Sim Exam 1 WRONG ANSWERS

Question 1

An auditor performs a search for unrecorded liabilities to ascertain that all payables have been recorded in the proper period. The search may be performed in each of the following areas except:

A.	 Significant payments prior to the end of the period.

B.	 Unmatched invoices and unbilled receiving reports.

C.	 Unbilled professional fees at the end of the period.

D.	 Significant payments subsequent to the end of the period.

Answer 1

Choice “A” is correct. The search for unrecorded liabilities focuses on identifying items that should have been but were not included in the year-end payable balance. Payments made prior to year-end reflect items that are no longer liabilities.

Choice “B” is incorrect. Unmatched invoices and unbilled receiving reports may indicate that an unrecorded liability exists.
Choice “C” is incorrect. Unbilled professional fees may not be properly recorded as year-end liabilities.

Choice “D” is incorrect. Payments made subsequent to the end of the period may relate to liabilities in existence at year-end.

Question 2

The auditor would not express an unmodified opinion in which of the following situations?

A.	 There has been a justifiable change in accounting principle inseparable from a change in accounting estimate, which the client has accounted for as a change in principle.

B.	 There has been a justifiable change in accounting principle inseparable from a change in accounting estimate, which the client has accounted for as a change in estimate.

C.	 There has been a justifiable change in the method of accounting for long-term contracts.

D.	 There exists a remote chance that the client may lose substantial amounts in a lawsuit recently filed against the client.

Answer 2

Choice “A” is correct. A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in estimate, not a change in principle. The client’s accounting constitutes a departure from GAAP.

Choice “B” is incorrect. A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in estimate. The client’s accounting is appropriate.

Choice “C” is incorrect. A justifiable change in accounting principle does not affect the unmodified opinion.
HAVE TO ASSUME THAT THIS IS OK
EOM MAY BE NECESSARY, BUT DOES NOT AFFECT THE OPINION

Choice “D” is incorrect. Generally no disclosure is necessary for a remote loss contingency, so this situation would have no financial statement impact and no effect on the unmodified opinion.
IT HAS TO BE PROBABLE TO ACCRUE; BUT SINCE IT’S A “REMOTE CHANCE” THERE IS NO NEED TO STATE, THEREFORE AN UNMOD OPINION IS OK.

Question 3

. The accounts payable department should receive the _ _ _ _ _ _ _ _ _ _ _ _ , _ _ _ _ _ _ _ _ _ _ _ _ , and _ _ _ _ _ _ _ _ _ _ _ _ _ , to assure that the goods received agree with what was ordered, and that the company is being billed only for what was received.

Answer 3

purchase order, receiving report, and vendor invoice

Sales orders relate to the revenue cycle, and accounts payable would have no use for them. The treasurer should mail the signed check after it is signed; to send it to accounts payable (a recordkeeping department) would be an inappropriate segregation of duties.

Question 4

Nissen, CPA, is a registered public accounting firm. Which situation is least likely to violate PCAOB independence standards?

A.	 Nissen provides non-audit services related to internal control to an audit client.

B.	 Nissen accepts an engagement in which the engagement fee is dependent upon the results of the audit.

C.	 Nissen provides tax services to the CEO of an audit client.

D.	 Nissen provides tax services related to an aggressive tax transaction.

Answer 4

Choice “A” is correct. Non-audit services related to internal control must be communicated to the audit committee in writing, but they are not prohibited. The potential effects of the services should be discussed with the audit committee.

Choice “B” is incorrect. An engagement in which the fee is dependent upon the results of the audit (a contingent fee) is prohibited by PCAOB independence standards.

Choice “C” is incorrect. Registered public accounting firms may not provide any tax services to corporate officers of the audit client.

Choice “D” is incorrect. Registered public accounting firms may not provide to audit clients any tax services related to certain aggressive tax transactions.

Question 5

A change in accounting principle that is inseparable from a change in estimate should be accounted for as change in _ _ _ _ _ _ _ _ _ _ .

Answer 5

estimate, not a change in principle.

CHANGE IN ESTIMATE IS OK FOR UM OPINION.

CHANGE IN PRINCIPLE IS A GAAP DEPARTURE.

Question 6

An auditor notes that retained earnings includes an amount appropriated in accordance with a loan covenant. Which procedures would the auditor use to audit retained earnings?

I.

Trace dividend declarations to appropriate authorization by management.

II.

Analyze the retained earnings account since the last audit.

III.

Use a standard bank confirmation to confirm the amount appropriated.

A.	 II only.

B.	 I and III, only.

C.	 II and III, only.

D.	 I, II, and III.

Answer 6

Choice “A” is correct. Statement II is true. The auditor should analyze the retained earnings account since the last audit. Generally this is fairly easy to do, since there are not very many direct entries to retained earnings. Statement I is false because dividends should be approved by the board of directors, not by management. Statement III is false because appropriations represent restrictions on the amount that can be paid as dividends, not a segregation of actual cash funds, so the bank would be unable to confirm appropriation amounts.

Choices “D”, “B”, and “C” are incorrect, based on the above explanation.

Question 7

What’s the dofference between an appropriation and a segregation?

Answer 7

APPROPRIATION - Same acct. Done on the fin stmt level. Bank does not have knowledge.

SEGREGATION - Seperation of actual funds at bank level.

Question 8

Actions for many vs few #’s of transactions.

Answer 8

Many - Focus on ending Balance.

Few - Look @ each trasaction

Question 9

Disclosure of fraud to parties other than a client’s senior management, those charged with governance, or its board of directors ordinarily is not part of an auditor’s responsibility. However, to which of the following outside parties may a duty to disclose irregularities exist?

To the SEC when the client reports an auditor change

To a successor auditor when the successor makes appropriate inquiries

To a government funding agency from which the client receives financial
assistance

A.	 Yes

Yes

No

B.	 Yes

Yes

Yes

C.	 No

Yes

Yes

D.	 Yes

No

Yes

Answer 9

Choice “B” is correct. The accountant may have a duty to disclose irregularities to all of the following outside parties:

Yes - The SEC when the client reports an auditor change.

Yes - A successor auditor when the successor makes appropriate inquiries.

Yes - A government funding agency from which the client receives financial assistance.

Choices “A”, “D”, and “C” are incorrect, based on the above exp

Question 10

Approving timesheets is an _ _ _ _ _ _ _ _ _ function, which should be seperated from __ _ _ _ _ _ _ _ _ _ _ _ _ _ _.

Answer 10

authorization

custody of assets (i.e., the payroll checks).

Question 11

In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year’s audit, the auditor most likely would choose:

A.	 Individual overdue balances.

B.	 Individual invoices.

C.	 Small account balances.

D.	 Large account balances.

Answer 11

Choice “B” is correct. The auditor should consider the nature of the information requested when determining the sampling unit for the current year audit. Certain respondents’ accounting systems may facilitate the confirmation of single transactions rather than of entire balances.

Choice “A” is incorrect. The auditor would not limit the population to overdue balances, since current balances can also be misstated.
BALANCES NOT OVERDUE CAN BE WRONG AS WELL

Choices “C” and “D” are incorrect. Defining the sampling unit based on account size would not address the problem that caused differences during the prior year.
SMALL AND LARGE BALANCES CAN BE WRONG AS WELL

Question 12

Which of the following is a communication requirement with respect to registered audit firms?

A.	 Registered firms must report to the audit committee the critical accounting policies and practices used.

B.	 Registered firms must provide a copy of the firm's quality control policies and procedures to management and the audit committee.

C.	 Registered firms must report to the internal audit manager any alternative accounting treatments discussed with management.

D.	 Registered firms must provide to management a schedule of unadjusted audit differences.

Answer 12

Choice “A” is correct. Registered firms must report to the audit committee the critical accounting policies and practices used.

Choice “B” is incorrect. There is no requirement that registered firms provide a copy of the firm’s quality control policies and procedures to management and the audit committee. However, the registered firm is required to provide a written statement regarding their independence to the audit committee.

Choice “C” is incorrect. Registered firms must report to the audit committee (not to the internal audit manager) any alternative accounting treatments discussed with management.

Choice “D” is incorrect. Registered firms must provide to the audit committee (not to management) a schedule of unadjusted audit differences.

Question 13

Which of the following would least likely be part of an auditor’s procedures with respect to fair values?

A.	 Develop an independent fair value estimate.

B.	 Review subsequent events occurring after completion of the audit for evidence regarding fair value measurements as of the balance sheet date.

C.	 Obtain management representations relating to intent and ability to carry out planned courses of action.

D.	 Evaluate the appropriateness of the valuation model used by management.

Answer 13

Choice “B” is correct. Events occurring after the balance-sheet date may provide audit evidence regarding year-end fair value measurements, but the auditor is only responsible for evaluating such events if they occur prior to the date of the auditor’s report. The auditor would not continue to review subsequent events once the audit has been completed.
NOTE: NEVER AFTER THE AUDIT IS DONE UNLESS SOMETHING WAS MISSED.

Choice “A” is incorrect. The auditor may develop an independent fair value estimate as a means of corroborating management’s estimate.

Choice “C” is incorrect. The auditor should obtain management representations relating to intent and ability to carry out planned courses of action.

Choice “D” is incorrect. The auditor should evaluate the appropriateness of the valuation model used by management.

Question 14

Which of the following circumstances requires modification of the accountant’s report on a review of interim financial information of a publicly held entity prepared on the basis of generally accepted accounting principles?

A.	 An uncertainty, lack of adherence to generally accepted accounting principles, and lack of adequate disclosure.

B.	 Lack of adherence to generally accepted accounting principles and lack of adequate disclosure.

C.	 None of the following: an uncertainty, an accounting change, lack of adherence to generally accepted accounting principles, lack of adequate disclosure.

D.	 An accounting change, lack of adequate disclosure, and lack of adherence to generally accepted accounting principles.

Answer 14

Choice “B” is correct. Departures from GAAP (including inadequate disclosure) require modification of the review report.

Choice “A” is incorrect. Uncertainties and accounting changes do not require report modifications, as long as disclosure is adequate.

Choice “C” is incorrect. Departures from GAAP (including inadequate disclosure) require modification of the review report.

Choice “D” is incorrect. Accounting changes do not require report modifications, as long as disclosure is adequate.

Question 15

What is important when looking for a December 31 cash transfer mistatement?

Answer 15

When the deposit was received in books
AND
When disburesement was recorded in books.

(Look for different years)

Question 16

Which of the following is the most likely sequence of events an auditor might follow in considering internal control?

A.	 An auditor performs tests of controls first, using the knowledge obtained from those tests to develop an understanding of internal control.

B.	 An auditor performs substantive tests prior to tests of controls, because a large number of substantive errors may help the auditor identify areas of weakness.

C.	 An auditor performs tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.

D.	 An auditor performs additional tests of controls after the detailed substantive testing has been completed, because it may be more efficient to do so.

Answer 16

Choice “C” is correct. An auditor may choose to perform tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.

Choice “A” is incorrect. The auditor generally would obtain an understanding of how internal control works first, to better be able to design appropriate tests of controls. While it is also acceptable to perform some tests of controls concurrently with obtaining an understanding of internal control, test of controls would not be performed prior to obtaining that understanding.

Choice “B” is incorrect. The auditor uses his or her understanding of internal control, as well as the results of any tests of controls, to determine the nature, timing, and extent of substantive tests.

Choice “D” is incorrect. Tests of controls are generally performed before substantive testing, as the assessed level of control risk is used to determine the nature, timing, and extent of substantive tests.

Question 17

What is the correct order for test of controls, understinding of controls, and substantive testing?

Answer 17

UNDERSTANDING then TEST OF CONTROLS then SUBSTANTIVE TEST

NOTE: For efficienct understanding and test of controls may be done at same time, but substantive tests are ALWAYS done after.

Tests of controls are generally performed before substantive testing, as the assessed level of control risk is used to determine the nature, timing, and extent of substantive tests.

An auditor may choose to perform tests of controls at the same time that he or she is obtaining an understanding of internal control, because it may be more efficient to do so.

Question 18

The AICPA Code of Professional Conduct includes which of the following as discreditable acts?

I.

Failure to return client records upon request

II.

Negligence in preparing client records

III.

Failure to file a personal tax return on a timely basis

A.	 II and III, only.

B.	 I, II, and III.

C.	 I and II, only.

D.	 I and III, only.

Answer 18

Choice “B” is correct. Failure to return client records upon request, negligence in preparing client records, and failure to file a personal tax return on a timely basis are all considered to be acts discreditable to the profession.

Choices “C”, “D”, and “A” are incorrect, based on the above explanation.

Question 19

While performing the current audit, the auditor gathers several types of evidence, including:

1 An accounts receivable confirmation sent to the auditor
2 Oral statements from the client regarding a transaction
3 The results of an auditor’s physical inspection of the client’s original documents
4 A monthly bank statement provided by the client

Which of the following is the correct hierarchy of audit evidence (from most to least reliable)?

Answer 19

3. Auditor’s direct personal knowledge (auditor’s physical inspection of documents)
4. External evidence directly received by auditor (accounts receivable confirmations received by auditor)
5. External evidence received and held by client (a monthly bank statement)
6. Oral evidence (oral statements from a client regarding a transaction)

It should be noted that while internal evidence is not one of the answer choices in the scenario above, it would be considered more reliable than oral evidence but less reliable than external evidence.

Question 20

Question
An auditor is conducting an attribute sampling application to test the effectiveness of a particular control. The following rates have been determined:

Sample deviation rate:

5%

Tolerable deviation rate:

6%

Allowance for sampling risk:

2%

Which of the following is true?

A.	 Since the tolerable deviation rate plus the allowance for sampling risk exceeds the sample deviation rate, the auditor may not rely on the control.

B.	 Since the tolerable deviation rate exceeds the sample deviation rate, the auditor may rely on the control.

C.	 Since the sample deviation rate exceeds the tolerable deviation rate less the allowance for sampling risk, the auditor may rely on the control.

D.	 Since the tolerable deviation rate less the allowance for sampling risk is less than the sample deviation rate, the auditor may not rely on the control.

Answer 20

Choice “D” is correct. A control cannot be relied upon when:

sample deviation rate (S) + allowance for sampling risk (A) > = tolerable deviation rate (T)

This can be restated as S > = T − A , which is what this option describes.

Choice “A” is incorrect. The sum of the tolerable deviation rate plus the allowance for sampling risk (T + A) is not a part of the proper equation, which compares S + A to T, nor can an algebraic manipulation be used to restate it in this format.
Choice “B” is incorrect. The sample deviation rate should not be compared to the tolerable deviation rate without an adjustment for sampling risk.
Choice “C” is incorrect. This option states that S > = T − A, which is true; however, it goes on to conclude that the control may be relied upon, which is false.

Question 21

What are the PPS sampling formulas for Sampling interval and Sample size?

Answer 21

Sampling Interval = Total mistatement / Reliability Factor

Sample Size = Recorded amt of population (dollar value) / Sampling Interval

Question 22

Question
Jonah, CPA is auditing the cash receipts area of Wildwood Widgets, Inc. Jonah notes that incoming cash receipts are listed in detail, and three copies of this list are made. One copy is sent to the cashier along with the actual cash receipts, one is sent to the accounts receivable department along with the remittance advices, and one is sent to the accounting department. Which of the following is true about this distribution of information?

A.	 It is unnecessary duplication to send copies to both the accounts receivable department and the accounting department.

B.	 A fourth copy should also be made and sent to the treasurer’s department, for use when the bank deposit is prepared.

C.	 It is appropriate because it allows several levels of comparison and reconciliation, and there is no need for additional copies to be sent elsewhere.

D.	 Sending a copy to the accounts receivable department constitutes an improper segregation of duties.

Answer 22

Choice “C” is correct. It is appropriate to distribute the cash receipts list in this manner, as it allows several levels of comparison and reconciliation. For example, the cashier can compare the actual receipts to the list before making the deposit. In addition, the accounts receivable control account and the accounts receivable subsidiary ledger can be posted separately and reconciled periodically. There is generally no need for additional copies beyond these three to be distributed.

Choice “A” is incorrect. The accounts receivable department can use this list and the remittance advices to reduce individual customer accounts. The accounting department can reduce the accounts receivable control account by the total amount. Periodic reconciliations between the subsidiary ledger and the control account can then be performed, which should identify any discrepancies.
Choice “B” is incorrect. There is no reason to send a copy to the treasurer, since the cashier is responsible for preparing the deposit.

Choice “D” is incorrect. It is appropriate to send a copy to the accounts receivable department. There is no violation of segregation of duties, since this is a recordkeeping function and does not involve authorization or access to assets.

Question 23

Which is not true about major programs?

A.	 Determination of major programs is based on management selection.

B.	 A program may be deemed to be major if the auditor has not met minimum audit guidelines in terms of the percentage of coverage of the audit.

C.	 The auditor is required to report on compliance and on internal control over compliance related to each major program.

D.	 Major programs are subject to both general and specific compliance requirements.

Answer 23

Choice “A” is correct. Major programs are determined by the auditor using a “risk-based approach”, not by management.

Choice “B” is incorrect. A program may be deemed to be major if the auditor has not met minimum audit guidelines in terms of the percentage of coverage of the audit.

Choice “C” is incorrect. The auditor is required to report on compliance and on internal control over compliance related to each major program.

Choice “D” is incorrect. Major programs are subject to both general and specific compliance requirements.

Question 24

Which of the following best describes the auditor’s responsibility with respect to Statements on Auditing Standards (SASs)?

A.	 The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and may not depart from such provisions.

B.	 The auditor should have sufficient knowledge of the SASs to identify relevant provisions, may not depart from such provisions, and must clearly indicate the relevant SAS section and paragraph numbers within the audit documentation.

C.	 The auditor should have sufficient knowledge of the SASs to identify relevant provisions, should be prepared to justify any departures from such provisions, and must clearly indicate the relevant SAS section and paragraph numbers within the audit documentation.

D.	 The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions.

Answer 24

Choice “D” is correct. The auditor should have sufficient knowledge of the SASs to identify relevant provisions, and should be prepared to justify any departures from such provisions. There is no requirement that the audit documentation include SAS section and paragraph numbers.

Choice “A” is incorrect. The auditor should have sufficient knowledge of the SASs to identify relevant provisions, however, in some cases, departure may be justified. The auditor should be prepared to justify any departures from such provisions.

Choice “B” is incorrect. The auditor should have sufficient knowledge of the SASs to identify relevant provisions, however, in some cases, departure may be justified. The auditor should be prepared to justify any departures from such provisions. Additionally, there is no requirement that the audit documentation include references to SAS section and paragraph numbers.

Choice “C” is incorrect. The auditor should have sufficient knowledge of the SASs to identify relevant provisions, however, there is no requirement that the audit documentation include references to SAS section and paragraph numbers.

Question 25

Under government auditing standards, when control risk has been assessed at the maximum level for assertions related to computerized information systems that materially impact the financial statements, the auditor should document:

I.

The basis for assessing control risk at the maximum.

II.

The planned audit procedures designed to reduce audit risk.

III.

Management’s acknowledgment of the assessed level of risk.

A.	 II and III, only.

B.	 I and III, only.

C.	 I and II, only.

D.	 I, II, and III.

Answer 25

Explanation
Choice “C” is correct. The auditor should document the basis for assessing control risk at the maximum and the planned audit procedures to reduce risk, but there is no requirement that the auditor document management’s acknowledgement of the assessed level of risk.

Choices “D”, “A”, and “B” are incorrect, based on the above explanation.

Question 26

1.

“We disclosed to you all known instances of non-compliance or suspected non-compliance with laws and regulations whose effects should be considered when preparing financial statements.” The foregoing passage most likely is from a (an):

A.	 Report on compliance with laws and regulations.

B.	 Management representation letter.

C.	 Attestation report on internal control.

D.	 Client engagement letter.

Answer 26

Choice “B” is correct. The statement above is a written representation obtained by the auditor from management.

Choice “A” is incorrect. An auditor would prepare a report on compliance with laws and regulations. The statement, “We disclosed to you all known instances of non-compliance or suspected non-compliance…” should come from management.

Choice “C” is incorrect. An auditor would prepare an attestation report on internal control. The statement, “We disclosed to you all known instances of non-compliance or suspected non-compliance…” should come from management.

Choice “D” is incorrect. A client engagement letter is used to document the understanding between the client and the auditor. The letter is generally sent from the auditor to the client, although the client may be requested to sign it. The statement, “We disclosed to you all known instances of non-compliance or suspected non-compliance…” should come from management. It would not be appropriate to include this in an engagement letter, which is often sent before the year has even ended.

Question 27

Which of the following representations does an auditor make explicitly and which implicitly when expressing an unmodified opinion?

Consistent Application
of GAAP

In accordance with
GAAP in the U.S.A.

A.	 Implicitly

Implicitly

B.	 Explicitly

Implicitly

C.	 Explicitly

Explicitly

D.	 Implicitly

Explicitly

Answer 27

Choice “D” is correct. The audit report specifically states whether the financial statements are presented in accordance with accounting principles generally accepted in the United States of America. On the other hand, consistency is not mentioned in the report, but is implied (i.e., it is assumed that there is consistency when there is no mention of it in the report).

Choice “A” is incorrect. The audit report specifically states whether the financial statements are presented in accordance with accounting principles generally accepted in the United States of America.

Choice “B” is incorrect. The audit report specifically states whether the financial statements are presented in accordance with accounting principles generally accepted in the United States of America. On the other hand, consistency is not mentioned in the report, but is implied (i.e., it is assumed that there is consistency when there is no mention of it in the report).

Choice “C” is incorrect. Consistency is not mentioned in the report, but is implied (i.e., it is assumed that there is consistency when there is no mention of it in the report).

Question 28

An auditor makes use of a specialist who has a contractual relationship with the client. Which of the following is true?

A.	 This is a violation of generally accepted auditing standards.

B.	 The lack of independence must be disclosed in the auditor’s report, but will not preclude the issuance of an unqualified opinion.

C.	 This is acceptable provided that the auditor evaluates the effect of the relationship on the specialist’s objectivity.

D.	 The lack of independence must be disclosed in the auditor’s report, and the auditor should issue a qualified opinion or a disclaimer of opinion, depending on materiality.

Answer 28

Choice “C” is correct. Use of a specialist who is related to the client is acceptable, but the auditor must consider the risk that the specialist’s objectivity might be impaired, in which case the auditor may need to perform additional procedures.

Choice “A” is incorrect. Use of a specialist who is related to the client is acceptable and is not a violation of generally accepted auditing standards.

Choices “D” and “B” are incorrect. The fact that the specialist is related to the client need not be disclosed in the audit report, and it will not preclude the issuance of an unqualified opinion.

Question 29

Comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor should:

A.	 Indicate the substantive reasons for the qualification in the predecessor auditor's opinion.

B.	 Request the client to reissue the predecessor's report on the prior year's statements.

C.	 Issue an updated comparative audit report indicating the division of responsibility.

D.	 Express an opinion only on the current year's statements and make no reference to the prior year's statements.

Answer 29

Choice “A” is correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor auditor should indicate in an other-matter (explanatory) paragraph of the audit report (1) that the financial statements of the prior period were audited by a predecessor auditor, (2) the type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reasons for the modification, (3) the nature of any emphasis-of-matter or other-matter (explanatory) paragraph included in the predecessor auditor’s report, and (4) the date of the predecessor auditor’s report.

Choice “B” is incorrect. The predecessor auditor, not the client, may reissue the previous year’s audit report.

Choice “C” is incorrect. An audit report would indicate a division of responsibility when the group auditor’s opinion is based in part on the report of another auditor.
Choice “D” is incorrect. If the prior year’s financial statements are issued, the previous year’s audit opinion must also be disclosed.

Question 30

Procedures performed by an internal auditor can be used to:

I.

Help the external auditor understand internal control

II.

Provide direct assistance to the external auditor by performing substantive tests

III.

Provide direct assistance to the external auditor by performing tests of controls

A.	 II and III only.

B.	 I, II, and III.

C.	 I and II only.

D.	 I and III only.

Answer 30

Choice “B” is correct. Internal auditors may assist the external auditor in obtaining an understanding of internal control or in performing tests of controls or substantive tests.

Choices “A”, “C”, and “D” are incorrect, based on the above explanation.

Question 31

Question
When an auditor qualifies an opinion for a nonissuer due to a scope limitation, the auditor should modify the section(s) of the report related to:

Management’s Responsibility

Basis for Qualified Opinion

Opinion

A.	 No

No

Yes

B.	 Yes

Yes

Yes

C.	 No

No

No

D.	 No

Yes

Yes

Answer 31

Choice “D” is correct. A scope limitation resulting in a qualified opinion requires modification of both the Basis for Qualified Opinion and Opinion sections of the auditor’s report.

Choice “A” is incorrect. Modification of the Basis for Qualified Opinion section is required.

Choice “B” is incorrect. The Management’s Responsibility section is not modified.

Choice “C” is incorrect. Modification of the Basis for Qualified Opinion and Opinion sections is r

Question 32

Which of the following auditor concerns would be least likely to cause the auditor to withdraw from the engagement?

A.	 The industry in which the client operates is burdened by excessive competition and client management is dominated by an individual who emphasizes the achievement of specific profit margins.

B.	 The integrity of management is in question.

C.	 A material error was found in the depreciation calculation for the current period.

D.	 Upper level of management appears to have engaged in collusion in an effort to embezzle receipts on account.

Answer 32

Choice “C” is correct. Errors are unintentional and would not cause an auditor to withdraw from the engagement.

Choice “A” is incorrect. A high degree of competition coupled with the fact that a single individual dominates management increases the risk of fraud. In cases where significant fraud risk exists, the auditor may consider withdrawing from the engagement.

Choices “B” or “D” are incorrect. Concerns about management integrity may cause the auditor to withdraw from the engagement, because such concerns increase the likelihood of financial statement misrepresentation.

Question 34

Morris & Shannon, CPAs, is a registered accounting firm. Which of the following is not a requirement that Morris & Shannon must adhere to in auditing the financial statements of an issuer?

A.	 Describe the scope of the internal control testing performed.

B.	 Monitor independence from issuers who are audit clients.

C.	 Maintain audit documentation for at least five years.

D.	 Provide a second partner review of each audit report.

Answer 34

Choice “C” is correct. Morris & Shannon must maintain audit documentation for at least seven years.

Choice “A” is incorrect. Morris & Shannon must describe in audit reports the scope of testing of the issuer’s internal control structure and procedures.
Choice “B” is incorrect. Morris & Shannon must monitor independence from issuers that it audits.

Choice “D” is incorrect. Morris & Shannon must provide a concurring or second partner review of each audit report.

Question 34

Which of the following procedures would an auditor ordinarily perform during the review of subsequent events?

A.	 Inquire of the client's legal counsel concerning litigation.

B.	 Investigate significant deficiencies in internal control previously communicated to the client.

C.	 Analyze related party transactions to discover possible irregularities.

D.	 Review the cut-off bank statements for the period after the year-end.

Answer 34

Choice “A” is correct. An auditor would most likely obtain a letter from the entity’s legal counsel describing any pending litigation, unasserted claims, or loss contingencies, to obtain evidence that might impact the year-end financial statements.

Choice “B” is incorrect. Investigating significant deficiencies in internal control previously communicated to the client would be a procedure performed as part of the planning process and would provide the auditor with information regarding the internal control structure, not subsequent events.

Choice “C” is incorrect. Analyzing related party transactions to discover possible irregularities generally is performed to evaluate financial statement disclosure, not to identify subsequent events.

Choice “D” is incorrect. Reviewing cut-off bank statements for the period after year-end generally is performed to evaluate the year-end cash balance, not to identify subsequent events.

Question 35

Question
Larry, CPA, is auditing the financial statements of Stooge System Services. The year-end receivable balance is $1,100,000, and Larry has decided to send confirmations to a sample of Stooge’s customers. Below is an excerpt from the audit documentation showing the results of the confirmation process.

Number of
Accounts
Total Dollar Value
(Book Value)
Confirmation Results

72

$158,400

Confirmed without exception

11

$30,250

Confirmed with exception

17

$44,625

No reply received

Which of the following would Larry most likely perform next?

A.	 Send second requests to the seventeen accounts for which no replies were received, and ask the client to adjust the financial statements to agree with the confirmations for the eleven accounts confirmed with exception.

B.	 Perform additional investigation for the twenty-eight accounts that were not "confirmed without exception."

C.	 No further audit work is necessary, since the total dollar value that was not "confirmed without exception" ($30,250 plus $44,625) is immaterial to the accounts receivable balance taken as a whole.

D.	 Send second requests to the seventeen accounts for which no replies were received, and perform additional investigation of the eleven accounts confirmed with exception.

Answer 35

Choice “D” is correct. Larry should send second requests to the seventeen accounts for which no replies were received, and perform additional investigation of the eleven accounts confirmed with exception.

Choice “A” is incorrect. Larry would not ask the client to adjust the account balances without performing additional investigation first, as it is entirely possible that the client is right and the customer is wrong.

Choice “B” is incorrect. Generally an auditor would at least attempt to send second requests before performing alternative audit procedures.

Choice “C” is incorrect. The amount that was not “confirmed without exception” represents 6.8% of the total accounts receivable balance, which is not clearly immaterial. The auditor would not be likely to ignore this amount without at least attempting to send second requests and perform additional audit procedure

Question 36

A report includes the following language, “This report is intended solely for the information and use of the board of directors and management of X Company, and is not intended to be and should not be used by anyone other than the specified parties.” This report would most likely relate to which of the following engagements?

A.	 A report on a client's compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements.

B.	 A report on a specified element in a financial statement, where that element is prepared in accordance with the tax basis of accounting.

C.	 A report on an examination of a financial forecast.

D.	 A report on financial statements prepared on the cash basis of accounting.

Answer 36

Choice “A” is correct. A report on a client’s compliance with a regulatory requirement, assuming the report is prepared based on a financial statement audit of the complete financial statements, would contain restricted use language.

Choice “B” is incorrect. A report on a specified element in a financial statement, where that element is prepared in accordance with the tax basis of accounting, would not contain restricted use language.

Choice “C” is incorrect. A report on an examination of a financial forecast does not require a restriction on the use of the report.

Choice “D” is incorrect. A report on financial statements prepared in conformity with the cash basis of accounting does not require a restriction on the use of the report.