether the assessments of the risks of material misstatement at the relevant assertion level in engagement planning are appropriate in light of the auditor’s substantive procedures.

This was the wrong Answer B. Management’s assertions that internal controls exist and are operating efficiently.

The auditor does not perform substantive tests to address management’s assertions about internal control. Substantive procedures are directed at searching for material misstatements.

Question 28

An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the

A. Projection may NOT be included in a document with audited historical financial statements.

B. Accountant’s responsibility to update the projection for future events and circumstances is limited to one year.

C. Projection omits all hypothetical assumptions and presents the most likely future financial position.

D. Engagement does NOT include an evaluation of the support for the assumptions underlying the projection.

Answer 28

D. Engagement does NOT include an evaluation of the support for the assumptions underlying the projection.

A compilation is not intended to provide any assurance on the prospective financial information or the underlying assumptions.

Wrong answer A. Projection may NOT be included in a document with audited historical financial statements.

AICPA attestation standards specifically permit prospective financial statements to be included in a document containing historical financial statements along with the CPA’s report.

Question 29

Kent is auditing an entity’s compliance with requirements governing a major federal financial assistance program in accordance with the Single Audit Act. Kent detected noncompliance with requirements that have a material effect on that program.

Kent’s report on compliance should express a(an)

A. Unqualified opinion with a separate explanatory paragraph.

B. Qualified opinion or an adverse opinion.

C. Adverse opinion or disclaimer of opinion.

D. Limited assurance on the items tested.

Answer 29

B. Qualified opinion or an adverse opinion.

If the auditor detects noncompliance with requirements that have a material effect on the program being audited, the auditor should issue a qualified or adverse opinion on compliance

Wrong Answer C. Adverse opinion or disclaimer of opinion.

If the auditor detects noncompliance with requirements that have a material effect on the program being audited, the auditor should issue a qualified or adverse opinion on compliance. It would not be appropriate to issue a disclaimer.

Question 30

Which of the following are “affiliates” of clients so that a member in public practice might have to worry about its relationships with the entity in order to preserve independence?

A. The Dawes accounting firm is auditing ABC Co., which owns 61% of the stock of DEF Mfg. Co. (from which Dawes has borrowed quite a bit of money).

B. The Dawes accounting firm is auditing DEF Co., which is owned substantially by ABC Mfg. Co. (from which Dawes has borrowed quite a bit of money).

C. The Dawes accounting firm is auditing ABC Co. and has borrowed quite a bit of money from DEF Mfg. Co. while the Pensive Hedge Fund owns a majority control of both ABC and DEF.

D. All three answer choices provided.

Answer 30

D. All three answer choices provided.

Because all three answer choices are correct, this is the best answer

Question 31

The objective of a review of interim financial information of a public entity is to provide the accountant with a basis for

A. Determining whether the prospective financial information is based on reasonable assumptions.

B. Expressing a limited opinion that the financial information is presented in conformity with the applicable financial reporting framework.

C. Deciding whether to perform substantive audit procedures prior to the balance sheet date.

D. Reporting whether material modifications should be made for such information to conform with the applicable financial reporting framework.

Answer 31

D. Reporting whether material modifications should be made for such information to conform with the applicable financial reporting framework.

The objective of a review of interim financial information is to provide the accountant with a basis for reporting whether material modifications should be made for such information to conform to the applicable financial reporting framework.

Wrong Answer

B. Expressing a limited opinion that the financial information is presented in conformity with the applicable financial reporting framework.

A review report on interim financial information does not express any type of “opinion.” It provides negative assurance by indicating whether or not the accountant is aware of material modifications which should be made for the interim financial information to conform with the applicable financial reporting framework.

Question 32

Statements on Standards for Accounting and Review Services (SSARS) identify which of the following as a “preparation” engagement?

A. Typed client-prepared financial statements, without modification, as an accommodation to the client.

B. Provided a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements.

C. Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.

D. Generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

Answer 32

D. Generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

Preparing the financial statements (with or without using software), whether the financial statements were based on a special purpose framework or not, would be viewed as a “preparation engagement.”

Wrong Answer

C. Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements.
Proposing adjusting journal entries or providing other bookkeeping services would not be viewed as a “preparation engagement.”

Question 33

For audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent

 As a substantive test  	  In the final review stage  
 Yes 	                                        Yes 
 Yes 	                                        No 
 No 	                                               Yes 
 No 	                                                No

Answer 33

Analytical procedures are required during planning and in the final review stage. They may be, but are not required to be, used as substantive tests.

c. No Yes

Wrong Answer is Yes Yes
Analytical procedures are required during planning and in the final review stage. They may be, but are not required to be, used as substantive tests.

Question 34

Which of the following is not a type of threat to compliance that is featured in the Conceptual Framework?

A. Adverse interest threats.
B. Espionage threats.
C. Familiarity threats.
D. Undue influence threats.

Answer 34

B. Espionage threats.

The code does not speak about espionage threats.

Wrong Answer is
A. Adverse interest threats.

Adverse interest threats as might occur when a client and firm sue each other are a threat to compliance.

Question 35

An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s

A. Minutes of board of directors’ meetings.
B. Transfer agent’s records.
C. Cancelled stock certificates.
D. Treasury stock certificate book.

Answer 35

A. Minutes of board of directors’ meetings

To verify stockholders’ equity transactions, the auditor would review minutes of board of directors’ meetings. The minutes would document changes such as the issuance of new capital stock, the purchase of treasury shares, or merger through an exchange of stock.

Wrong Answer is

B. Transfer agent’s records.
Review of board of directors’ minutes is more commonly performed than a review of transfer agent’s records. Not all companies employ transfer agents. The procedure commonly performed with regard to transfer agents is to obtain a confirmation to verify the existence of new transactions and the accurate recording of existing transaction

Question 36

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

A. Inquire about the existence of related party transactions.
B. Determine whether accounting estimates deviate from historical patterns.
C. Confirm inventories at locations outside the entity.
D. Review the lawyer’s letter for information about litigation.

Answer 36

D. Review the lawyer’s letter for information about litigation.

If the auditor is concerned about identifying all material accounting estimates, the auditor is seeking to discover unrecorded estimates. The auditor is most likely to review the lawyer’s letter for information about litigation. Litigation losses is an area that commonly requires estimates and one in which estimates could be material to the financial statements.

It is also an area that falls outside of the normal financial reporting process and, thus, is more likely to be missed.

Wrong Answer was

B. Determine whether accounting estimates deviate from historical patterns.

Evaluating accounting estimates historically would enable the auditor to determine whether such estimates were properly valued. This procedure would not necessarily enable the auditor to discover unrecorded accounting estimates.

Question 37

Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?

A. The expected population deviation rate has little effect on determining the sample size.
B. As the population size doubles, the sample size should also double
C. As the tolerable deviation rate increases, the sample size should also increase.
D. The population size has little effect on the sample size.

Answer 37

D. The population size has little effect on the sample size.

Sample size for an internal control-related sampling application (known as attributes sampling) is normally determined from available tables, which do not explicitly consider population size. Those tables are based upon an assumption of a very large population. Accordingly, population size has little effect on sample size for attributes sampling.

Wrong Answer

B. As the population size doubles, the sample size should also double.
Sample size for an internal control-related sampling application (known as attributes sampling) is normally determined from available tables, which do not explicitly consider population size. These tables are based upon an assumption of a very large population. Accordingly, population size has little effect on sample size for attributes sampling.
C. As the tolerable deviation rate incr

Question 38

When planning a review of an audit client’s interim financial statements, which of the following procedures should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?

A. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end.
B. Inquire of the entity’s outside legal counsel about the status of any previous pending litigation and any new litigation involving the entity.
C. Select a sample of material revenue transactions occurring during the interim period and examine supporting documentation.
D. Consider the results of audit procedures performed with respect to the current year’s financial statements..

Answer 38

D. Consider the results of audit procedures performed with respect to the current year’s financial statements.

AICPA Professional Standards specifically identify that the accountant should consider the results of any audit procedures performed with respect to the current year’s financial statements as a procedure that would be applicable to planning a review of interim financial information with respect to updating the auditor’s knowledge of the entity’s business and its internal control.

Wrong Answer

A. Perform analytical procedures on selected accounts by comparing the interim amounts to the amounts for the previous audited fiscal year end.

Although this would be done as a basis for conclusions for the review, it would not be performed in connection with planning the review.

Question 39

Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the entity?

A. Review the audit documentation and the audit programs of the component auditor.
B. Visit the component auditor and discuss the results of the other CPA’s audit procedures.
C. Make inquiries about the professional reputation and independence of the component auditor.
D. Determine that the component auditor has a sufficient understanding of the subsidiary’s internal control.

Answer 39

C. Make inquiries about the professional reputation and independence of the component auditor.

When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor.

Wrong Answer A. Review the audit documentation and the audit programs of the component auditor.

A review of the audit documentation and audit programs of the component auditor would be more likely to be performed when the group engagement partner does NOT plan to make reference to the component auditor.

Question 40

A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, except

A. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.

B. Serving on at least one other issuer’s audit committee or disclosure committee of the board of directors.

C. Actively supervising a principal financial officer or principal accounting officer.

D. Assessing performance of the public accountants with respect to preparation, auditing, or evaluation of financial statements.

Answer 40

B. Serving on at least one other issuer’s audit committee or disclosure committee of the board of directors.

According to SEC rules promulgated pursuant to Section 407 of SOX, serving on two audit committees at once does not mean that the person is a financial expert. He or she might have been a professional bowler (only) before taking the two positions.

Wrong Answer

A. As a principal financial officer, principal accounting officer, controller, public accountant, or auditor.

One who has served in these important roles satisfies SOX’s requirement for a financial expert on the audit committee as spelled out in detailed SEC rules published at 17 C.F.R. 229.407(d)(5)(ii).

Question 41

Confirmation procedures applicable to assets (e.g., accounts receivable) fundamentally address which assertion associated with account balances at the end of the period?

A. Existence.
B. Completeness.
C. Presentation and disclosure.
D. Valuation and allocation.

Answer 41

A. Existence.

GAAS indicate that external confirmations are frequently used to verify account balances. In doing so, they provide stronger evidence for the existence assertion than for the other assertions identified.

Wrong Answer

D. Valuation and allocation.

GAAS indicate that external confirmations are frequently used to verify account balances. In doing so, they provide stronger evidence for the existence assertion than for the valuation and allocation assertion.

Question 42

Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specific transaction by an entity that is audited by another CPA.

Blue may accept this engagement but should

A. Consult with the continuing CPA to obtain information relative to the transaction.

B. Report the engagement’s findings to the entity’s audit committee, the continuing CPA, and management.

C. Disclaim any opinion that the hypothetical application of accounting principles conforms with generally accepted accounting principles.

D. Notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.

Answer 42

A. Consult with the continuing CPA to obtain information relative to the transaction.

An accountant is allowed to accept an engagement to provide an opinion on the application of accounting principles to a specific transaction. The accountant, however, must consult with the continuing CPA to obtain all of the available facts pertinent to the transaction.

Wrong answer

D. Notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.
An accountant is allowed to accept an engagement to provide an opinion on the application of accounting principles to a specific transaction. The accountant is not required to notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.

However, the accountant would note that the report was intended solely for the information and use of specified parties, identify the parties to whom use is restricted, and state that the report is not intended to be and should not be used by anyone other than the specified parties.

Question 43

Financial statements of a nonpublic entity that have been reviewed by an accountant should be accompanied by a report stating that

A. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted.

B. All information included in the financial statements is the representation of the management of the entity.

C. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

D. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.

Answer 43

B. All information included in the financial statements is the representation of the management of the entity.

A review includes a statement that management is responsible for the preparation and fair presentation of the financial statements in accordance with the applicable financial reporting framework

Wrong Answer

A. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted.

A review report would not state that the scope of the inquiry and analytical procedures performed by the accountant has not been restricted. The review report indicates that a review consists principally of inquiries of company personnel and analytical procedures applied to financial data.

Question 44

Which of the following statements about audit sampling risks is correct for a nonissuer?

A. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.

B. Nonsampling risk can arise because an auditor failed to recognize misstatements.

C. Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.

D. Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective.

Answer 44

B. Nonsampling risk can arise because an auditor failed to recognize misstatements.

Nonsampling risk refers to any error unrelated to sampling risk that the auditor might commit when performing an audit sampling task, such as failing to recognize a misstatement or otherwise misinterpreting the audit evidence.

wrong Answer A. Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population.

This statement describes sampling risk rather than nonsampling risk.

Question 45

Tech Company has disclosed an uncertainty due to pending litigation. The auditor’s decision to issue a qualified opinion rather than an unmodified opinion with an emphasis-of-matter paragraph most likely would be determined by the

A. Lack of sufficient evidence.

B. Inability to estimate the amount of loss.

C. Entity’s lack of experience with such litigation.

D. Lack of insurance coverage for possible losses from such litigation.

(Audit Reports- Qualified for Scope limitation)

Answer 45

A. Lack of sufficient evidence.

A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The lack of sufficient evidence represents a scope limitation, which could result in a qualified opinion.

B. Inability to estimate the amount of loss.

A qualified opinion is rendered when a GAAP departure or a scope limitation exists. The inability to estimate the amount of loss is neither a scope limitation nor a GAAP departure. An uncertainty may be disclosed even when the amount of the loss cannot be estimated.

Question 46

A CPA is required to comply with the provisions of Statements on Standards for Accounting and Review Services when

Processing financial data for clients of other CPA firms Consulting on accounting matters
Yes Yes
Yes No
No Yes
No No

(SSARS General Principles)

Answer 46

No, No

The Statements on Standards for Accounting and Review Services are not applicable when: 1) preparing a working trial balance; 2) assisting in adjusting the books of account; 3) consulting on accounting, tax, and similar matters; 4) preparing tax returns ; 5) providing bookkeeping or data processing services, and 6) processing financial data for clients of other accounting firms.

Question 47

According to PCAOB auditing standards, in reporting whether a previously reported material weakness continues to exist, the auditor may appropriately issue

A. An unqualified or qualified opinion.
B. An unqualified or adverse opinion.
C. An unqualified opinion or a disclaimer of opinion.
D. An unqualified opinion, a qualified opinion, an adverse opinion, or a disclaimer of opinion.

(Sarbanes-Oxley Act of 2002 and the PCAOB
Auditing Standard No.4 )

Answer 47

C. An unqualified opinion or a disclaimer of opinion.

The auditor is allowed to issue an unqualified opinion or a disclaimer of opinion.

Wrong Answer is

B. An unqualified or adverse opinion.

Paragraph 43 of AS #4 states, “any limitations on the scope of the auditor’s work require the auditor either to disclaim an opinion or to withdraw from the engagement. An adverse opinion is not permitted.”

Question 48

The objectives of the internal control structure for a production cycle are to provide assurance that transactions are properly executed and recorded, and that

A. Production orders are prenumbered and signed by a supervisor.

B. Custody of work in process and of finished goods is properly maintained.

C. Independent internal verification of activity reports is established.

D. Transfers to finished goods are documented by a completed production report and a quality control report.

(Internal Control Transaction Cycles- Miscellaneous Cycles)

Answer 48

B. Custody of work in process and of finished goods is properly maintained.
Management’s objectives in establishing and maintaining an internal control structure are to ensure that:
1) transactions are executed in accordance with management’s general or specific authorization;
2) transactions are recorded as necessary to permit preparation of the financial statements in accordance with GAAP and to maintain accountability for assets;
3) access to assets is permitted only in accordance with management’s authorization; and
4) the recorded accountability for assets is compared with the existing assets at reasonable intervals and differences are investigated and resolved. Ensuring that custody of work in process and of finished goods is properly maintained is an example of the third objective.

Wrong Answer

D. Transfers to finished goods are documented by a completed production report and a quality control report.

Documentation of transfers to finished goods is a control procedure established to ensure that control objectives are met.

Question 49

Which of the following situations creates an independence problem for Kim?

I. Kim owns an insurance policy that does not contain an investment option and was issued under normal terms, procedures, and requirements.
II. Kim owns an insurance policy with an investment option, and she invested a small amount in the ABC Mutual Fund, even though Kim is a covered member for purposes of ABC, which is an audit client of her firm.

A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.

(Financial Interests- Depository Accounts, brokerage accounts and insurance policies.)

Answer 49

B. II only.

Under these facts, Kim’s interest in ABC is a direct financial interest, which creates an independence problem.

Wrong Answer I chose was

D. Neither I nor II.
Because situation II is correct, this answer cannot be correct.

Question 50

Which of the following statements is most accurate regarding sufficient and appropriate documentation?
A. Accounting estimates are not considered sufficient and appropriate documentation.

B. Sufficient and appropriate documentation should include evidence that the audit documentation has been reviewed.

C. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the audit documentation.

D. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years

(Nature of Evidence 1)

Answer 50

B. Sufficient and appropriate documentation should include evidence that the audit documentation has been reviewed.

A review of the audit documentation is a critical part of the overall audit process. It is the means by which every audit judgment made is reviewed and confirmed by a more experienced auditor to ensure that the audit evidence supports the opinion rendered.

Wrong Answer I chose was

A. Accounting estimates are not considered sufficient and appropriate documentation.
This statement appears incomplete. An accounting estimate is simply a number. Numbers, by themselves, are insufficient audit evidence. Audit work to verify completeness, accuracy, validity of source data used, etc., is needed.

Question 51

An auditor uses the assessed level of control risk to

A. Evaluate the effectiveness of the entity’s internal control policies and procedures.

B. Identify transactions and account balances where inherent risk is at the maximum.

C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.

D. Determine the acceptable level of detection risk for financial statement assertions.

(Internal Control concepts & Standards- Internal Control Concepts & Standards 2)

Answer 51

D. Determine the acceptable level of detection risk for financial statement assertions.

The auditor assesses control risk (the risk that the internal control structure will not prevent or detect a material misstatement) and inherent risk (the risk of a material misstatement occurring) in order to determine the acceptable level of detection risk.

Wrong Answer that I chose was
C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.

The auditor’s assessed level of control risk would not be used to indicate whether materiality thresholds are sufficiently high. Instead, the assessed level of control risk impacts the acceptable level of detection risk and, thus, the evidence which must be gathered. Control risk is a component of audit risk. Audit risk and materiality are considered together in determining the nature, timing, and extent of auditing procedures to be performed

Question 52

A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements (SSAE) when engaged to

A. Report on financial statements that the CPA generated through the use of computer software.

B. Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

C. Provide the client with a financial statement format that does not include dollar amounts.

D. Audit financial statements that the client prepared for use in another country.

(Other Professional Services- Management Discussion & Analysis)

Answer 52

B. Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC.

The attestation standards must be followed when reviewing MD&A prepared pursuant to SEC requirements. The standards apply to both an examination and a review of MD&A.

They do not apply to engagements involving the provision of recommendations to improve MD&A.

Wrong Answer that I chose was

A. Report on financial statements that the CPA generated through the use of computer software.

An engagement to report on computer-generated financial statements would be subject to either the Auditing Standards or the Statements on Standards for Accounting and Review Services (SSARS).

Question 53

Brown, CPA, has been engaged to examine and report on Crow Company’s written assertion about the effectiveness of Crow’s internal control over financial reporting in an integrated audit under AICPA standards. In what form may Crow appropriately present its written assertion?

I. In a separate report that will accompany Brown’s report.

II. In a representation letter to Brown.

A. I only.

B. II only.

C. Either I or II.

D. Neither I nor II

(Other Professional Services- Reporting on Internal Control in an Integrated Audit)

Answer 53

A. I only.

Management must provide its written assertion about the effectiveness of Crowe’s internal control in a report that accompanies the auditor’s report. (AT 501)

Wrong Answer that I chose was

C. Either I or II.

Management must provide its written assertion about the effectiveness of Crowe’s internal control in a report that accompanies the auditor’s report. (AT 501)

Question 54

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’s invoices.

C. Tracing inventory items from the tag listing back to the physical inventory quantities.

D. Performing cut-off procedures for shipping and receiving.

(Audit Evidence Specific Audit Areas- Inventory)

Answer 54

D. Performing cut-off procedures for shipping and receiving.

The completeness assertion pertains to transactions that have NOT been recorded or are missing. Performing cut-off procedures for shipping and receiving enables the auditor to detect late transactions that may not have been recorded in the proper period and may be missing from the current (audit) year.

Wrong Answer that I chose was

A. Scanning perpetual inventory, production, and purchasing records.

The completeness assertion pertains to transactions that have NOT been recorded or are missing. Scanning perpetual inventory, production, and purchasing records, for the most part, looks at recorded transactions.

Question 55

Which of the following statements is correct concerning an auditor’s required communication with an entity’s audit committee?

A. This communication should include disagreements with management about significant audit adjustments, whether satisfactorily resolved or unresolved.

B. If matters are communicated orally, it is necessary to repeat the communication of recurring matters each year.

C. If matters are communicated in writing, the report is required to be distributed to both the audit committee and management.

D. This communication is required to occur before the auditor’s report on the financial statements is issued.

(Planning Activities-Required Communication with those charged with governance)

Answer 55

A. This communication should include disagreements with management about significant audit adjustments, whether satisfactorily resolved or unresolved.

The auditor is required to communicate with the audit committee about the following: the auditor’s responsibilities under GAAS, significant accounting policies, management judgments and accounting estimates, significant audit adjustments (resolved and unresolved, other information in documents containing audited financial statements, disagreements with management, consultation with other accountants, and difficulties encountered in performing the audit.

Wrong Answer that I chose was

D. This communication is required to occur before the auditor’s report on the financial statements is issued.

Communication with the audit committee may occur at any time, as long as the communication is timely. It is NOT required to occur before the issuance of the auditor’s report unless there is a legal obligation to report certain matters within a specified time frame.

Question 56

Tell, CPA, is auditing the financial statements of Youth Services Co. (YSC), a not-for-profit organization, in accordance with Government Auditing Standards. Tell’s report on YSC’s compliance with laws and regulations is required to contain statements of

  Positive assurance  	  Negative assurance  
           Yes 	                           Yes 

           Yes 	                            No 

               No 	                            Yes 

          No                                 	    No 

( Other types of Reports- Compliance Audits)

Answer 56

Yes Yes

The auditor is required to give positive assurance on the items tested as to compliance with laws and regulations. The auditor provides negative assurance on the items not tested.

Wrong Answer I chose was

 No 	                                   Yes  The auditor is required to give positive assurance on the items tested as to compliance with laws and regulations. The auditor provides negative assurance on the items not tested.

Question 57

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?

A. Tracing amounts in the subsidiary ledger to details on shipping documents.

B. Comparing receivable turnover ratios to industry statistics for reasonableness.

C. Inquiring about receivables pledged under loan agreements.

D. Assessing the allowance for uncollectible accounts for reasonableness.

The valuation assertion for accounts receivable addresses whether accounts receivable are appropriately stated at net realizable value. The procedure, therefore, which addresses valuation, involves assessing the reasonableness of the allowance for uncollectible accounts.

Audit evidence- Specific Audit Areas- Accounts Receivale

Answer 57

D. Assessing the allowance for uncollectible accounts for reasonableness.

The valuation assertion for accounts receivable addresses whether accounts receivable are appropriately stated at net realizable value. The procedure, therefore, which addresses valuation, involves assessing the reasonableness of the allowance for uncollectible accounts.

Wrong Answer

C. Inquiring about receivables pledged under loan agreements.

Inquiring about receivables pledged under loan agreements provides evidence supporting the rights and obligations assertion.

Question 58

Which of the following presumptions does not relate to the appropriateness of audit evidence?

A. The more effective the internal control structure, the more assurance it provides about the accounting data and financial statements.

B. An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

C. Evidence obtained from independent sources outside the entity is more reliable than evidence secured solely within the entity.

D. The independent auditor’s direct personal knowledge, obtained through observation and inspection, is more persuasive than information obtained indirectly.

(Audit Evidence Concepts & Standards Nature of Evidence 1)

Answer 58

B. An auditor’s opinion, to be economically useful, is formed within reasonable time and based on evidence obtained at a reasonable cost.

Note that this is another negatively worded question. They want the presumption that does NOT relate to the appropriateness of audit evidence. The appropriateness of evidence addresses the reliability of that evidence. The fact that an audit must be performed within a reasonable time period and at reasonable cost is not relevant to the appropriateness of evidence. It does, however, relate to the sufficiency of evidence.

Wrong Answer I chose was A. The more effective the internal control structure, the more assurance it provides about the accounting data and financial statements.

Note that this is another negatively worded question. They want the presumption that does NOT relate to the appropriateness of audit evidence. The appropriateness of evidence addresses the reliability of that evidence. The effectiveness of the internal control system does impact the reliability of the accounting data and financial statements being generated.

Question 59

Which of the following statements concerning evidential matter is correct?

A. Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.

B. An effective internal control structure contributes little to the reliability of the evidence created within the entity.

C. The cost of obtaining evidence is not an important consideration to an auditor in deciding what evidence should be obtained.

D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

(Audit Evidence Concepts & Standards Nature of Evidence 1)

Answer 59

D. A client’s accounting data cannot be considered sufficient audit evidence to support the financial statements.

While the accounting records - including the general and subsidiary ledgers, the journals, and supporting worksheets - are considered to constitute evidence in support of the financial statements, accounting data, by itself, cannot be considered sufficient support for the financial statements. The auditor must test the accounting data in order to develop persuasive evidence to support the opinion.

Wrong answer I chose is

A. Competent evidence supporting management’s assertions should be convincing rather than merely persuasive.

The auditor’s objective is to gather sufficient appropriate evidence to support the opinion. Frequently, the auditor finds it necessary to rely on evidence that is persuasive rather convincing. As a result, appropriate evidence supporting management’s assertions may be persuasive instead of convincing.

Question 60

When using confirmations to provide evidence about the completeness assertion for accounts payable, the appropriate population most likely would be

A. Vendors with whom the entity has previously done business.

B. Amounts recorded in the accounts payable subsidiary ledger.

C. Payees of checks drawn in the month after the year end.

D. Invoices filed in the entity’s open invoice file.

Audit Evidence- Specific Audit Areas- current liabilities

Answer 60

A. Vendors with whom the entity has previously done business.

In auditing the completeness assertion for accounts payable, the auditor is concerned about the possible understatement of accounts payable. The appropriate population for a confirmation effort would, therefore, be vendors with whom the entity has previously done business, in order to try to identify unrecorded payables.

Wrong answer is

C. Payees of checks drawn in the month after the year end.

Confirmation of checks drawn in the month after the year end with payees is not generally performed. Such checks are typically examined as part of the search for unrecorded liabilities.

Question 61

Which of the following presumptions is correct about the reliability of evidential matter?

A. Information obtained indirectly from outside sources is the most reliable evidential matter.

B. To be reliable, evidential matter should be convincing rather than persuasive.

C. Reliability of evidential matter refers to the amount of corroborative evidence obtained.

D. An effective internal control structure provides more assurance about the reliability of evidential matter.

(Audit Evidence Concepts & Standards Nature of Evidence 1)

Answer 61

D. An effective internal control structure provides more assurance about the reliability of evidential matter.

The effectiveness of the internal control structure directly impacts the reliability of the accounting data and financial statements. The more effective the internal control structure, the greater the assurance provided as to the reliability of evidential matter.

Wrong Answer I chose was

A. Information obtained indirectly from outside sources is the most reliable evidential matter.

Information obtained DIRECTLY from outside sources is considered to be more reliable and thus, to provide greater assurance.

Question 62

Which of the following actions by a CPA most likely violates the profession’s ethical standards?

A. Arranging with a financial institution to collect notes issued by a client in payment of fees due.

B. Compiling the financial statements of a client that employed the CPA’s spouse as a bookkeeper.

C. Retaining client records after the client has demanded their return.

D. Purchasing a segment of an insurance company’s business that performs actuarial services for employee benefit plans.

MIPP’s Nonindependence rules- Discreditable acts

Answer 62

C. Retaining client records after the client has demanded their return.

Only audit documentation may be retained indefinitely by a CPA. Such documentation may be necessary for defending against a malpractice suit. Client records, however, must be returned to a client upon request.

Wrong answer I chose was

B. Compiling the financial statements of a client that employed the CPA’s spouse as a bookkeeper.

An unethical situation might arise in the case of an AUDIT in such a situation, as independence would be threatened by the employment of the CPA’s spouse. However, merely compiling financial statements poses no ethical dilemma.

Question 63

Which of the following is a member in business?

A. Al, an internal auditor at Megamax Corporation.

B. Tina, a staff accountant at Big State University’s bursar’s office.

C. Zane, a CPA on staff at the Securities Exchange Commission who help commission lawyers understand cases that come before them.

D. All three choices provided.

(MIPP’s non-independence rules-Members in Business)

Answer 63

D. All three choices provided.
Because all three answer choices are correct, this answer is the best choice.

I stupidly chose

B. Tina, a staff accountant at Big State University’s bursar’s office.

Although this is a correct answer, it is not the best answer.

Question 64

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers.

This test of controls most likely was performed to support management’s financial statement assertion(s) of

Presentation and disclosure Rights and obligations
Yes Yes
Yes No
No Yes
No No

(Audit Evidence Concepts & Standards Nature of Evidence 1)

Answer 64

No Yes

Follow-up on errors reported by customers provides evidence that the customers exist and that the receivables are valid; i.e., that the client has the rights to the assets. The auditor’s test of controls thus provides evidence to support the assertion of rights and obligations. It does not address presentation and disclosure.

I wrongly Chose

Yes No

This answer is not correct because this test of controls does not address presentation and disclosure; it addresses rights and obligations.

Question 65

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling?

A. The sampling distribution should approximate the normal distribution.

B. Overstated units have a lower probability of sample selection than units that are understated.

C. The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan.

D. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

(Audit Sampling-Probability-Proportional-to-Size (PPS) Sampling)

Answer 65

C. The auditor controls the risk of incorrect acceptance by specifying this risk level for the sampling plan.

PPS sampling enables the auditor to directly control for the risk of incorrect acceptance by requiring the auditor to specify the desired level of that risk.

Wrong Answer

A. The sampling distribution should approximate the normal distribution.

In PPS sampling, the sampling distribution does NOT approximate the normal distribution. The population consists of the number of dollars in the account balance being tested. An individual account’s chance of being chosen for the sample is proportional to its size.

Question 66

When companies use information technology (IT) extensively, evidence may be available only in electronic form. What is an auditor’s best course of action in such situations?

A. Assess the control risk as high.

B. Use audit software to perform analytical procedures.

C. Use generalized audit software to extract evidence from client databases.
.
D. Perform limited tests of controls over electronic data.

(Internal Control - Concepts and Standards-Internal Control Standards 2)

Answer 66

C. Use generalized audit software to extract evidence from client databases.

When evidence is available only in electronic form, the auditor may find that generalized audit software is the best and most efficient means of extracting evidence from client databases. Generalized audit software consists of programs that enable an auditor to perform tests on client computer files and databases.

Wrong Answer

B. Use audit software to perform analytical procedures.

Audit software is frequently used to perform analytical procedures and can be used regardless of the form of the evidence. The importance of evidence only in electronic form is whether such information is available and accessible permanently as that may impact the nature and timing of tests to be performed.

Question 67

Which of the following controls is a processing control designed to ensure the reliability and accuracy of data processing?

	  Limit test  	  Validity check test  
	   Yes 	                          Yes 
	   No 	                          No 
	   No 	                          Yes 
	  Yes 	                           No 

(IT (Computer) Auditing- IT Controls—Application Controls)

Answer 67

Yes Yes

Limit tests and validity check tests are both processing controls designed to ensure the reliability and accuracy of data processing. While the Study Text has included both as examples of input controls, they can also be utilized as processing controls.

No Yes
Limit tests and validity check tests are both processing controls designed to ensure the reliability and accuracy of data processing. While the Study Text has included both as examples of input controls, they can also be utilized as processing controls.

Question 68

The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may

A. Allow the internal auditor to perform tests of internal controls.

B. Allow the internal auditor to audit a major subsidiary of the company.

C. Not assign any task to the internal auditor because of the internal auditor’s lack of independence.

D. Allow the internal auditor to perform analytical procedures, but not be involved with any tests of details.

Answer 68

A. Allow the internal auditor to perform tests of internal controls.

The auditor may use internal auditors to provide direct assistance in performing tests of control and/or substantive tests.

Wrong Answer I chose was

D. Allow the internal auditor to perform analytical procedures, but not be involved with any tests of details.

The auditor may use internal auditors to provide direct assistance in performing substantive tests, including analytical procedures and/or tests of details.

Question 69

The Chicago office of the ABC accounting firm performs the financial statement audit of Ebben Co. Assuming that the IFAC Code applies to the relationship, who among the following must comply with the Code’s rules on independence?

A. Tip, a tax partner in ABC’s Miami office who does no work for Ebben Co.

B. Sally, a senior partner in ABC’s New York headquarters who has no supervisory authority over anyone in ABC’s Chicago office.

C. Ted, a retired auditor whom ABC hired to help its audit team because of his years of experience in auditing companies in Ebben Co’s line of business.

D. All of the above.

Other Ethics Codes-International Federation of Accountants (IFAC)

Answer 69

C. Ted, a retired auditor whom ABC hired to help its audit team because of his years of experience in auditing companies in Ebben Co’s line of business.

Ted is covered. An expert who functions as part of the engagement team must meet independence rules. It would be an obvious threat to compliance with fundamental principles if that were not the case.

Wrong Answer is

D. All of the above.

Because Ted is covered, this cannot be the correct answer.

Question 70

The PCAOB issued Auditing Standard #1 in 2004, which specified the reporting language to be used in audit reports applicable to issuers relative to the AICPA standards that the PCAOB adopted on an interim basis in April, 2003. The PCAOB audit report modifications included all of the following, except for

A. Changed the title of the report from “Independent Auditor’s Report” to “Report of the Independent Registered Public Accounting Firm.”

B. Changed the date of the auditor’s report to the date that the issuer’s financial statements have been filed with the Securities and Exchange Commission.

C. Replaced the reference to “auditing standards generally accepted in the United States of America” with reference to “the standards of the Public Company Accounting Oversight Board (United States).”

D. Added a requirement that registered public accounting firms specify their city and state (or country, as applicable) along with their signature and date of the audit report.

Sarbanes-Oxley Act of 2002 and the PCAOB
Auditing Standard No. 1

Answer 70

B. Changed the date of the auditor’s report to the date that the issuer’s financial statements have been filed with the Securities and Exchange Commission.

The PCAOB did not change how the auditor’s report is dated. That date is determined by when the auditor has gathered sufficient appropriate audit evidence as a reasonable basis for the opinion, not by the date of any filings with the SEC. Answers A, C, and D were changes in the auditor’s report as a result of Auditing Standard #1.

Wrong answer is

C. Replaced the reference to “auditing standards generally accepted in the United States of America” with reference to “the standards of the Public Company Accounting Oversight Board (United States).”

The PCAOB did not change how the auditor’s report is dated. That date is determined by when the auditor has gathered sufficient appropriate audit evidence as a reasonable basis for the opinion, not by the date of any filings with the SEC. Answers A, C, and D were changes in the auditor’s report as a result of Auditing Standard #1

Question 71

Which of the following procedures would the group auditor most likely perform after deciding to make reference to a component auditor who audited a subsidiary of the entity?

A. Review the audit documentation and the audit programs of the component auditor.

B. Visit the component auditor and discuss the results of the other CPA’s audit procedures.

C. Make inquiries about the professional reputation and independence of the component auditor.

D. Determine that the component auditor has a sufficient understanding of the subsidiary’s internal control.

Audit Reports-Audits of Group Financial Statements

Answer 71

C. Make inquiries about the professional reputation and independence of the component auditor.

When part of the audit is performed by a component auditor, the group auditor is required to make inquiries concerning the professional reputation, independence, and competence of the component auditor.

Wrong answer is

A. Review the audit documentation and the audit programs of the component auditor.

A review of the audit documentation and audit programs of the component auditor would be more likely to be performed when the group engagement partner does NOT plan to make reference to the component auditor.