Test wrong answers

Question 1

An auditor reads the cover letter accompanying the document containing the audit report and audited financial statements and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?

Answer 1

NO ACTION

As the cover letter accompanying the document containing audited financial statements is not Other Information, no action is required on the part of auditor even if there is a material inconsistency.

Question 2

Which of the following characteristics most likely would be indicative of check kiting?

Answer 2

Low average balance compared to high level of deposits

A kiting scheme involves draw­ing a check on one account to inflate the balance in another

Question 3

To assist in planning and performing the engagement, the auditor is required to request a review of the predecessor auditor’s audit documentation—the auditor may ask for management to arrange this either ____or _____ accepting the engagement.

Answer 3

before or after

Question 4

The auditor must not make any ____ to audit documentation before the end of the specified retention period.

additions
amendments
deletions

Answer 4

The auditor must not make any deletions to audit documentation before the end of the specified retention period.

Question 5

An accountant should comply with all codified SSARS sections relevant to the engagement. A section is relevant to the engagement

Answer 5

When the section is in effect and the circumstances addressed by it exist

SSARS sections are relevant to engagements to prepare financial statements and compilations and reviews of financial statements of governmental entities. The accountant’s responsibilities, however, may be affected by law, regulation, or other authority which may encompass a broader scope than an engagement in accordance with SSARS. These additional responsibilities are not dealt with in SSARS.

Question 6

The overall audit strategy

Answer 6

Sets the scope, timing, and direction of the audit and guides the development of the audit plan.

Question 7

4 preconditions for audit of non-issuer

Answer 7

1- Determine whether the audit team is competent to perform the audit

2-Assess the client’s auditability (financial statements and records are adequate, integrity)

3-Perform an inquiry with the predecessor auditor

4-Engagement letter to document terms

Question 8

If management refuses to authorize the predecessor auditor to respond to the successor auditor, can the engagement still be accepted?

Answer 8

Can still accept. The auditor should inquire about the reasons and consider the implications of that refusal in deciding whether or not to accept the engagement.

Question 9

US GAAS provides a list of matters that may be subject to the auditor’s inquiry of the predecessor auditor. What items may be included?

Answer 9

(1) Info that might bear on the integrity of management
(2) Disagreements w/management about accounting policies, auditing procedures, or other similarly significant matters
(3) communications to those charged with governance regarding fraud and noncompliance with laws/regulations
(4) Comm to mgmt/governance regarding significant deficiencies and material weaknesses in internal control
(5) Understanding about the reason for the change in auditors

Question 10

Can’t gain evidence over OPENING inventory. What type of opinion?

Answer 10

Balance Sheet = UNQUALIFIED
b/c you are comfortable with ending inventory

Income Statement = DISCLAIMER
b/c you aren’t sure about COGS

Question 11

One material weakness =

Answer 11

ADVERSE OPINION on internal control

Question 12

Professional judgement of an auditor entails

Answer 12

• Comeptencies necessary to achieve reasonable judgements

- Developed by the auditor through relevant training, knowledge, and experience

Question 13

Government accounting

Report on ICFR is ALWAYS required.

Auditor should always report:

Answer 13

Significant Deficiencies

AND

Material Weaknesses

Question 14

Shipping dept returns nonconforming goods.

Purchasing debt should send to the accounting department a _____ ____.

Answer 14

Debit Memo

credit memo provided by the vendor

Question 15

Parallel Simulation - main advantage?

Answer 15

The size of the sample can be GREATLY EXPANDED at relatively little additional cost.

Question 16

DO the component auditors have to be included in risk discussions?

Answer 16

Optional

Question 17

Special consideration must be given to zero and negative balance accounts which usually are excluded from what type of sampling?

Answer 17

Probability-Proportional-to-Size Sampling

Question 18

What are the elements of a CPA firm’s Quality Control program?

Answer 18

• Tone at the Top
• Ethical Req/Independence
• Acceptance & Continuance of client rel.
• Human Resources
• Monitoring
• Engagement Performance

Question 19

According to the PCAOB’s Engagement Quality Review standard, an engagement quality reviewer must have what 4 characteristics?

Answer 19

Competence
Integrity
Objectivity
Independence

Question 20

A dual purpose test is designed and evaluated by considering each purpose of the test _____

Answer 20

separately

Question 21

Internal control understanding for

review?
compilation?

Answer 21

NO and NO

Question 22

The rules for independence, professional competence, and compliance with standards are spe­cifically pertinent to members in public practice. What rule always pertains to both members in PUBLIC AND PRIVATE practice?

Answer 22

Integrity and Objectivity

Question 23

A CPA in charge of the external audit of a nonissuer received an unexpected inheritance that includes 100 shares of the audit client’s common stock. Which of the following actions should the CPA take to avoid violating independence rules?

Answer 23

Sell or donate the stock within 30 days after receipt of ownership rights.

Question 24

The risk of material misstatement at the assertion level consists of which of the following sets of two components?

Answer 24

Inherent Risk + Control Risk

Question 25

Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides ______ assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed.

Reasonable
Limited
No

Answer 25

Due to the inherent limitations of an audit, an audit performed in accordance with US GAAS provides NO assurance that all noncompliance with laws and regulations will be detected or that any contingent liabilities that result will be disclosed.

Question 26

If the auditor determines that a deficiency, or a combination of deficiencies, in internal control is not a material weakness, the auditor should consider whether ____ ______ having knowledge of the same facts and circumstances, would likely reach the same conclusion.

Answer 26

If the auditor determines that a deficiency, or a combination of deficiencies, in internal control is not a material weakness, the auditor should consider whether PRUDENT OFFICIALS, having knowledge of the same facts and circumstances, would likely reach the same conclusion.

Question 27

When communicating internal control related matters identified in an audit, which matter is not required to be in the written communication?

Answer 27

Internal control deficiencies determined not to be significant deficiencies and material weaknesses

Question 28

Items that would be considered a mitigating condition concerning an entity’s ability to continue as a going concern:

Answer 28

• Plans to dispose of an asset or business
  
  • Plans to reduce or delay expenditures
  • Plans to borrow money or restructure debt
  • Plans to increase ownership equity

Question 29

An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?

Answer 29

Document the auditor’s understanding of internal controls.

The client’s failure to do so does not constitute a scope limitation; necessitate that the auditor assess control risk at the maximum level; nor restrict the auditor’s responsibility to assess the effec­tiveness of controls.

Question 30

Is a management representation letter required in a compilation?

Answer 30

No, not required.

Question 31

Nile, CPA, on completing an audit, was asked by the client to provide technical assistance in integrating a new IT system. The set of pronouncements designed to guide Nile in this engagement is the Statement(s) on

Answer 31

Standards for Consulting Services

are used to develop findings, conclusions and recommendations for client consideration and decision making.

Question 32

When a public company changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an explanatory paragraph added to the audit report. This paragraph should identify the nature of the change and

Answer 32

Refer to the financial statement note that discusses the change in detail.

Question 33

According to US GAAS, when the auditor of the group financial statements is assuming responsibility for the work of component auditors, for a component that is significant due to its individual financial significance to the group, the group engagement team, or a component auditor on its behalf, should perform

Answer 33

An audit using component materiality

Question 34

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant’s report and issue a(an)

Answer 34

ADVERSE OPINION

Question 35

What misstatements should the auditor address?

Answer 35

The auditor should accumulate ALL (not just uncorrected) misstatements identified during the audit, OTHER THAN those that are clearly trivial.

The auditor should communicate on a timely basis with the appropriate level of management ALL (not just uncorrected) misstatements accumulated during the audit. The auditor should request management to correct those misstatements.

Question 36

RISK ASSESSMENT:

The engagement partner is only required to include

Answer 36

key members of the engagement team. The engagement partner should determine which matters are to be communicated to engagement team members not involved in the discussion.

Question 37

Before issuing an unmodified report on a compliance audit, an auditor becomes aware of an instance of material non-compliance occurring after the period covered by the audit. The least appropriate response by the auditor would be to

Answer 37

Issue a QUALIFIED compliance report describing the subsequent noncompliance

Question 38

In an engagement to examine management’s discussion and analysis (MD&A), which of the following best defines control risk?

Answer 38

The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner

Question 39

During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor’s required response to the discovery?

Answer 39

The auditor should bring the transaction to the attention of an appropriate level of management.

Question 40

The use of which of the following word(s) in the IESBA Code of Ethics for Professional Accountants imposes a requirement?

Answer 40

The auditor “shall”….

Question 41

The Sarbanes-Oxley Act of 2002 specifies that an audit committee must contain at least one financial expert. The attributes of a financial expert on the audit committee can be acquired in a number of ways, including:

Answer 41

• serving as a principal financial officer
• principal accounting officer, controller, public accountant, or auditor
• actively supervising a principal financial officer or principal accounting officer;
• assessing the performance of public accountants with respect to preparation, auditing, or evaluation of financial statements.

Question 42

Governmental performance audit objectives vary widely and may include assessments of

Answer 42

• Internal Control
• Compliance
• Prospective Analyses

Question 43

Allowance for Sampling Risk =

Answer 43

Achieved Upper Precision Limit - Observed Sample Rate

Question 44

The auditor should agree, in writing when appropriate, with the auditor’s specialist regarding the nature, extent, and timing of communication between the auditor and the specialist, including the form of any report to be provided by the specialist and all of the following except

Answer 44

Any relevant technical performance standards or other professional or industry requirements that the auditor’s specialist will follow

Editor’s note: If we’re relying on the auditor’s specialist (i.e. our specialist), then we trust that the specialist has the competency to follow her respective standards and guidelines with respect to the area we’re relying on her report for.

Question 45

According to the ethical standards of the profession, a CPA’s independence would most likely be impaired if the CPA.

Contracted with a client to supervise the client’s office personnel
OR
Served, with a client bank, as a co-fiduciary of an estate or trust

Answer 45

Contracted with a client to supervise the client’s office personnel

Serving in any capacity equivalent to that of a member of management during the period covered by the financial statements is considered to impair independence.

Question 46

What is most important concerning internal control in an electronic data interchange (EDI) system?

PREVENTIVE or DETECTIVE controls

Answer 46

PREVENTIVE

Preventive controls are generally more important than detective controls in EDI systems because of the speed with which goods and services are delivered.

Question 47

When audit data analytics is used for risk assessment procedures, what is the correct order of performing the steps of ADA application?

Perform the ADA.
Consider the relevance and reliability of the data used.
Evaluate the results and conclude whether the purpose and specific objectives of performing the ADA have been achieved.
Plan the ADA.
Access and prepare the data for the purpose of the ADA

Answer 47

The chronological steps to applying audit data analytics are as follows:

    Planning of audit data analytics
    Access and prepare data
    Assess the relevance and reliability of data
    Performing audit data analytics
    Evaluate and Conclude

Question 48

An auditor is engaged to report on supplementary information in relation to the financial statements as a whole that is included in a client-prepared document containing audited financial statements. Under these circumstances, the auditor has elected to report on the supplementary information in an other-matter paragraph in the audit report on the financial statements. The other-matter paragraph should

Answer 48

State that the information is limited to data derived from records used to prepare the entity’s financial statements

Question 49

US GAAS require the auditor to include the justification for a departure from a relevant presumptively mandatory requirement in the audit documentation. What language indicates a presumptively mandatory requirement?

Answer 49

SHOULD = presumptively mandatory

MUST = unconditional requirement

Question 50

Service Organization’s Type 1 Report vs. Type 2:

Answer 50

Obtaining and reading a Type 1 report would not be appropriate as it provides an opinion regarding the design and implementation of internal controls but not its operating effectiveness.

Obtaining and reading a Type 2 report of the service organization’s auditor that provides opinion on design, implementation, and operating effectiveness of Internal Controls.

Question 51

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

Answer 51

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

Question 52

Which department is responsible for blanking out the quantity ordered on the receiving department copy?

Answer 52

The purchasing department, not accounting, is involved with the approval of purchase requisitions and blanking out the quantity ordered on the receiving department copy of the purchase order.

Question 53

Authorization of write-offs should be done by?

Answer 53

Treasurer

Question 54

Which of the following factors would the auditor not explicitly consider when determining sample size in an attribute sample for a test of controls?

An acceptable level of the risk of over-reliance.

The tolerable deviation rate.

The expected population deviation rate.

The tolerable misstatement.

Answer 54

The tolerable misstatement.

The tolerable misstatement is a factor in determining the sample size for the test of details and not a factor for determining the sample size in the test of control.

Question 55

US GAAS use two categories of professional requirements

Answer 55

UNCONDITIONAL

and

Presumptively Mandatory

Question 56

What is an auditor’s evaluation of a statistical sample for attributes when a test of 50 documents results in 3 deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%?

Answer 56

Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

The auditor should modify his or her planned assessed level of control risk when the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. In this question, the deviation rate of 6% (3 deviations among 50 documents) plus the allowance for sampling risk of 2% is greater than the given tolerable rate of 7%.

Question 57

Detection risk is inversely related to

Answer 57

Assurance provided by substantive tests

Detection risk relates to substantive audit procedures and is managed by the auditor’s response to the risk of material misstatement (RMM). For a given level of audit risk, detection risk should bear an inverse relationship to the RMM at the relevant assertion level. As the RMM increases, the level of detection risk that can be accepted by the auditor decreases (and the need for the assurance provided by substantive tests increases).

Question 58

If a partner or professional employee leaves the firm and subsequently is employed by or associated with that client in a key position, then the firm’s independence would be impaired, unless a number of conditions are met, including:

Answer 58

-there are no amounts owed to a former partner or professional employee for a prior interest in the firm or for unfunded,
vested retirement benefits;

• the former partner is not in a position to exert any influence over the accounting firm’s operations or financial policies;
• and the former partner may not participate or appear to participate, and is not associated with, the firm.

NOTE: It is irrelevant how long the former partner was employed with the firm. Disclosure of the relationship is not adequate.

Question 59

When an auditor of a nonissuer becomes aware that one or more auditing procedures that the auditor considered necessary in the circumstances existing at the time of the audit were omitted from the audit of the financial statements,

Answer 59

The US GAAS guidance relevant to this matter relates to the period subsequent to the AUDIT REPORT RELEASE DATE regarding when the auditor became aware of the omission.

Question 60

If a service auditor is unable to obtain a written assertion from the service organization’s management regarding its system and the suitability of the design and operating effectiveness of controls, it would be most appropriate for the auditor to

Answer 60

Withdraw from the engagement unless prohibited by law.

Question 61

According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and occur

• before audit report date OR
• before issuance of audit report?

Answer 61

According to PCAOB auditing standards, all required audit committee communications should be made in a timely manner and prior to the issuance of the audit report; not the date of the audit report. (Per GAAS and sometimes per PCAOB auditing standards, the issuance of the audit report is termed the release of the audit report, as in the audit report release date. Under both sets of standards, this is when the auditor grants the entity permission to use the audit report in connection with the issuance of the entity’s financial statements.)

Unless otherwise specified, required audit committee communications can be done orally or in writing.

Question 62

Which procedures, by themselves, do not provide sufficient appropriate audit evidence on which to base an audit opinion?

I. Risk assessment procedures
II. Tests of details
III. Tests of controls

Answer 62

I and III

A test of details by itself can provide sufficient evidence to base an audit opinion on.

Question 63

The scope of an audit is not restricted when an attorney’s response to an auditor as a result of a client’s letter of audit inquiry limits the response to

Answer 63

Matters to which the attorney has given substantive attention in the form of legal representation

Question 64

Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process?

Answer 64

Integrated test facility

Question 65

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

Answer 65

The combined assessed level of inherent risk and control risk relative to accounts receivable is low.

Question 66

Data Analytics can be used in which steps of the audit?

Answer 66

ALL STEPS!

Question 67

what is the Risk of Incorrect Rejection?

Answer 67

The risk of incorrect rejection is the risk that the sample supports the conclusion that the recorded account balance is materially misstated when, in fact, it is not materially misstated.

Question 68

Which of the following is a characteristic of non-statistical sampling?

Answer 68

It requires judgment to select a sample.

Statistical sampling is where the sample size is determined using quantitative measures and applying laws of probability. It is objective and results in reducing sampling risk and because of this is preferable for an audit engagement.

Non-statistical sampling is where the auditor uses her/his judgment to determine the sample size.

Question 69

Regardless of the assessed risks of material misstatement, an auditor would perform some

Answer 69

Regardless of the assessed risk 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.

Question 70

In reporting on a performance audit under Government Auditing Standards, an auditor most likely would be required to report findings directly to outside parties under which of the following circumstances?

Answer 70

When entity management fails to satisfy legal or regulatory requirements to report such information to external parties specified

Question 71

What is an auditor’s responsibility for supplementary information which is outside the basic financial state­ments but required by a standard setter designated by the AICPA to promulgate GAAP?

Answer 71

The auditor should apply certain LIMITED PROCEDURES to the supplementary information and include an other-matter paragraph in the audit report to refer to the RSI.

Question 72

Which of the following components of internal control contributes most to a strong control environment?

Answer 72

Management adheres to internal control policies.

Question 73

When the user entity uses the services of a service organization the user auditor DOES/DOES NOT make reference to the service auditor’s report as a basis, in part, for the user auditor’s opinion on the user entity’s financial statements.

Answer 73

When the user entity uses the services of a service organization the user auditor does not make reference to the service auditor’s report as a basis, in part, for the user auditor’s opinion on the user entity’s financial statements.