Wiley MCQs

Question 1

If an auditor is obtaining an understanding of an issuer’s
information and communication component of internal control,
which of the following factors should the auditor assess?
a. The integrity and ethical values of top management.
b. The philosophy and operating style of management to promote effective internal control over financial reporting.
c. The classes of transactions in the issuer’s operations that are signifi cant to the issuer’s fi nancial statements.
d. The oversight responsibility over fi nancial reporting and internal control by the board or audit committee

Answer 1

Answer (c) is correct because an auditor’s understanding
of an issuer’s information and communication component of
internal control relates most directly to the signifi cant classes
of transactions. Answer (a) is incorrect because the control
environment includes integrity and ethical values. Answer (b)
is incorrect because management’s philosophy and operating
style is considered in the control environment. Answer (d)
is incorrect oversight relates most directly to the monitoring
component of internal control.

Question 2

Which of the following is not a role of the risk assessment
in an integrated audit of a nonissuer?
a. Concluding on the effectiveness of a given control.
b. Selecting controls to test.
c. Determining signifi cant accounts and relevant
assertions.
d. Determining evidence necessary to conclude on the
effectiveness of a given control.

Answer 2

Answer (a) is correct, not a role in the risk assessment,
because the objective is to express overall opinions on internal
control and the fi nancial statements, not to express an opinion
on the effectiveness of each individual control; also, in the
early risk assessment information on such effectiveness has not
yet been collected. Answer (b) is incorrect because selecting
controls to test is a part of the role. Answer (c) is incorrect
because determining signifi cant account and assertions is a
part of the role. Answer (d) is incorrect because determining
evidence necessary to conclude on the effectiveness of a given
control is a part of the role.

Question 3

Which of the following situations represents a limitation,
rather than a failure, of internal control?
a. A jewelry store employee steals a small necklace from a
display cabinet.
b. A bank teller embezzles several hundred dollars from
the cash drawer.
c. A purchasing employee and an outside vendor
participate in a kickback scheme.
d. A movie theater cashier sells reduced-price tickets to
full-paying customers and pockets the difference.

Answer 3

Answer (c) is correct because the professional standards
indicate that collusion among individuals is a limitation
of internal control in that it may allow those individuals to
circumvent controls; here a control over disbursements may
exist but be circumvented through two (or more) individuals
working together to “beat” (make ineffective) the control.
Answer (a) is incorrect because there apparently is no
operating control over the display cabinet. Answer (b) is
incorrect because there apparently is no operating control over
cash in the cash drawer. Answer (d) is incorrect because there
apparently is no operating control over who is sold reducedprice
tickets.

Question 4

An audit client has substantial assets held in a trust that
is managed by the trust department of a bank. Which of the
following actions by the auditor is the most effi cient way
to obtain information about the trust department’s internal
controls?
a. Perform a review or compilation of the trust department.
b. Perform tests of controls on a sample of the client’s
transactions with the trust department.
c. Rely on the trust department’s audit report on internal
controls placed in operation and their operating
effectiveness.
d. Ask management of the trust department to complete
a questionnaire about internal controls and provide
fl owcharts for related processes.

Answer 4

Answer (c) is correct because auditors often rely upon
service organization reports that provide assurance with
respect to those controls; these reports are used by auditors
(“user auditors”) and companies that use the services of the
service organization. Answer (a) is incorrect because review
and compilation reports do not provide assurance on internal
control. Answer (b) is incorrect because while performing
such tests of controls is possible, it is unlikely to be the most
effi cient approach. Answer (d) is incorrect because no such
questionnaire is used

Question 5

Which of the following levels would most likely address
the risk of material misstatement by the auditor’s consideration
of an entity’s control environment?
a. Financial statements.
b. Disclosures.
c. Classes of transactions.
d. Specifi c account balances.

Answer 5

Answer (a) is correct because the professional standards
suggest that risks of material misstatement at the fi nancial
statement level may derive, in particular, from a defi cient
control environment. Answer (b) is incorrect because the
control environment is not as directly related to disclosures
as it does to the proper reply. Answer (c) is incorrect because
the control environment does not relate as directly to classes
of transactions as it does to the proper reply. Answer (d) is
incorrect because the control environment does not relate as
directly to specifi c account balances as it does to the proper
reply.

Question 6

In addition to descriptions of the nature, timing, and
extent of planned risk assessment procedures and planned
further audit procedures, which of the following additional
pieces of information should be documented in the audit plan?
a. Procedures performed to assess independence and the
ability to perform the engagement.
b. The understanding of the terms of the engagement,
including scope, fees, and resource allocation.
c. Other audit procedures to be performed to comply with
generally accepted auditing standards.
d. Issues with management integrity that could affect the
decision to continue the audit engagement.

Answer 6

Answer (c) is correct because the audit plan (program)
should include the various types of audit procedures performed
during the audit. Answer (a) is incorrect because procedures
performed to assess independence are ordinarily more directly
related to the fi rm’s quality controls. Answer (b) is incorrect
because this understanding is documented in the engagement
letter. Answer (d) is incorrect because these issues, if they
arise, will be included in the audit documentation itself.

Question 7

An audit team has concluded that inventory is highly
susceptible to misappropriation and that a potential
misstatement would be material to the fi nancial statements.
How should the audit team address the audit procedures to the
increased risk?
a. Review the client’s control procedures over the
safeguarding of inventory, and perform a physical
inventory count on the last day of the current year.
b. Review the client’s control procedures over the
safeguarding of inventory, incorporate the use of
substantive analytical procedures, and develop an
expectation.
c. Review the client’s control procedures over the
safeguarding of inventory, but do not modify
substantive procedures over inventory.
d. Review the client’s control procedures over the
safeguarding of inventory, and perform physical
inventory counts throughout the current year.

Answer 7

Answer (a) is correct because in such a high risk
environment the timing of procedures may be performed at
year-end (the balance being reported upon in the audit report),
rather than at interim periods. Answer (b) is incorrect because
substantive analytical procedures may not be as reliable as an
inventory count at identifying misappropriation. Answer (c) is
incorrect because the increased risk would suggest the need to
modify substantive procedures when the auditor had not been
aware of the risk when originally planning the audit. Answer
(d) is incorrect because a year-end count is more likely to be
performed since the company is reporting as of the last day of
the year.

Question 8

Notes:

Issuer: These are public companies that issue securities and file with the SEC. The audit is a requirement by law. Non-

issuer: These are private companies and do not issue securities or file with the SEC

Question 9

When planning an engagement to examine the
effectiveness of the entity’s internal control in an integrated
audit of a nonissuer, a practitioner would least likely consider
which of the following factors?
a. Preliminary judgments about the effectiveness of
internal control.
b. The extent of recent changes in the entity and its
operations.
c. The type of available evidential matter pertaining to the
effectiveness of the entity’s internal control.
d. The evaluation of the operating effectiveness of the
controls.

Answer 9

Answer (d) is correct because evaluation of the operating
effectiveness of controls occurs after tests of controls have
been performed, which is after planning. Answer (a) is
incorrect because a practitioner should make preliminary
judgments about the effectiveness of internal control during
planning. Answer (b) is incorrect because during planning a
practitioner should consider recent changes in the entity and
its operations since those changes may require changes in
the scope of the engagement. Answer (c) is incorrect because
during planning a practitioner should consider the type of
evidence available so as to be able to design procedures.

Question 10

In the audit of a nonissuer, which of the following
statements is correct regarding the use of external
confi rmations to obtain audit evidence?
a. Management’s refusal to allow an auditor to perform
external confi rmation procedures is considered a
departure from GAAP suffi cient to qualify the opinion.
b. Negative confi rmations provide more persuasive audit
evidence than positive confi rmations.
c. Negative confi rmations should be used only if a very
high exception rate is expected.
d. A factor for an auditor to consider when designing
confi rmation requests is the assertion being tested.

Answer 10

Answer (d) is correct because confi rmations are often
better for some assertions (e.g., existence) than they are
for others (completeness). Answer (a) is incorrect because
management refusal is a scope limitation, not a departure
from GAAP. Answer (b) is incorrect because positive, not
negative, confi rmations ordinarily provide more persuasive
audit evidence. Answer (c) is incorrect because negative
confi rmations are ordinarily used when there is a low
exception rate.

Question 11

After performing a compliance audit of an entity that
received federal funds, what conclusion would the auditor
draw if the entity does not have adequate documentation to
support $5 million in operating expenses paid from federal
program funds?
a. The entity spent $5 million in operating expenses that
were not approved.
b. Questioned costs of $5 million for operating expenses
have been identifi ed.
c. The entity spent $5 million of government funds for
services that were not required.
d. The entity submitted unauthorized invoices for
expenses.

Answer 11

Answer (b) is correct because such costs that are
inadequately supported are referred to as questioned costs.
Answer (a) is incorrect because the operating expenses may or
may not have been properly approved. Answer (c) is incorrect
because the services may or may not have been required.
Answer (d) is incorrect because there is no indication of
submission of unauthorized invoices.

Question 12

An auditor of a nonissuer is most likely to conclude that
a misstatement identifi ed during an audit that is below the
quantitative materiality limit is qualitatively material if it
a. Changes the company’s operating results from a net loss
to a net income.
b. Arises from a transaction cycle with controls that were
determined to be operating effectively.
c. Is the fi rst time a misstatement has arisen from the
relevant transaction cycle.
d. Decreases management’s incentive compensation for
the period.

Answer 12

Answer (a) is correct because a misstatement that changes
a company’s operating results from a net loss to a net income
may be considered important by a fi nancial statement user
who is particularly concerned when a loss of any magnitude
occurs. Answer (b) is incorrect because the misstatement
itself, not that it arose in a cycle the auditor believed to
operate effectively, is of most signifi cance. Answer (c) is
incorrect because whether it is the fi rst or second time may
not necessarily affect the materiality decision. Answer (d) is
incorrect because the professional standards state that such a
misstatement that has the effect of increasing not decreasing
management’s compensation may be material

Question 13

What is the maximum number of days in which a
nonissuer’s auditor should complete the assembly of the fi nal
audit fi le following the report release date?
a. 30 days.
b. 45 days.
c. 60 days.
d. 75 days.

Answer 13

Answer (c) is correct because the documentation
completion period, the number of days a nonissuer’s auditor
may use to complete assembly of the fi nal audit fi le, is 60
days for a nonissuer’s auditor. Answer (a) is incorrect because
the documentation completion period is longer than 30
days. Answer (b) is incorrect because while 45 days is the
documentation completion period for issuers, it is not for
nonissuers. Answer (d) is incorrect because the documentation
completion period is less than 75 days.

Question 14

In an integrated audit of a nonissuer, if an auditor
concludes that a material weakness exists as of the date
specifi ed in management’s assertion, the auditor should take
which of the following actions?
a. Obtain written representations from management
relating to such matters.
b. Communicate, in writing, to the entity’s outside legal
counsel that the material weakness exists.
c. Issue an adverse opinion.
d. Disclaim an opinion.

Answer 14

Answer (c) is correct because the existence of a material
weakness results in an adverse opinion. Answer (a) is incorrect
because no such written representation need be obtained.
Answer (b) is incorrect because, ordinarily, outside counsel
need not be contacted. Answer (d) is incorrect because a
disclaimer of opinion is not issued in this situation.

Question 15

A nonissuer requests that a CPA change an audit
engagement to a review engagement. If the accountant agrees
to the change, how, if at all, should the accountant’s review
report be modifi ed?
a. The accountant should issue the review report without
mentioning the change in engagement.
b. The accountant should include in the review report a
disclaimer of an audit opinion.
c. The accountant should include in the review report
the circumstances that resulted in the change in
engagement.
d. The accountant should include in the review report a
reference to the original engagement but not the reason
for the change.

Answer 15

Answer (a) is correct because a review report should not
mention the change in engagement. Answer (b) is incorrect
because no such disclaimer should be included in the review
report. Answer (c) is incorrect because the review report
should not include the circumstances. Answer (d) is incorrect
because the original engagement should not be referred to.

Question 16

Which of the following procedures regarding notes
payable would an accountant most likely perform during a
nonissuer’s review engagement?
a. Confi rming the year-end outstanding note payable
balance with the lender.
b. Examining records indicating proper authorization of
the notes payable.
c. Making inquiries of management regarding maturities,
interest rate, and collateral.
d. Documenting control procedures for payment
calculations of the notes’ principal and interest.

Answer 16

Answer (c) is correct because a review consists primarily
of such inquiries, analytical procedures and obtaining written
representations from management. Answer (a) is incorrect
because confi rming accounts is not ordinarily a part of
a review engagement. Answer (b) is incorrect because a
nonissuer review does not ordinarily include such tests of
controls. Answer (d) is incorrect because such documentation
is not required.

Question 17

When financial statements that an accountant has
compiled in accordance with Statements on Standards
for Accounting and Review Services omit substantially
all disclosures required by generally accepted accounting
principles, the accountant’s report should include
a. Management’s justification for its decision to elect to
omit substantially all the disclosures.
b. No modification of the standard compilation report
because compilations do not require disclosures that are
required for audited fi nancial statements.
c. Information alerting readers about omission of the
disclosures and notifi cation that the omission may
infl uence the user’s conclusions about the fi nancial
statements.
d. A separate paragraph in the compilation report stating
that the fi nancial statements are misleading due to the
lack of disclosures by management.

Answer 17

Answer (c) is correct because the proper accountant’s
report does alert readers about the omission and state that those disclosures may influence a user’s conclusions. Answer (a) is incorrect because management’s justification is not included in the report. Answer (b) is incorrect because
the compilation report must indicate that the disclosures
are omitted.
Answer (d) is incorrect because the financial statements are not considered misleading if the accountant is
still involved and has not withdrawn from the engagement.

Question 18

An issuer’s auditor is prohibited from providing tax
services to which of the following individuals?
a. The chair of the board of directors.
b. The chair of the audit committee.
c. The CEO.
d. The CFO of an affi liate of the issuer audited by another
fi rm.

Answer 18

Answer (c) is correct because an issuer’s independence is
impaired when that auditor provides tax services to individuals
in a fi nancial reporting oversight role (this includes the chief
executive offi cer, the president, the chief fi nancial offi cer and
a number of other such professionals). Answer (a) is incorrect
because tax services may be provided to a board of director
member when that member’s only tie to the company is as
a member of the board of directors. Answer (b) is incorrect
because tax services may be provided to the chair of the audit
committee when that individual’s only tie to the company is
as a member of the board of directors (and its committees,
such as the audit committee). Answer (d) is incorrect because
tax services may be provided to the CFO of an affi liate that
is audited by another fi rm or an affi liate whose fi nancial
statements are not material to the issuer’s audited fi nancial
statements.

Question 19

Each of the following is an ethical principle that should
guide the work of auditors in the conduct of audits under
government auditing standards, except
a. Materiality.
b. Integrity.
c. The public interest.
d. Proper use of government information.

Answer 19

Answer (a) is correct because materiality is not an ethical
principle under government auditing standards. Answer (b)
is incorrect because integrity is an ethical principle under
government auditing standards. Answer (c) is incorrect
because the public interest is an ethical principle under
government auditing standards. Answer (d) is incorrect
because proper use of government information is an ethical
principle under government auditing standards.

Question 20

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 20

Answer (b) is correct because the IFAC Code of Ethics
requires audit teams to be independent during both the
engagement period and the period covered by the fi nancial
statements. Answer (a) is incorrect because independence is
not required for the following period (assuming one will not be
on the audit team during that period). Answer (c) is incorrect
because the fi scal year, not the calendar years are considered.
Answer (d) is incorrect because no such two year requirement
exists.

Question 21

Which of the following procedures would most likely
assist an auditor in identifying related party transactions?
a. Evaluate the reasonableness of management’s
accounting estimates that are subject to bias.
b. Retest ineffective internal control activities for evidence
of management override.
c. Review the minutes of the meetings of the board of
directors and its committees.
d. Send second requests for unanswered positive
confi rmations of accounts receivable.

Answer 21

Answer (c) is correct because the minutes of the board
of directors and its committees may well include discussion
of related party matters. Answer (a) is incorrect because
accounting estimates may, but often will not, help auditors
to identify related party transactions. Answer (b) is incorrect
because evidence on management override does not directly
address identifying related party transactions. Answer (d) is
incorrect because such confi rmations often are not to related
parties.

Question 22

Which of the following factors would most likely
infl uence the form and extent of the auditor’s documentation
of an entity’s internal control environment?
a. Complexity and size of the entity.
b. Amount of audit work performed at an interim date.
c. Amount of audit work performed by the internal
auditor.
d. Results of verifying material account balances.

Answer 22

Answer (a) is correct because the level of complexity
and the size of the entity have a major effect on the form and
content of controls related audit documentation; for example,
consider the likely difference in documentation between a
small retail store and a large international highly diversifi ed
company. Answer (b) is incorrect because the amount of
work performed at an interim date has a lesser effect on the
form and extent of the auditor’s documentation than does the
correct reply. Answer (c) is incorrect because the amount of
work performed by the internal auditor has a lesser effect on
the form and extent of the auditor’s documentation than does
the correct reply. Answer (d) is incorrect because the results of
verifying material account balances amount of work performed
at an interim date has a lesser effect on the form and extent of
the auditor’s documentation than does the correct reply.

Question 23

In which of the following circumstances is an auditor
most likely to rely on work done by internal auditors?
a. If fi nancial statement amounts are material and the
degree of subjectivity in evaluating the audit evidence
is high.
b. If the internal auditors have concluded that the risk of
material misstatement at the overall fi nancial level is
negligible.
c. For fi nancial statement amounts judged by the auditor
to require little or no subjectively evaluated audit
evidence.
d. For fi nancial statement amounts determined largely or
entirely on the basis of estimates made by management.

Answer 23

Answer (c) is correct because an external auditor uses
more of the work of internal auditors in situations in which
low levels of judgement are required. Answer (a) is incorrect
because the external auditor is responsible for the overall
audit and, therefore, he or she is hesitant to rely on work in
very material areas and in situations in which subjectivity is
high. Answer (b) is incorrect because the external auditor, not
the internal auditors must conclude as to risk. Answer (d) is
incorrect because estimates are a risky area which the external
auditor will most likely perform.

Question 24

Which of the following statements is correct regarding a
management representation letter?
a. A representation letter can be used in place of specifi c,
previously identifi ed audit procedures.
b. A representation letter encompasses a different set
of assertions than those inherent in the fi nancial
statements.
c. The date of the representation letter should typically be
the same as the audit report.
d. The representations made apply until the date of a
client’s fi nancial statements.

Answer 24

Answer (c) is correct because the representations should
be obtained as late as possible in an audit—ordinarily when
the auditor has obtained suffi cient appropriate audit evidence,
the date of the audit report. Answer (a) is incorrect because
client representations are not a substitute for other procedures.
Answer (b) is incorrect because a different set of assertions is
not included in a representation letter. Answer (d) is incorrect
because representations must be obtained as of a later date.

Question 25

Which of the following components of internal
control would be considered the foundation for the other
components?
a. Information and communication.
b. Risk assessment.
c. Control environment.
d. Control activities.

Answer 25

Answer (c) is correct because the control environment
sets the tone of an organization, infl uencing the control
consciousness of is people and, accordingly is the foundation
for all the other components. Answer (a) is incorrect because
information and communication is less comprehensive than
the proper reply. Answer (b) is incorrect because while risk
assessment is used to identify and analyze risks, it is less
comprehensive than the proper rely. Answer (d) is incorrect
because while control activities include the various policies and
procedures to help ensure that necessary actions ae taken to
address risks, they are less comprehensive than the proper reply.

Question 26

Which of the following activities by small-business
clients best demonstrates management integrity in the absence
of a written code of conduct?
a. Emphasizing ethical behavior through oral
communication and management example.
b. Developing and maintaining formal descriptions of
accounting procedures.
c. Documenting internal control procedures using
fl owcharts rather than narratives.
d. Reporting regularly to the board of directors about
operations and fi nances.

Answer 26

Answer (a) is correct because orally emphasizing ethical
behavior and providing examples of such behavior are
indictors of management integrity. Answer (b) is incorrect
because formal descriptions of accounting procedures may or
may not relate to management integrity. Answer (c) is incorrect
because narratives may well provide adequate documentation

Question 27

Which of the following procedures would be appropriate
to test the existence assertion during an audit of accounts
receivable?
a. Trace transactions from the subsidiary ledger to the
general ledger.
b. Send confi rmations to customers.
c. Trace a sample of invoices to recording in the general
ledger.
d. Determine that all shipments before year end are
recorded as sales.

Answer 27

Answer (b) is correct because confi rmations are
particularly effective relating to the existence assertion because
a respondent acknowledges the information confi rmed. Answer
(a) is incorrect because tracing from the subsidiary ledger to
the general ledger may more directly address the accuracy
of posting such transactions. Answer (c) is incorrect because
tracing invoices to the general ledger addresses completeness
more directly than it does existence. Answer (d) is incorrect
because determining that all shipments before year end are
recorded as sales addresses completeness more directly than
existence.

Question 28

A company’s management provided its auditors with
information concerning litigation, claims, and assessments.
Which of the following is the auditor’s primary means of
corroborating management’s information?
a. Inquiring of company’s outside counsel.
b. Meeting with the company’s audit committee.
c. Meeting with the company’s Chairman of the Board.
d. Inquiring of the company’s in-house counsel.

Answer 28

Answer (a) is correct because the client’s external
counsel is the primary source of such information. Answer
(b) is incorrect because while the audit committee may have
information on litigation, claims and assessments, one other
party ordinarily has more such information. Answer (c) is
incorrect because while the chairman of the board may have
information on litigation, claims and assessments, one other
party ordinarily has more such information. Answer (d) is
incorrect because, when possible, the auditor would prefer
obtaining such information from a more independent party.
37. Answer

Question 29

Which of the following would cause an auditor of an
entity’s fi nancial statements to issue either a qualifi ed opinion
or a disclaimer of opinion?
a. Scope limitation involving a recorded uncertainty.
b. Inadequate disclosure of an uncertainty.
c. The use of inappropriate accounting principles.
d. Unreasonable accounting estimates.

Answer 29

Answer (a) is correct because a scope limitation results
in either a qualifi ed opinion or a disclaimer, depending upon
the pervasiveness of the possible effects of any undetected
misstatements. Answer (b) is incorrect because inadequate
disclosure of an uncertainty is a departure from GAAP—this
will result in either a qualifi ed opinion or an adverse opinion.
Answer (c) is incorrect because the use of inappropriate
accounting principles is a departure from GAAP—this will
result in either a qualifi ed opinion or an adverse opinion.
Answer (d) is incorrect because unreasonable accounting
estimates ae departures from GAAP—this will result in either
a qualifi ed opinion or an adverse opinion.

Question 30

At the completion of an audit, which of the following
entities has ownership of the audit working papers?
a. The client.
b. The client’s audit committee.
c. The CPA fi rm that performed the audit.
d. The client’s stockholders.

Answer 30

Answer (c) is correct because the CPA fi rm owns the
working papers at all times, not just at completion of an audit.
Answer (a) is incorrect because while the client owns the
accounting records, it does not own the audit working papers.
Answer (b) is incorrect because the client’s audit committee
does not own the working papers. Answer (d) is incorrect
because the client’s stockholders do not own the working
papers.

Question 31

Answer (c) is correct because the CPA fi rm owns the
working papers at all times, not just at completion of an audit.
Answer (a) is incorrect because while the client owns the
accounting records, it does not own the audit working papers.
Answer (b) is incorrect because the client’s audit committee
does not own the working papers. Answer (d) is incorrect
because the client’s stockholders do not own the working
papers.

Answer 31

Answer (c) is correct because the CPA fi rm owns the
working papers at all times, not just at completion of an audit.
Answer (a) is incorrect because while the client owns the
accounting records, it does not own the audit working papers.
Answer (b) is incorrect because the client’s audit committee
does not own the working papers. Answer (d) is incorrect
because the client’s stockholders do not own the working
papers.

Question 32

Before accepting an engagement to compile or review
the fi nancial statements of a nonissuer, which of the following
specifi c inquiries should a successor accountant consider
making to the predecessor accountant?
a. How cooperative was the owner’s lawyer in providing a
legal opinion?
b. How did you assess inherent risk and control risk?
c. How would you describe the integrity of the owner?
d. What evaluation did you make of any accounting
estimates?

Answer 32

Answer (c) is correct because a successor will inquire
of such major issues as management integrity. Answer (a)
is incorrect because no such inquiry concerning the owner’s
lawyer is made since neither a compilation nor a review
ordinarily includes contacting that attorney. Answer (b)
is incorrect because no such assessment is required when
performing a compilation or review. Answer (d) is incorrect
because no such inquiry concerning accounting estimates is
ordinarily included.

Question 33

An entity has failed to provide documentation for a
newly acquired material asset and informs its auditors that
the documentation is lost. According to generally accepted
government auditing standards what would this situation
typically indicate to the auditors?
a. Fraudulent activity.
b. Abusive activity.
c. Misappropriation of assets.
d. A heightened risk of fraud.

Answer 33

Answer (d) is correct because while the failure to
provide documentation is consistent with fraud, it is also
consistent with simply losing certain documents; thus there
is a heightened risk of fraud, but fraud may or may not be
the explanation for the lack of documentation. Answer (a)
is incorrect because it is uncertain as to whether fraudulent
activity is present. Answer (b) is incorrect because an abusive
activity may or may not be present. Answer (c) is incorrect
because misappropriation may or may not be involved.

Question 34

An accountant performing a compilation for a nonissuer
believes that the fi nancial statements might be materially
misstated. The client refuses to provide additional or revised
information. How should the accountant respond?
a. By requesting that the engagement be changed from a
compilation to a review or audit.
b. By issuing a compilation report that is qualifi ed for a
scope limitation.
c. By withdrawing from the compilation engagement.
d. By issuing an adverse report on the compilation.

Answer 34

Answer (c) is correct because when such information
seems incomplete or otherwise unsatisfactory, and the client
refuses to modify it, the professional standards state that the
accountant should withdraw from the engagement. Answer
(a) is incorrect because changing the engagement will not
eliminate the situation as the fi nancial statements still might be
materially misstated. Answer (b) is incorrect because qualifi ed
opinions are only issued based on audits, not compilations or
reviews. Answer (d) is incorrect because adverse opinions are
only issued based on audits, not compilations or reviews.

Question 35

During an audit of a nonissuer’s fi nancial statements, an
auditor should perform tests of controls to obtain suffi cient
appropriate audit evidence about the operating effectiveness of
relevant controls if
a. The auditor does not presume that client management
has committed fraud.
b. More fi nancial documentation is available through tests
of controls.
c. Substantive procedures alone cannot provide suffi cient
appropriate audit evidence.
d. The auditor does not intend to rely on the operating
effectiveness of controls.

Answer 35

Answer (c) is correct because when substantive procedures
alone cannot provide suffi cient appropriate audit evidence,
the auditor will need to perform tests of controls. Answer (a)
is incorrect because the decision to perform tests of controls
isn’t ordinarily tied to a presumption that management has not
committed fraud. Answer (b) is incorrect because the level
of documentation available doesn’t demine whether tests of
controls are performed. Answer (d) is incorrect because tests
of controls are performed when an auditor intends to rely on
the operating effectiveness of controls, not on when the auditor
does not intend to so rely.

BECAUSE IN THIS CASE, the level of your controls risks might be at LOW (kaya ka magtetest of controls), hence, your Detection Risk is High, leading to decrease of Substantive Procedures

Question 36

In performing interviews and examining documents
related to preliminary work in a fi nancial statement audit of a
nonissuer, an auditor identifi es a business risk associated with
plans for a new product line. What should the auditor do as a
result?
a. Modify the scope of the engagement to include an
analysis of the budget for the new product line and
consider the new risk in conjunction with other risks
after the budget items have been analyzed.
b. Analyze the newly identifi ed risk in conjunction with
economic circumstances related exclusively to the new
product line and consider whether there is an immediate
consequence for the risk of material misstatement for
affected classes of transactions.
c. Modify the fi nancial statement disclosures to include
the newly identifi ed risk if it is likely that the new
product line will have an adverse effect on the
company’s profi tability.
d. Analyze the newly identifi ed risk in conjunction with
other known business risks and consider whether there
is an immediate consequence for the risk of material
misstatement at various levels of the audit.

Answer 36

Answer (d) is correct because the newly identifi ed
information should be considered in conjunction with
information on other known business risks. Answer (a) is
incorrect because the scope of the audit may or may not have
to be modifi ed. Answer (b) is incorrect because the auditor
should consider other factors related to the new product line.
Answer (c) is incorrect because the new product line may not
require fi nancial statement disclosures.

Question 37

If interim substantive procedures for an account identifi ed
no exceptions, which of the following would the auditor not
perform on that account at year end?
a. Tests of details for the entire year under audit.
b. Tests of details of activity during the period since the
interim testing date.
c. Reconciliation of year-end balances to interim balances.
d. Substantive analytical procedures of the period since the
interim testing date.

Answer 37

Answer (a) is correct because the interim tests, which
identifi ed no exceptions, already included much of the year’s
work. Answer (b) is incorrect because the emphasis of testing
will be on activity since the interim testing date. Answer (c) is
incorrect because such reconciliation is appropriate. Answer
(d) is incorrect because substantive analytical procedures
represent a possible approach for the period since the interim
testing date.

Question 38

In communicating with those charged with governance,
the auditor must decide whether to communicate with the
audit committee or the client’s entire board of directors. Which
of the following considerations will be least relevant to this
decision?
a. Whether the audit committee will be able to provide
further information and explanations that the auditor
may require while performing the audit.
b. The nature of the matters to be communicated.
c. Management’s preference.
d. Regulatory requirements related to audit
communications with those charged with governance

Answer 38

Answer (c) is correct because management’s preference is
not particularly relevant; most relevant is determining those
charged with governance since that is the target group for the
communication. Answer (a) is incorrect because the audit
committee may be able to provide important information to
the auditor during the audit. Answer (b) is incorrect because
not all matters are relevant to those charged with governance.
Answer (d) is incorrect because regulatory requirements
should be followed.

Question 39

Public Company Accounting Oversight Board

Answer 39

The Public Company Accounting Oversight Board (also known as the PCAOB) is a private-sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee accounting professionals who provide independent audit reports for publicly traded companies

Question 40

According to the Sarbanes-Oxley Act of 2002, the
PCAOB has the legal authority to perform each of the
following, except:
a. Prosecute suspected criminal violations by registered
public accounting fi rms.
b. Process, review, and approve the registration of public
accounting fi rms that audit issuers.
c. Inspect and review selected audit engagements of
registered public accounting fi rms.
d. Establish auditing, quality control, and independence
standards for audits of issuers.

Answer 40

Answer (a) is correct because the PCAOB does not have
the authority to prosecute suspected criminal violations by
registered CPA fi rms. Answer (b) is incorrect because the
PCAOB is involved with the registration of public accounting
fi rms that audit issuers. Answer (c) is incorrect because
the PCAOB does perform such inspections. Answer (d) is
incorrect because the PCAOB may establish auditing, quality
control, and independence standards for audits of issuers.

Question 41

Which of the following best describes the effect of a
contingent fee arrangement on the auditor’s independence?
a. The contingent fee arrangement does not impair
independence if it is consistent with the registered
public accounting fi rm’s quality control policies.
b. The contingent fee arrangement impairs independence.
c. The contingent fee arrangement does not impair
independence unless more than half of the fee is subject
to contingencies.
d. The contingent fee arrangement impairs independence
unless approved by the client’s audit committee.

Answer 41

Answer (b) is correct because any contingent fee
arrangement impairs auditor independence. Answer (a) is
incorrect because a contingent fee arrangement does impair
independence, regardless of quality control practices. Answer
(c) is incorrect because a contingent fee impairs independence,
regardless of is amount. Answer (d) is incorrect because a
contingent fee impairs independence even if approved by the
client’s audit committee.

Question 42

An accountant is engaged to perform compilation services
for a new client in an industry with which the accountant
has no previous experience. How should the accountant
obtain suffi cient knowledge of the industry to perform the
compilation service?
a. By obtaining the most recent letter of credit from the
entity’s primary fi nancial institution.
b. By consulting AICPA guides, industry publications, or
individuals knowledgeable about the industry.
c. By researching the entity’s Internet site and searching
for current press releases.
d. By reviewing the predecessor accountant’s workpapers
without the knowledge of the entity.

Answer 42

Answer (b) is correct because an accountant can obtain
the needed industry knowledge by consulting AICPA guides, industry publications, or individuals knowledgeable about the industry. Answer (a) is incorrect because a letter of credit will not provide the industry information needed. Answer (c) is incorrect because the Internet site and current press releases are likely to provide more information on the company itself, as contrasted to the industry. Answer (d) is incorrect because a successor only reviews a predecessor accountant’s workpapers
after a client has agreed to allow such a review.