Test Wrong Answers Part II

Question 1

When should the auditor design TEST OF CONTROLS?

Answer 1

• When the auditor’s assessment of RMM at the relevant assertion level includes an expectation that the controls are operating effectively, i.e., the auditor intends to rely on the operating effectiveness of controls in determining the nature, timing, and extent of substantive procedures; or
• Substantive procedures alone cannot provide sufficient appropriate audit evidence at the relevant assertion level

Question 2

Quality control, as referred to in Statements on Quality Control Standards (SQCS), applies to a CPA firm’s responsibilities for its system of quality control for its

Answer 2

SQCS address a CPA’s firm’s responsibilities for its system of quality control for its accounting and auditing practice.

Question 3

The auditor’s (3) objectives in evaluating an entity’s accounting estimates are to ensure:

Answer 3

(1) all account­ing estimates that could be material to the financial statements have been developed,
(2) the estimates are reasonable, and
(3) the estimates are in conformity with the applicable financial reporting framework and are disclosed properly.

Question 4

Under the ethical standards of the profession, which of the following investments by a CPA in a corporate client is an indirect financial interest?

Answer 4

MUTUAL FUND

An investment held through a regulated mutual fund DOES NOT impair independence.

Question 5

Inquiry alone is not sufficient to test the operating effectiveness of controls. Accordingly, other audit procedures are performed in combination with inquiries. Which procedure combined with inquiry generally provides the least assurance?

Answer 5

OBSERVATION

Inquiry and observation generally may provide the least assurance of these alternatives because an observation is pertinent only at the point in time at which it is made.

Question 6

For audit procedures related to the inspection of significant contracts or agreements, the auditor should

Answer 6

Include abstracts or copies of those contracts or agreements in the audit documentation

NOTE:
The auditor should include abstracts or copies of those contracts or agreements in the audit documentation whether or not they would be needed by an experienced auditor.

Question 7

Which of the following statements is correct concerning the use of prior audit evidence regarding the operating effectiveness of controls?

Answer 7

If the auditor plans to rely on controls that have not changed since they were last tested, the auditor should test the controls AT LEAST ONCE EVERY THIRDA AUDIT and should test some controls during each audit.

Question 8

When is timely, i.e., as soon as practicable, communication of matters involving noncompliance with laws and regulations to those charged with governance required?

Answer 8

When the noncompliance is believed to be intentional and its effect on the financial statements is material

Question 9

According to the IFAC Code of Ethics for Professional Accountants, audit teams are required to be independent of the audit client during the engagement period and during which other period?

Answer 9

The period covered by the financial statements

Question 10

Which of the following correctly identifies the deadline for the completion of audit documentation of a nonissuer?

Answer 10

Within 60 days after the REPORT RELEASE

date.

Question 11

According to US GAAS, an auditor is associated with financial information when

Answer 11

The auditor has applied procedures sufficient to permit the auditor to report in accordance with US GAAS.

Question 12

According to US GAAS, if the group engagement partner decides to assume responsibility for the work of a component auditor, the group engagement partner

Answer 12

Should be involved in the work of the component auditor, insofar as that work relates to the expression of an opinion on the group financial statements

Question 13

A registered public accounting firm is conducting an audit of an issuer and initiated its current-year audit on January 1, year 3. Many of the firm’s former auditors are now employed by the client. Under which of the following circumstances may the firm perform the audit?

Answer 13

Under the AICPA Code of Professional Conduct, a CPA firm’s independence is impaired by employment relationship if a firm employee joins the client within one year of dissociating with the firm and has significant interaction with the CPA firm engagement team.

Where the client’s CFO was the lead partner on the audit till December 31, year 1 and the firm initiated its current-year audit on January 1, year 3, the one-year cooling-off period has been completed and the firm can conduct the audit without its independence being impaired.

Question 14

US GAAS are developed and issued in the form of:

Answer 14

Statements on Auditing Standards

they do not address the responsibilities of the auditor that may exist in legisla­tion, regulation, or otherwise, in connection with, for example, the offering of securities to the public.

US GAAS are codified into AU sections; not SAS sections

Question 15

Which of the following would an auditor ordinarily consider the greatest risk regarding an entity’s use of electronic data interchange (EDI)?

Answer 15

Improper transactions or disclosure of transactions, regardless of the media, are usually the greatest risk

Question 16

An arm’s length transaction is a transaction conducted on such terms and conditions between:

Answer 16

An arm’s length transaction is a transaction conducted on such terms and conditions between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests.

Question 17

According to the profession’s standards, which of the following is not required of a CPA performing a consulting engagement?

Answer 17

Maintaining independence from the client

Question 18

When establishing the overall audit strategy, the auditor should determine materiality for :

Answer 18

When establishing the overall audit strategy, the auditor should determine materiality for the financial statements as a whole. Only if, in the specific circumstances of the entity, one or more particular classes of transactions, account balances, or disclosures exist for which misstatements of lesser amounts than materiality for the financial statements as a whole could reasonably be expected to influence the economic decisions of users, then, taken on the basis of the financial statements, the auditor also should determine the materiality level or levels to be applied to those particular classes of transactions, account balances, or disclosures.

Question 19

Having an emphasis-of-matter paragraph is not a requirement when reporting on which of the following special-purpose frameworks?

Answer 19

Regulatory basis (for general use)

The emphasis-of-matter paragraph is required when reporting financial statements prepared in accordance with an applicable financial reporting framework, other than regulatory basis financial statements intended for general use.

Question 20

The auditor should document findings that could result in a

Answer 20

The auditor should document findings that could result in a modification of the auditor’s report.

Question 21

1st general standard

3rd general standard

Answer 21

1st general standard
Objective review of the adequacy of the training and proficiency of personnel is a quality control issue and relates to the first general standard—the audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

3rd general standard:
The exercise of due professional care requires critical review at every level of supervision of the work done and the judgment exercised by those assisting in the audit.

Question 22

An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the

Answer 22

Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate.

Question 23

When an audit firm includes a report on compliance with aspects of contractual agreements in the auditor’s report on the non-issuer’s financial statements, in which paragraph of the audit report should the report on compliance be included?

Answer 23

Other-matter paragraph.

Question 24

In which of the following situations would an auditor who is rendering an audit opinion on the financial statements of an employee benefit plan that will be filed with the Department of Labor be considered independent?

Answer 24

Independence is impaired by:

Material or Immaterial direct financial interest

Material indirect financial interest

Business Relationships with the audit client:  If a member of the auditor's firm was an investment advisor to the employee benefit plan during the period of professional engagement, he or she is making investment decisions for the client, which impairs independence. The auditor should be independent during the entire period of engagement and not just as of the date of the opinion.

Question 25

A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

Answer 25

The lawyer and the auditor

Question 26

An audit report on special-purpose financial statements (except for a report on regulatory basis financial statements intended for general use) should include an emphasis-of-matter paragraph that

Answer 26

States that the special-purpose framework is a basis of accounting other than GAAP

NOTES:

• the phrase other comprehensive basis of accounting is not used.
• Basis of Accounting is an appropriate heading for the emphasis-of-matter paragraph
• the framework should not be described in the emphasis-of-matter paragraph; instead, the paragraph should refer to the note to the financial statements that describes that framework.

Question 27

A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the

Answer 27

Sample size

The principal advantage of statistical over nonstatistical sampling methods is that statistical methods provide a model for determining sample size while explicitly recognizing relevant factors (e.g. risk of assessing control risk too low, tolerable rate, and expected deviation rate). In nonstatistical sampling, the auditor implicitly recognizes the relevant factors while determining the sample size based on his or her own judgment and experience.

Question 28

According to the PCAOB, when a qualified opinion results from a scope limitation or insufficiency of evidential matter, the auditor’s report should describe the basis for departure from an unqualified opinion:

Answer 28

In a separate paragraph immediately following the Opinion Paragraph AND

Refer to that description in both the Basis for Opinion section and Opinion Paragraph of the auditor's report

Question 29

Whose signatures should be included in the management representation letter to the auditor?

Answer 29

The CEO or president and the most senior accounting person (such as the CFO) are usually required to sign the letter.

Question 30

During planning, an auditor of a non-issuer should communicate which of the following to those charged with governance at an entity?

Answer 30

The audit does not relieve management of its responsibilities for the financial statements

Question 31

Regarding internal control deficiencies, what should the engagement team communicate to group management and those charged with governance?

Answer 31

The group engagement team should communicate to group management and those charged with governance of the group material weaknesses and significant deficiencies in internal control that are relevant to the group; not all internal control deficiencies.