REVIEW BEFORE TEST**** A1-A6 Audit Flashcards
In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor’s consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is:
A. Decided in conjunction with the auditor’s risk assessment.
B. Determined separately for each major federal financial assistance program.
C. Calculated in relation to the financial statements taken as a whole.
D. Ignored, because all account balances, regardless of size, are fully tested.
Choice “B” is correct. Under the Single Audit Act, materiality is determined separately for each major federal financial assistance program.
Choice “A” is incorrect. Materiality must be determined before risk is assessed.
Choice “C” is incorrect. Under a GAAS audit, materiality is determined in relation to the
financial statements taken as a whole. Under a GAGAS audit, materiality levels may be
lower due to the public accountability of the entity, the various legal requirements, and
the visibility and sensitivity of governmental programs, activities, and functions.
Choice “D” is incorrect. The Single Audit Act does not require that all balances be tested
MCQ-08430
Which of the following strategies most likely could improve the response rate of the
confirmation of accounts receivable?
A. Including a list of items or invoices that constitute the account balance.
B. Restricting the selection of accounts to be confirmed to those customers with
relatively large balances.
C. Requesting customers to respond to the confirmation requests directly to the auditor by fax or email.
D. Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.
Choice “A” is correct. Positive accounts receivable confirmations require a recipient to respond and confirm their account balance. These confirmations may be blank or have the amount owed stated. A recipient is more likely to respond if it is easier for them to verify the balance. A listing of items or invoices that constitute an account balance
would be easier to confirm than a confirmation that is blank or one that just shows the total balance owed. (If the total amount of the balance is shown, the recipient may have to take an additional step of adding up all the invoices owed.)
Choice “B” is incorrect. Restricting the selection to those customers with relatively large
balances might not improve the response rate. For example, customers with large
balances may have several invoices that they would have to review and total.
Choice “C” is incorrect. Requesting customers to respond to the confirmation requests
directly to the auditor by fax or e-mail might not improve the response rate. Some
customers may prefer to respond by mail. In addition, recipients that respond
electronically should also be requested to mail the original confirmation to the auditor.
Choice “D” is incorrect. A recipient, who does not want to respond to a confirmation,
probably would not be persuaded by a notification that second requests will be mailed
if they fail to respond in a timely manner.
Analytical procedures are required for which of the following?
A. Tests of balances.
B. Client retention decision.
C. Internal control evaluation.
D. Audit planning.
Choice “D” is correct. Analytical procedures are required during an audit’s planning and final review.
Choice “A” is incorrect. Analytical procedures may be used to test the balance of accounts, but are not required to be utilized as a substantive procedure.
Choice “B” is incorrect. Analytical procedures are not required to be performed when deciding whether to retain a client.
Choice “C” is incorrect. Analytical procedures are not utilized to perform the evaluation of internal control. Procedures performed to evaluate internal control may include inquiry of appropriate personnel, observation of the entity’s operation, and/or inspection of relevant documentation.
MCQ-01510
According to the profession’s ethical standards, an auditor would be considered independent in which of the following instances?
A. The client owes the auditor fees for more than two years prior to the issuance of
the audit report.
B. The auditor is the officially appointed stock transfer agent of a client.
C. The auditor’s checking account that is fully insured by a federal agency, is held at
a client financial institution.
D. The client is the only tenant in a commercial building owned by the auditor.
Choice “C” is correct. Because the deposit account is fully insured, independence is not considered to be impaired.
Choice “A” is incorrect. If fees are owed for more than one year, the auditor is
considered to be a creditor of the client, and independence is impaired.
Choice “B” is incorrect. It has been held that an auditor who is appointed the stock
transfer agent of a corporation is not considered to be independent because the
functions of a stock transfer agent are similar to that of a manager of the client.
Choice “D” is incorrect. If the client is the auditor’s only tenant, the auditor definitely has a financial interest in the client’s well being, and this situation impairs independence.
MCQ-06864
Before accepting an engagement to audit a new client, a CPA is required to obtain:
A. An understanding of the prospective client’s industry and business.
B. The prospective client’s consent to make inquiries of the predecessor.
C. The prospective client’s signature to a written engagement letter.
D. An assessment of fraud risk factors likely to cause material misstatements.
Choice “B” is correct. In a new client relationship, it is mandatory to make inquiries of the predecessor auditor. Client permission is needed, however. If the client is unwilling to agree to this procedure, the auditor should consider the implications and decide
whether to accept the engagement.
Choice “A” is incorrect. An understanding of the client’s business would be gained during the planning phase of the audit.
Choice “C” is incorrect. The prospective client’s signature to a written engagement
letter would be obtained upon the acceptance of an engagement, not prior to the
acceptance.
Choice “D” is incorrect. An assessment of fraud risk factors is not required prior to accepting a new client.
MCQ-08687
In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan?
A. Other audit procedures to be performed to comply with generally accepted auditing standards.
B. Procedures performed to assess independence and the ability to perform the engagement.
C. Issues with management integrity that could affect the decision to continue the audit engagement.
D. The understanding of the terms of the engagement, including scope, fees, and
resource allocation.
Choice “A” is correct. The audit plan should include documentation of specific audit procedures (including other audit procedures) to be performed to comply with generally accepted auditing standards.
Choice “B” is incorrect. The auditor’s assessment of independence is required to be documented, but is not required to be documented in the audit plan. The audit plan outlines the nature, extent, and timing of the procedures to be performed during the
audit.
Choice “C” is incorrect. Issues with management integrity that could affect the decision
to continue the audit engagement should be documented. However, the specific issues
with management integrity generally are not documented in the audit plan.
Choice “D” is incorrect. The understanding of the terms of the engagement, including
scope, fees, and resource allocation, should be documented (typically in the form of an
engagement letter), but is not required to be documented in the audit plan. The audit
plan outlines the nature, extent, and timing of the procedures to be performed during
the audit.
MCQ-07635
During the initial fieldwork phase of a new audit engagement, the auditor discovers that the
client is currently involved in several lawsuits. If the auditor requests that the client prepare a letter of inquiry request to their outside attorneys, and the client refuses, the audit firm should take which of the following courses of action?
A. Discuss the pending lawsuits with client management and issue an unmodified
opinion if their responses are adequate.
B. Prepare the letter of inquiry and send directly to the outside attorneys.
C. Issue a disclaimer of opinion or withdraw from the audit engagement.
D. Perform alternative procedures to gather information regarding these lawsuits.
Choice “C” is correct. In the event the client refuses to prepare a letter of inquiry to be sent by the auditor to the client’s outside attorneys, there is a scope limitation. If the client refuses to prepare or permit a letter of inquiry, the audit firm should either issue a disclaimer of opinion or withdraw from the audit engagement.
Choice “A” is incorrect. Discussing pending lawsuits with client management is not sufficient to eliminate the need for a letter of inquiry under the above scenario.
Choice “B” is incorrect. The audit firm should not prepare the letter of inquiry as it must
be done by client management. Once prepared by the client, it is sent to the attorneys by the auditor.
Choice “D” is incorrect. Under the above scenario, there is a scope limitation, which is
not mitigated by alternative audit procedures.
Which of the following is not part of obtaining an understanding of internal control?
A. Determining the extent to which internal controls are computerized.
B. Considering the types of misstatements that may occur in an entity’s financial statements.
C. Determining whether internal controls are operating effectively.
D. Considering knowledge obtained from previous audits.
Choice “C” is correct. The auditor is not required to obtain knowledge about operating effectiveness as part of the understanding of internal control. This knowledge is obtained later, for specific controls on which the auditor plans to rely.
Choices “B”, “D”, and “A” are incorrect. During the planning phase of the audit, the auditor obtains an understanding of the internal control system by considering:
- The types of misstatements that may occur.
- The risk that misstatements may occur.
- Factors that influence the design of tests of controls and substantive tests.
- The assessment of inherent risk.
- Judgments about materiality.
- The complexity and sophistication of the entity’s operations and systems.
- The use of manual vs. computerized control procedures.
Such knowledge may be obtained by appropriate inquiry, inspection, or observation. Knowledge may also be obtained based on previous experience with the client and/or an understanding of the industry in which the entity operates.
Which of the following best describes a type of judgmental misstatement?
A. A clerical error that resulted in an amount recorded as $5,000 that should have
been recorded as $500.
B. An inaccuracy in processing data.
C. Differences between management and the auditor’s judgment regarding estimates.
D. A difference between the classification of a reported financial statement element
and the classification according to generally accepted accounting principles.
Choice “C” is correct. Differences between management and the auditor’s judgment
regarding estimates is an example of a type of judgmental misstatement.
Choices “B”, “A”, and “D” are incorrect. An inaccuracy in processing data, a clerical error in reporting of amounts, and a difference between the classification of a reported financial statement element and the classification according to GAAP are all examples
of factual misstatements.
MCQ-04624
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
A. The inability to review the predecessor auditor’s working papers.
B. The indications that management has not investigated employees in key positions before hiring them.
C. The prospective client’s unwillingness to permit inquiry of its legal counsel.
D. The CPA’s lack of understanding of the prospective client’s operations and industry.
Choice “C” is correct. A direct letter of inquiry to the entity’s legal counsel is required, and a client’s refusal to permit such inquiry generally will result in a disclaimer of opinion. It is unlikely that a CPA would accept a new audit engagement under such circumstances.
Choice “A” is incorrect. Inability to review the predecessor auditor’s working papers
would not cause a CPA to decline a new audit engagement. The CPA would simply need to perform an appropriate level of work to substantiate the opening financial statement balances.
Choice “B” is incorrect. Indications that management has not investigated employees in key positions before hiring them is a fraud risk factor that the auditor would need to consider in planning the audit, but it would not cause the CPA to decline the
engagement.
Choice “D” is incorrect. The CPA need not have an understanding of the prospective client’s operations and industry before accepting a new audit engagement. Such an understanding may be obtained after acceptance, during the planning phase of the engagement.
MCQ-14968
Block, a CPA firm, is finalizing the audit of a nonissuer. In drafting the audit report containing
an unmodified opinion, how should Block make the following representations in the audit opinion on comparative financial statements?
Consistent application of accounting principles /
Examination of evidence on a test basis
A. Explicitly Explicitly
B. Implicitly Implicitly
C. Implicitly Explicitly
D. Explicitly Implicitly
Choice “C” is correct. Consistency is implicit in the auditor’s report, and will be explicitly mentioned in an emphasis-of-a-matter paragraph only if there are issues with consistency. Within the Auditor’s Responsibility section of the report, the following
statement is explicitly made: “Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.”
Choice “A” is incorrect. Only the examination of evidence on a test basis is explicitly
stated in the auditor’s report. The statement is included in the Auditor’s Responsibility
section.
Choice “B” is incorrect. Only consistency in the application of accounting principles is
implicit in the auditor’s report.
Choice “D” is incorrect. The consistency of the application of accounting principles is
implicit while the examination of evidence on a test basis is explicitly stated in the
Auditor’s Responsibility section.
An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the:
A. The accountant takes responsibility for the adequacy of the procedures performed.
B. The accountant and engaging party agree, or will be able to agree, on the criteria to be used in the determination of the findings.
C. Accountant also examines the prospective financial statements.
D. Provisions of Statements on Standards for Accounting and Review Services (SSARS) are followed.
Choice “B” is correct. In an agreed-upon procedures engagement, both the practitioner and the engaging party must agree, or be able to agree, on the criteria that will be used in the determination of findings. In addition, agreement should be reached on the
procedures to be performed and any materiality limits to be applied.
Choice “A” is incorrect. In an agreed-upon procedures engagement, the engaging party
(and not the accountant) takes responsibility for the adequacy of the procedures for
their purposes.
Choice “C” is incorrect. There is no requirement that the accountant also examine
prospective financial statements in an agreed-upon procedures engagement.
Choice “D” is incorrect. An agreed-upon procedures engagement for prospective
financial statements is governed by Statements on Standards for Attestation
Engagements (SSAE), not Statements on Standards for Accounting and Review
Services (SSARS).
MCQ-05822
Which of the following procedures would an auditor most likely perform prior to the balance sheet date?
A. Send inquiry letter to client’s legal counsel.
B. Review subsequent events.
C. Perform search for unrecorded liabilities.
D. Review detail and test significant travel and entertainment expenses.
Choice “D” is correct. The auditor may choose to perform detailed audit work during an interim period prior to the balance sheet date, especially for accounts that are reasonably predictable. If travel and entertainment expenses are budgeted and closely monitored, they may very well be predictable and subject to interim testing.
Choice “A” is incorrect. A letter of audit inquiry to the client’s legal counsel relates to
pending or threatened litigation matters that existed at the balance sheet date and for a
period thereafter. Since the letter includes discussion of matters existing at the balance
sheet date, it would not be possible to send this letter prior to the balance sheet date.
Choice “B” is incorrect. Subsequent events occur (by definition) after the balance sheet
date, so it would not be possible to review them prior to the balance sheet date.
Choice “C” is incorrect. The search for unrecorded liabilities is a search for obligations
that existed, but were not recorded, as of the balance sheet date. Therefore, it would
not be possible to perform this search prior to the balance sheet date.
MCQ-15105
An accountant may accept an engagement to apply agreed-upon procedures to prospective
financial statements provided that:
A. Responsibility for the adequacy of the procedures performed is taken by the accountant.
B. Negative assurance is expressed on the prospective financial statements taken
as a whole.
C. The accountant is independent from the responsible party.
D. The prospective financial statements are also examined
Choice “C” is correct. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that certain conditions are met, including independence from the responsible party.
Choice “A” is incorrect. The engaging party must understand that it takes responsibility for acknowledging the adequacy of the procedures.
Choice “B” is incorrect. No assurance is expressed in an agreed-upon procedures engagement.
Choice “D” is incorrect. There is no requirement that the prospective financial
statements be examined. In fact, the practitioner’s report on the application of agreedupon procedures states that the auditor did not perform an examination
In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if the:
A. Auditor understands the form and content of the specialist’s findings in relation to the representations in the financial statements.
B. Auditor, as a result of the specialist’s findings, decides to indicate a division of responsibility with the specialist.
C. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.
D. Auditor, as a result of the specialist’s findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements.
Choice “D” is correct. When expressing an unmodified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in a departure from an unmodified opinion. The auditor may need the permission of the specialist before referencing the specialist in the report.
Choice “A” is incorrect. The auditor must understand the form and content of the
specialist’s findings in relation to the representations in the financial statements to be
able to review the specialist’s work. However, this does not affect whether or not the
auditor refers to the specialist in the auditor’s report.
Choice “B” is incorrect. An auditor should not divide responsibility for the audit with a
specialist. Further, making reference to the specialist in an unmodified unqualified
report generally is inappropriate.
Choice “C” is incorrect. Lack of client familiarity with the specialist does not affect the
auditor’s report. Also, it is the auditor (not the client) who must be satisfied regarding
the specialist’s qualifications.
