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Question 1

The authority to accept incoming goods in receiving should be based on:

Answer 1

an approved purchase order

Question 2

what is the differences between a purchase order, a vendor invoice, a material requisition, and a bill of lading?

Answer 2

A purchase order is written authorization from a buyer, for a supplier to deliver specified goods or services to the buyer, at the price, quality level, delivery date, and certain other terms specified in the agreement.

A vendor might send goods without the authorization from the buyer so a vendor invoice would not provide any control over the receipt of goods. A bill of lading is a legal document between the shipper of a good and the carrier detailing the type, quantity and destination; this would be similar to the vendor invoice as the bill of lading would not determine whether the good was properly authorized by the purchaser. A materials requisition would originate from a production department to request materials for manufacturing purposes.

Question 3

Which of the following best describes the earliest date for an auditor’s report?

Answer 3

The date the auditor has obtained sufficient appropriate audit evidence to support the opinion

Question 4

The date the auditor has obtained sufficient appropriate audit evidence to support the opinion

Answer 4

investigation of variances within a formal budgeting system.

Question 5

A CPA concludes that the unaudited financial statements on which the CPA is disclaiming an opinion are not in conformity with an applicable financial reporting framework because management has failed to capitalize leases. The CPA suggests appropriate revisions to the financial statements, but management refuses to accept the CPA’s suggestions. Under these circumstances, the CPA ordinarily would:

Answer 5

describe the nature of the departure from an applicable financial reporting framework in the CPA’s report and state the effects on the financial statements, if practicable.

The key to this question is the phrase “unaudited financial statements.” A CPA would disclaim an opinion on the unaudited financial information of a public entity (an issuer) when he is associated with the financial statements but has not reviewed or audited them. The disclaimer would state that the financial statements “were not audited by us and, accordingly, we do not express an opinion on them.” If there should be a material departure from an applicable financial reporting framework that management refuses to correct, the CPA should modify the language in the report to describe the departure.

The CPA is not expressing limited assurance in this circumstance; he is expressing no assurance when there is a disclaimer. The report cannot be restricted to the entity’s management and board of directors if it is accompanying financial information required to be submitted to a third party. As an audit has not been performed, the CPA would not issue a qualified or adverse opinion.

Question 6

In obtaining an understanding of an entity’s internal control, an auditor is required to obtain knowledge about the:

operating effectiveness of policies and procedures.
design of policies and procedures.

Answer 6

design of policies and procedures

Question 7

An auditor assesses control risk because it:

Answer 7

affects the level of detection risk that the auditor may accept.

Question 8

Snow, CPA, was engaged by Master Co. (an issuer) to audit and report on the effectiveness of Master’s internal control over financial reporting and audit the financial statements. Snow’s integrated audit report should state that:

Answer 8

because of inherent limitations of any internal control, internal control may not prevent, or detect and correct, misstatements.

Question 9

An auditor would least likely initiate a discussion with those charged with governance concerning:

Answer 9

the maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

Question 10

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

Answer 10

Reduction of the frequency of data entry errors

Question 11

An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor:

Answer 11

should assess the risk that the actuary’s objectivity might be impaired.

Question 12

Section 11(A) of the Securities Act of 1933:

Answer 12

shifts the burden of proof in a lawsuit from the investor to the CPA who audited the financial statements.

Question 13

According to the AICPA Code of Professional Conduct, which of the following actions will impair independence?

Answer 13

Participating in the hiring or termination of a client’s employees

Question 14

Preparing client financial statements based on information in a trial balance, processing payroll for a client’s signature based on client recordkeeping, and assisting a client in drafting a stock-offering document or memorandum will not impair independence.

Answer 14

will not impair independence

Question 15

what categories are reflected in the internal control ?

Answer 15

definition of internal control:

Reliability of financial reporting
Effectiveness and efficiency of operations
Compliance with applicable laws and regulations
Segregation of functional responsibilities is a basic concept of internal control, but not a primary objective as provided in the definition.

Question 16

auditor responsibilities regarding an ordinary audit engagement include ?

Answer 16

The auditor’s responsibilities regarding an ordinary audit engagement include identifying circumstances in which generally accepted accounting principles have not been consistently observed.

The auditor must perform the audit in accordance with generally accepted auditing standards (not accounting principles—read every answer choice carefully). The auditor does not always express an opinion—there are circumstances under which he will disclaim, or not express, an opinion. Adopting sound accounting policies and procedures and establishing and maintaining an internal control structure are specifically and explicitly stated as the responsibility of management. (The auditor must adopt sound auditing policies and procedures.)

Question 17

An accountant agrees to the client’s request to change an engagement from a review to a compilation of financial statements. The compilation report should include

Answer 17

When an engagement is changed from a review to a compilation, provided that the accountant concludes that there is reasonable justification for the change, the compilation report should not reference the original engagement, any review procedures that were already performed before the change, or any scope limitations that resulted in the change in engagement.

Compilations and reviews are performed according to SSARS (Statements on Standards for Accounting and Review Services), not GAAS (generally accepted auditing standards).

Question 18

analytical procedure perform

Answer 18

“Analytical procedures performed as risk assessment procedures may identify aspects of the entity of which the auditor was unaware and may assist in assessing the risks of material misstatement in order to provide a basis for designing and implementing responses to the assessed risks….Analytical procedures may enhance the auditor’s understanding of the client’s business….However, when such analytical procedures use data aggregated at a high level…the results of those analytical procedures provide only a broad initial indication about whether a material misstatement may exist.

Question 19

The auditor is precluded from including which of the following statements in his or her communication of internal control related matters identified in an audit?

Answer 19

While the auditor may communicate there were no material weaknesses identified during the audit, AU-C 265.16 precludes “a written communication stating that no significant deficiencies were identified during the audit

Question 20

In reviewing accounting estimates prepared by management, the auditor should:

perform retrospective review of prior-period estimates to determine a possible bias.
test assumptions that are not considered sensitive or otherwise significantly affected by judgments.

Answer 20

perform retrospective review of prior-period estimates to determine a possible bias.

Question 21

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?

Answer 21

Of the listed procedures, reviewing the lawyer’s letter for information about litigation would most likely assist the auditor in determining whether management has identified all accounting estimates that could be material to the financial statements. Related party transactions and inventories outside the entity are not estimated amounts. Reviewing the historical pattern of accounting estimates will not usually reveal an unidentified accounting estimate.

Question 22

In performing an audit of internal controls over financial reporting integrated with an audit of financial statements, the auditor uses:

Answer 22

an audit standard specifically designed for an integrated audit of internal controls.

Question 23

Why should an auditor obtain an understanding of control activities relevant to an audit?

Answer 23

Information on control activities can be utilized to determine areas that need attention.

Question 24

The auditor determines that effective internal controls exist for all relevant assertions related to a material class of transactions, account balance, and disclosure. As a result, the auditor can elect to perform which of the following tests?

Tests of controls
Substantive procedures
Analytical procedures

Answer 24

Because effective internal controls generally reduce but do not eliminate the risk of material misstatement, tests of controls reduce but do not eliminate the need for substantive procedures.” AU-C 330.18 states, “Irrespective of the assessed risks of material misstatement, the auditor should design and perform substantive procedures for all relevant assertions related to each material class of transactions, account balance, and disclosure.” While the auditor can elect to use only a substantive approach, if a test of controls is not efficient, the auditor cannot use only a test of controls approach. Therefore, “Either I or II” is not a correct answer.

Question 25

An internal auditor was assigned to confirm whether operating personnel had corrected several errors in transaction files that were discovered during a recent audit. Which of the following automated tools is the auditor most likely to use

Answer 25

use online inquiry

Question 26

Which of the following professional services would be considered an attestation engagement?

Advocating on behalf of a client about trust tax matters under review by the Internal Revenue Service

Providing financial analysis, planning, and capital acquisition services as a part-time, in-house controller

Advising management in the selection of a computer system to meet business needs

Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions

Answer 26

An engagement to prepare the income statement and balance sheet for one year in the future based on client expectations would be considered an attest engagement, because the accountant is issuing an examination, review, or agreed-upon procedures report on another party’s assertion.

The other answer choices describe consulting services that CPAs often provide to their clients.

Question 27

Which of the following statements regarding the going concern assumption is correct?

Answer 27

The statement “Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary” is correct (AU-C 570.02). The auditor makes a decision based on relevant conditions and events that exist at, or have occurred prior to, the auditor’s report

Question 28

In an audit of a nonissuer’s financial statements, projected misstatement is:

Answer 28

an auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample.

Question 29

Which of the following is a substantive test that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable?

Answer 29

Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports

Question 30

The objective of a dual-purpose test of details of transactions performed as tests of controls is to:

Answer 30

evaluate whether controls operated effectively.

Tests of details of transactions can be performed as tests of controls or as substantive tests. When a substantive test of a transaction is performed concurrently with a test of a control relevant to that transaction, it is called a dual-purpose test. The dual-purpose test is designed to achieve the objectives of both the test of the control and the substantive test. The objective of tests of details of transactions performed as tests of controls is the same as that of any test of controls: to evaluate whether controls operated effectively. The objective of tests of details of transactions performed as substantive tests is to detect material misstatements in the account balances of the financial statements.

Monitoring the design and use of entity documents such as prenumbered shipping forms is a type of control procedure. In planning the audit, the auditor’s understanding of the entity’s internal control includes its design and determining whether controls have been placed in operation.

Question 31

Which of the following situations most likely represents the highest risk of a misstatement arising from misappropriations of assets?

Answer 31

A large number of bearer bonds on hand represents the highest risk of a misstatement arising from misappropriations of assets. The incorrect answer choices are various schemes of fraudulent financial reporting:

A large number of inventory items with low sales prices suggests a scheme to underreport the value of inventory.
A large number of transactions processed in a short period of time suggests a scheme to falsely inflate revenue.
A large number of fixed assets with easily identifiable serial numbers suggests a scheme to record nonexistent fixed assets.
Misappropriation of assets means theft of assets. Bearer bonds are highly susceptible to theft. Since whoever holds them owns them and they are not registered, they are easily transferred and are more likely to be stolen. Registered bonds have to be registered with the bond’s issuer. The holder’s name and contact information is recorded by the issuer. The owner’s name is printed on the bond certificate. Most registered bonds are also tracked electronically. They are worthless if stolen.

Question 32

The permanent (continuing) file of an auditor’s workpapers most likely would include copies of th

Answer 32

Materials that have importance for next year’s engagement are often segregated and placed in a permanent file. Of the responses provided, only debt agreements would have importance for next year’s engagement and thus would be included in the auditor’s permanent file.

Question 33

Which of the following statements is correct regarding the auditor’s consideration of the possibility of noncompliance under applicable law or regulations by clients?

Answer 33

If specific information concerning noncompliance with laws and regulations comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether noncompliance under applicable law or regulations has occurred.

Question 34

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Answer 34

Inclusion of zero and negative balances generally does not require special design considerations.

Question 35

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Answer 35

Likely frauds that can occur in the revenue cycle include shipping goods to nonexistent customers (which are stolen by employees), failing to bill “customers” (these could again be employees) for goods shipped, recording sales without an underlying transaction in order to inflate the sales and accounts receivable figures, creating fictitious credit memos for “returned” goods (a method of stealing cash), and booking sales in periods earlier than they actually occurred (to hike up the sales figures). A client most likely will overstate revenue and accounts receivable in a fraudulent scheme. Only the “authorization of credit memos by personnel who receive cash may permit the misappropriation of cash” is a likely scenario which would benefit either the entity or certain dishonest employees.

Intentionally recording claims for goods returned in other customer’s accounts is incorrect because recording such claims in the wrong account is likely to be quickly detected when customers who have not received the credit complain.

Question 36

Block CPA Firm is engaged to perform a financial statement audit of BIG Company (an issuer). BIG Company is required to report on the company’s internal control over financial reporting (ICFR), but that report is not required to be audited. Which of the following would be a required element of the audit report of BIG Company?

Answer 36

Explanatory language in the “Basis of Opinion” section noting that no audit of internal controls over financial reporting is required, although management is required to report on the company’s internal control over financial reporting

Question 37

Which of the following is a required procedure that an auditor must perform when complying with AU-C 945, Auditor Involvement with Exempt Offering Documents?

Answer 37

Perform a subsequent events review from the date of the financial statement auditor’s report through the date of the exempt offering

Question 38

An auditor may achieve audit objectives related to particular assertions by:

Answer 38

performing analytical procedures.

Specific audit objectives are developed regarding assertions. Assertions are management representations that are embodied in the account balance, transaction class, and disclosure component of financial statements. Substantive tests (tests of detail and analytical procedures) are performed to detect material misstatements in the account balance, transaction class, and disclosure components of financial statements. Substantive tests help to achieve audit objectives by verifying no material misstatements exist. Of the responses provided, only analytical procedures are substantive tests.

Question 39

Which of the following procedures would an accountant most likely perform during an engagement to review the financial statements of a nonissuer?

Answer 39

Inquire of management about related party transactions

Question 40

“Enhanced Review of Periodic Disclosures by Issuers,” dictates that

Answer 40

the SEC will review disclosures made by issuers.

Question 41

During the initial planning phase of an audit, a CPA most likely would:

Answer 41

discuss the timing of the audit procedures with the client’s management.

Question 42

embedded audit do what ?

Answer 42

Embedded audit modules enable continuous monitoring of transaction processing.

Analyzing the efficiency of programming is a characteristic of mapping.

Question 43

According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA’s independence?

Answer 43

Only direct and material indirect financial interests

Question 44

Which of the following computer documentations would an auditor most likely utilize in obtaining an understanding of internal control?

Answer 44

system flowchart

Question 45

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

Financial statement accounts likely to contain a misstatement
Conditions that require extension of audit tests

Answer 45

both

Question 46

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

Answer 46

vendors with whom the entity has previously done business.

Question 47

Which of the following characteristics of prospective financial statements would require the practitioner to include in a report on the prospective financial statements a paragraph that restricts the use and distribution of the report?

Answer 47

Projected, or prospective, financial statements are either financial forecasts or financial projections that include the summaries of significant assumptions and accounting policies. A financial projection report is restricted in its use and distribution.

A financial forecast report may be generally distributed. A prospective financial statements report that does not contain a financial projection may be generally distributed. A general distribution forecast compilation report may be prepared by a practitioner who lacks independence

Question 48

Which of the following audit procedures most likely will involve sampling?

Answer 48

Testing of process for approval of credit to customers for sales on account

Question 49

Which of the following parties should request inquiry of a client’s lawyer?

Answer 49

Client management addresses the attorney and requests that information regarding litigation, claims, and assessments (LCA), which management has already disclosed, be confirmed directly with the auditor. Due to the confidential nature of the communications between a client and an attorney, the client must give permission for the attorney to discuss any matters with the auditor. This letter is a means of obtaining corroborating evidence regarding contingencies which may be facing the client.

Question 50

Management is responsible for making the accounting estimates in the financial statements. Estimates are based on subjective as well as objective factors and, as a result, judgment is required to estimate an amount at the financial statement date. In regards to accounting estimates made by management, the auditor is responsible for:

determining the accuracy of the estimate.
evaluating the reasonableness of the estimate.

Answer 50

evaluating the reasonableness of the estimate. only

Question 51

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:

Answer 51

Presentation and disclosure: No; Rights and obligations: Yes

Question 52

Section 105 of SOX Title I, “Investigations and Disciplinary Proceedings,” dictates that:

Answer 52

the PCAOB may investigate any act or practice, or omission to act, by a registered public accounting firm that may violate any provision of the Sarbanes-Oxley Act, PCAOB rules, securities laws, and professional standards

Question 53

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

Answer 53

Performing analytical procedures to identify areas that may represent specific risks

The other answer choices (reviewing investment transactions of the audit period to determine whether related parties were created, obtaining an attorney’s representation letter to discover whether any unusual transactions have occurred, and obtaining a written representation letter from the client to emphasize management’s responsibilities) are substantive procedures that would be performed as part of obtaining sufficient appropriate audit evidence to support the assertions of the financial statements and the objective of the audit.

Question 54

When considering the use of management’s written representations as audit evidence about the completeness assertion, an auditor should understand that such representations:

Answer 54

complement, but do not replace, substantive tests designed to support the assertion.

Question 55

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to:

Answer 55

When an auditor lowers the amount of tolerable misstatement, a more careful audit is planned to detect small misstatements. Of the items listed above, only “perform the planned auditing procedures closer to the balance sheet date” results in a more careful audit. The other choices result in a less careful audit.

Question 56

An analysis of which of the following accounts would best aid in verifying that all fixed assets have been capitalized?

Answer 56

Repairs and maintenance

An entity is most likely to mistakenly record a major repair that extends the life of a fixed asset in the repairs and maintenance expense account. The auditor would examine the population of expenses posted in this account to determine if any capital purchases have been incorrectly recorded. Examination of the other accounts listed would not aid in this audit objective.

Question 57

If an accountant is performing a review engagement for a nonissuer and considers it necessary to communicate a matter that is not presented in the financial statements, then the accountant should include this information in which of the following paragraphs in the review report?

Answer 57

the other matter paragraph

At the accountant’s discretion, an emphasis-of-matter paragraph and/or an other-matter paragraph may be added to the standard review report, provided that the accountant does not believe that the financial statements may be materially misstated. Such paragraph should only refer to information presented or disclosed in the financial statements.

The other-matter paragraph, if any, should be included immediately after the accountant’s conclusion paragraph and any emphasis-of-matter paragraph, and should use the heading “Other Matter.” The other-matter paragraph should state that the information is presented for purposes of additional analysis and is not a required part of the statements, and that the information is the representation of management

Question 58

Section 403 of SOX Title IV, “Disclosures of Transactions Involving Management and Principal Stockholders,” dictates that:

Answer 58

any person who is directly or indirectly the beneficial owner of more than 10% of any class of any equity security or is a director or an officer of the issuer must file statements required by SOX and the SEC.

Question 59

In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of:

Answer 59

completeness.

The primary focus of an auditor in the examination of liabilities (e.g., accounts payable) is to verify that all of the entity’s liabilities have been recorded.

Question 60

An auditor most likely would be responsible for communicating significant deficiencies in the design of internal control:

Answer 60

to specific legislative and regulatory bodies when reporting under Government Auditing Standards.

Question 61

An auditor may not issue a qualified opinion when:

Answer 61

For public companies, when the auditor is not independent, he or she should disclaim an opinion indicating that he or she is not independent, but the auditor should not give the reasons for lack of independence or list any procedures performed. For nonpublic companies, if the auditor lacks independence, the auditor may issue only a compilation report. Therefore, an auditor may not issue a qualified opinion when the auditor lacks independence with respect to the audited entity.

Question 62

A client has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the amounts pervasively distort the financial statements?

Answer 62

When a client has capitalizable leases but refuses to capitalize them in the financial statements, the client has made a material departure from GAAP that is neither necessary nor justified by the client. When a misstatement is both material and pervasive, the auditor should issue an adverse opinion

Question 63

An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing Standards (the “Yellow Book”) because of the provisions of government grant funding agreements. Under these circumstances, the CPA is required to report on the enterprise’s internal controls either in the report on the financial statements or in:

Answer 63

Financial audits performed under generally accepted government auditing standards (GAGAS) require, along with the audit of the financial statements, reports on internal control, compliance with laws and regulations, and provisions of contracts and grant agreements as they relate to financial transactions, systems, and processes.

written report describing each significant deficiency observed, including identification of those considered material weaknesses.

Reports in compliance with the “Yellow Book” need to contain the scope of the auditor’s testing but do not need to include immaterial misstatements.

Auditors may report on the entity’s internal control over financial reporting and compliance with laws and regulations and provisions of contracts or grant agreements in the report on the financial statements, or in a separate report (which may be bound in the same document with the report on the financial statements). If the auditor issues a separate report, he/she should include a reference to the separate report in the financial statement audit report and also state that the reports are an integral part of a GAGAS audit and important for assessing the results of the audit.

Question 64

when to use qualified , disclaim, and adverse opinion?

Answer 64

A scope limitation involving a recorded uncertainty would cause an auditor of an entity’s financial statements to issue either a qualified opinion or a disclaimer. A scope limitation is an audit constraint brought on by management or other issues that do not let the auditor complete the audit.

Since the auditor was unable to complete the audit, the auditor did not obtain all of the sufficient appropriate audit evidence, and the financial statements will have a qualified or disclaimer of opinion.

The auditor should express a qualified or an adverse opinion in the following situations: the auditor concludes that a matter involving a risk or an uncertainty is not adequately disclosed in the financial statements, the accounting principles used cause the financial statements to be materially misstated, or management’s estimate is unreasonable and its effect is to cause the financial statements to be materially misstated.

Question 65

Gole, CPA, is engaged to review the 20X2 financial statements of North Co., a nonissuer. Previously, Gole audited North’s 20X1 financial statements and expressed an unmodified opinion. Gole decides to include a separate paragraph in the 20X2 review report because North plans to present comparative financial statements for 20X1 and 20X2. This separate paragraph should indicate that:

Answer 65

no auditing procedures were performed after the date of the 20X1 auditor’s report

Question 66

In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to:

Answer 66

assess whether management has identified laws and regulations that have a direct and material effect on the entity’s financial statements.

Question 67

At the accountant’s discretion, an emphasis paragraph may be added to the standard review report. examples ?

Answer 67

Examples of matters accountants may wish to emphasize include that the entity has had significant transactions with related parties; uncertainties; that the entity is a component of a larger business enterprise; unusually important subsequent events; and accounting matters, other than those involving a change or changes in accounting principles, affecting the comparability of the financial statements with those of the preceding period.

Question 68

When considering internal control, an auditor should be aware of the concept of reasonable assurance, which recognizes that:

Answer 68

internal control policies and procedures may be ineffective due to mistakes in judgment and personal carelessness.

Question 69

what information go into other matter paragraphs?

Answer 69

the information is presented for purposes of additional analysis and is not a required part of the statements, and that the information is the representation of management.

Question 70

what steps to do when assessing control risk at below the maximum

Answer 70

1st step: identify specific activities that are likely to detect or prevent material misstatement
2nd step: perform test of control, not test of details , to evaluate the effectiveness of these control activities

If the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing, there is no basis for attempting to reduce the assessed level of control risk below maximum. Analytical procedures are used in planning audit procedures, substantive testing, and reviewing the financial statements; these procedures do not contribute to the auditor’s assessment of control risk. Tests of details of transactions and account balances are used primarily as substantive tests.

Question 71

before reissuing a compilation report, the predecessor accountant should

Answer 71

Before reissuing a compilation report, the predecessor accountant should:

read the financial statements of the current period and the successor’s report,
compare the prior year’s financial statements with those of the current period, and
obtain a letter from the successor accountant that indicates whether he is aware of any matter that might have a material effect on the financial statements, including disclosures, reported on by the predecessor.

Question 72

A CPA is engaged to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:

Answer 72

Statements on Standards for Attestation Engagements (SSAE) are issued by senior technical bodies of the AICPA. They apply to practitioners engaged to perform an examination or a review; or issue an agreed-upon procedure report on subject matter, or an assertion about the subject matter that is the responsibility of another party (these are called “attest engagements”). Examining and reporting on management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria would fall under these standards.

Statements on Standards for Accounting and Review Services (SSARS) are issued by the Accounting and Review Services Committee of the AICPA. They describe the professional requirements imposed on accountants performing a compilation or review. Statements on Auditing Standards (SAS) are issued by the Auditing Standards Board of the AICPA. They contain the generally accepted auditing standards with which an auditor is expected to comply. Statements on Standards for Consulting Services (SSCS), issued by the AICPA, supersede the Statements on Standards for Management Advisory Services (SSMAS). They provide standards of practice for practitioners performing consulting services (defined broadly as consultation, advisory, implementation, transaction, support, and product services)

Question 73

the auditor report for a performance audit of a governmental enity in according with Goverment auditing standard should contain?

Answer 73

The auditor’s report for a performance audit of a governmental entity in accordance with Government Auditing Standards should contain:

the objectives, scope, and methodology of the audit,
the audit results, including findings, conclusions, and recommendations, as appropriate,
a reference to compliance with generally accepted government auditing standards,
the views of responsible officials, and
if applicable, the nature of any privileged and confidential information omitted.
A concurrent opinion on the historical financial statements is not the objective of the performance audit and is not required.

Question 74

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

Answer 74

Obtain an understanding of the entity’s risk assessment process

Question 75

When communicating internal control related matters noted in an audit, an auditor’s report issued on significant deficiencies should indicate that:

Answer 75

the purpose of the audit was to report on the financial statements and not to provide assurance on internal control.

Question 76

The audit program usually cannot be finalized until the:

Answer 76

consideration of the entity’s internal control has been completed.

Question 77

If prior-period compiled financial statements have been restated and the predecessor accounting firm decides not to reissue its report, the successor accounting firm:

Answer 77

may be engaged to reissue the prior-period report.

Question 78

Which of the following factors would least likely affect the quantity and content of an auditor’s working papers?

Answer 78

The content of the representation letter

Question 79

Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable?

Answer 79

Obtaining a current value appraisal of the collateral

Question 80

To determine whether a particular assertion is relevant to a significant account balance or disclosure, the auditor should evaluate:

Answer 80

To determine whether a particular assertion is relevant to a significant account balance or disclosure, the auditor should evaluate:

the nature of the assertion,
the volume of transactions or data related to the assertion, and
the nature and complexity of the systems, including the use of information technology, by which the entity processes and controls information supporting the assertion.

Question 81

the quality control policies and procedures applicable to a firm’s accounting and auditing practice should encompass the following elements:

Answer 81

Leadership responsibilities for quality within the firm
Relevant ethical requirements
Acceptance and continuance of client relationships and specific engagements
Human resources
Engagement performance
Monitoring
Consideration of the advancement of the audit firm’s personnel would be part of the human resources element of quality control. The consultation procedures are considered in the engagement performance element of quality control.

Question 82

An accountant compiles the financial statements of a nonissuer and issues the standard compilation report. Although not specifically stated in this report, it is implied that:

Answer 82

substantially all disclosures required by GAAP are included in the financial statements.

explicitly states that the accountant has not reviewed or audited the financial statements.

The financial statements may be used to obtain credit if a standard compilation report is issued.

The standard compilation report’s limitation to presenting information that is the representation of management is explicitly addressed by stating, “Management is responsible for the preparation and fair presentation of the financial statements…”

Question 83

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonpublic entity’s financial statements?

Answer 83

In discussion of a compilation agreement on engagement terms, AR-C 90.10 makes no mention of the accountant obtaining an understanding of internal control for neither a review nor a compilation. Independence is required “when providing auditing or other attestation services” and when performing a review. Although the accountant expresses no opinion or assurance in a compilation, he does express limited assurance in a review report. The accountant is required to obtain a written management representation letter for a review engagement (since the report will provide limited assurance).

Question 84

A senior auditor conducted a dual-purpose test on a client’s invoice to determine whether the invoice was approved and to ascertain the amount and other terms of the invoice. Which of the following lists two tests that the auditor performed?

Answer 84

Tests of controls and tests of details

Dual-purpose testing is an audit procedure that performs a test of controls (i.e., evaluates the design effectiveness of a control) and performs a test of details (i.e., substantive testing) at the same time on the same sample of transactions. Dual-purpose testing involves a reperformance of client procedures to determine the occurrence rate of errors in a financial statement. The control test looks for evidence that the client verification procedure was effective and the substantive test looks for evidence that the transactions were accurate. The size of a sample designed for both purposes should be the larger of the samples that would otherwise have been designed for the two separate purposes.

Question 85

When performing an audit, a CPA notes that bad debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?

Answer 85

Require credit checks on all new customers

Question 86

Which of the following most accurately describes the process of a walkthrough?

Answer 86

Following a transaction from its origination until it is reflected in the financial stateme

Question 87

An entity engaged an accountant to review its financial statements in accordance with Statements on Standards for Accounting and Review Services (SSARS). The accountant determined that the entity maintained its accounts on an other-basis of accounting other than generally accepted accounting principles (GAAP). In this situation, the accountant most likely would have taken which of the following actions?

Answer 87

Modified the review report to reflect the fact that the financial statements were presented on an other-basis of accounting

Question 88

If properly disclosed in the financial statements, which of the following would ordinarily cause an accountant to modify his or her standard compilation or review report?

Uncertainty about the entity’s ability to continue as a going concern
Inconsistency in the application of accounting principles

Answer 88

If adequately disclosed in the financial statements, an uncertainty about an entity’s ability to continue as a going concern or other accounting matters (other than those involving a change in accounting principles) may be, at the accountant’s discretion, emphasized in the accountant’s report (but will not require a modification to the standard compilation or review report)

Question 89

In performing an integrated audit of internal controls with an audit of the financial statements, the auditor should design tests to accomplish which of the following objectives?

Answer 89

To obtain sufficient evidence to support both the auditor’s opinion on internal control over financial reporting as of year-end and the auditor’s control risk assessments for purposes of the audit of financial statements

Question 90

Comfort letters ordinarily are signed by the client’s:

Answer 90

A comfort letter is a letter issued to underwriters concerning the financial information contained in registration statements filed with the SEC in connection with the issuance of securities.

A comfort letter is sent (and signed) by the independent auditor to the underwriter.

Question 91

An accountant had begun to audit the financial statements of a nonpublic entity. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity’s request to change the engagement to a compilation?

Answer 91

If the auditor has been engaged to perform an audit of the financial statements, certain restrictions, called scope limitations, may cause the auditor to disclaim an opinion on the financial statements (to express no opinion). Restrictions on the scope of the audit would be circumstances such as the timing of the work (not being able to observe the physical inventory count); the inability to obtain sufficient appropriate audit evidence to support an opinion; an inadequacy in the accounting records; management’s refusal to provide a signed representation letter; or the inability to correspond with the entity’s legal counsel or to review the minutes from the board of director’s meetings.

If an auditor has been engaged to perform an audit, he should not agree to change to a compilation due to a scope limitation (which would otherwise require a disclaimer of opinion). An auditor could consider changing the engagement to a compilation if the entity’s principal creditors no longer require the entity to furnish audited financial statements.

Question 92

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

Answer 92

Identifying reasonable explanations for unexpected differences before talking to client management

Question 93

In auditing long-term bonds payable, an auditor most likely would:

Answer 93

compare interest expense with the bond payable amount for reasonableness.

Question 94

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

Answer 94

rights and obligations and existence.

(1) assertions about existence deal with whether assets (receivables are assets) exist at a particular date and that (2) assertions about rights and obligations deal with whether assets are the rights of the entity at a particular date. Confirmation of receivables verifies both the existence of the receivable and the rights of the entity to be paid the amount owed by the debtor.

Confirmations do not provide primary evidence of completeness (whether all assets are included) or valuation (whether the accounts will actually be paid).

Question 95

the make up of a review report

Answer 95

if prior audit report is not being reissued, no reference to prior year audited FS

1st paragraph: mention that less in scope than an audit, a description, no opinion is expressed

3rd paragraph: accountant responsibilities, mention AICPA, material modification

4th paragraph: negative assurance (not aware of any material modification)

5th paragraph: mention the type of opinion expressed, mention no auditing procedure were performed after the date of the report, mention that there should be no reference to “updating the prior year auditor report”

Question 96

what activities performed prior to the beginning of field work?

Answer 96

sending an engagement letter, setting forth the preliminary audit plan and materiality

Question 97

what activities performed prior to the beginning of field work?

Answer 97

sending an engagement letter, setting forth the preliminary audit plan and materiality , obtain an understanding of the entity, update the prior year written audit program, discussing the scope, establish the timing of audit, reading current year interim financial statement, arrange with client adequate working space, coordinate the assistance of client personel in data preparation, review of audit records related to the entity anddiscussions with other firm and entity personne

Question 98

debt ratio, quick ratio, return on asset

Answer 98

debt ratio equal total liabilities divided by total asset

quick ratio equal to current asset less inventories less prepaid , divided by current liabilities

rate of return on asset equal net income plus interest expense then divided by average total asset

Question 99

incentives, opportunity, and rationalization

Answer 99

incentive (risk factor that creates incentive or pressure for management and others to commit fraud);
opportunity (risk factor that provides the opportunity for fraud to be perpetrated); or
rationalization (risk factor that indicates a culture or environment that enables management to rationalize committing fraud).