| "Which of the following properly describes the auditor's responsibilities as opposed to management's responsibilities? A. | |
| Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement. | |
| B. | |
| Management is responsible for the entity's financial statements and the auditor is responsible for the selection and application of accounting principles. | |
| C. | |
| The auditor is responsible for identifying the laws and regulations applicable to the entity's activities and management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial. | |
| D. | |
| The auditor is responsible for the entity's financial statements and management is responsible for the selection and application of accounting principles.","Choice ""A"" is correct. Management is responsible for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial and the auditor is responsible for obtaining reasonable assurance about whether the financial statements are free of material misstatement. | |
| Choice ""C"" is incorrect. Management is responsible for both identifying the laws and regulations applicable to the entity's activities, and for affirming that the effects of any uncorrected misstatements in the financial statements are immaterial. | |
| Choices ""D"" and ""B"" are incorrect. Management is responsible for both the entity's financial statements and for the selection and application of accounting principles." | |
| "Which of the following is a required component of the independent auditor’s report expressing an unmodified opinion? A. | |
| An Opinion section including a reference to generally accepted auditing principles. | |
| B. | |
| An other-matter paragraph including the reason for the unmodified opinion. | |
| C. | |
| A Basis for Opinion section including a reference to generally accepted auditing standards. | |
| D. | |
| An Auditor's Responsibility section including the audit firm name.","Choice ""C"" is correct. A Basis for Opinion section including a reference to generally accepted auditing standards is a required component of the auditor’s unmodified opinion. | |
| Choice ""A"" is incorrect. The Opinion section includes a reference to generally accepted accounting (not auditing) principles. | |
| Choice ""B"" is incorrect. An other-matter paragraph is not where the reason for an unmodified opinion is expressed. The other-matter paragraph is used when required by GAAS or at the auditor's discretion. It refers to matters other than those presented or disclosed in the financial statements that are relevant to the user's understanding of the audit, the auditor's responsibilities, or the auditor's report. | |
| Choice ""D"" is incorrect. The firm name is generally not included in the Auditor's Responsibility section." | |
| "An auditor would express an unmodified opinion with an emphasis-of-matter paragraph added to the report for: A justified | |
| change in | |
| accounting | |
| principle | |
| An unjustified | |
| change in | |
| accounting | |
| principle | |
| A justified | |
| change in | |
| accounting | |
| estimate | |
| A. | |
| No | |
| Yes | |
| Yes | |
| B. | |
| No | |
| No | |
| Yes | |
| C. | |
| Yes | |
| No | |
| No | |
| D. | |
| Yes | |
| Yes | |
| No","Choice ""C"" is correct. Only a justified change in accounting principle would result in an unmodified opinion with an emphasis-of-matter paragraph. An unjustified change leads to a qualified or adverse opinion, and a change in estimate does not require an emphasis-of-matter paragraph. | |
| Choice ""A"" is incorrect. A justified change in accounting principle would be the other scenario of the three presented in which an unmodified opinion with an emphasis-of-matter paragraph would be appropriate. | |
| Choice ""B"" is incorrect. A justified change in accounting estimate does not require the use of an emphasis-of-matter paragraph. A justified change in accounting principle would be the other scenario of the three presented in which an unmodified opinion with an emphasis-of-matter paragraph would be appropriate. | |
| Choice ""D"" is incorrect. An unjustified change in accounting principle would lead to a qualified or adverse opinion." | |
| "A special report on financial statements prepared on the cash basis of accounting should include: A. | |
| A statement that the audit was conducted in accordance with generally accepted auditing standards. | |
| B. | |
| A qualified or adverse opinion, due to the departure from GAAP. | |
| C. | |
| An emphasis-of-matter paragraph including a brief explanation of the cash basis of accounting. | |
| D. | |
| A disclaimer of opinion, because an auditor should not report on financial statements that are not designed to be in conformity with GAAP.","Choice ""A"" is correct. A special report on financial statements prepared on the cash basis of accounting should include, in the auditor's responsibility paragraph, a statement that the audit was conducted in accordance with generally accepted auditing standards. | |
| Choice ""B"" is incorrect. A special report on financial statements prepared on the cash basis of accounting does not require a qualified or adverse opinion. An ""unmodified"" opinion may be presented stating that the financial statements are presented fairly in conformity with the cash basis of accounting. | |
| Choice ""C"" is incorrect. A special report on financial statements prepared on the cash basis of accounting does include an emphasis-of-matter paragraph, but it does not provide an explanation of the cash basis of accounting. Instead, it refers to the note that discusses the cash basis of accounting. | |
| Choice ""D"" is incorrect. A special report on financial statements prepared on the cash basis of accounting includes positive assurance, not a disclaimer of opinion, regarding whether the financial statements are presented fairly in conformity with the cash basis of accounting." | |
| "Assuming no other material misstatements are found, an independent auditor determines that supplementary information is not fairly stated relative to the basic financial statements taken as a whole. In this instance where the independent auditor was engaged to audit both the financial statements and the supplementary information, the independent auditor should: A. | |
| Issue a disclaimer of opinion on the financial statements. | |
| B. | |
| Issue an unmodified opinion on the financial statements without reference to the supplementary information outside the basic financial statements. | |
| C. | |
| Issue a qualified (except for) or adverse opinion on the financial statements. | |
| D. | |
| Issue an unmodified opinion on the financial statements and modify the auditor's opinion on the supplementary information within a separate section of the auditor's report with the heading ""Supplementary Information.""","Choice ""D"" is correct. Supplementary information is outside the basic financial statements, so problems with this information do not prevent the issuance of an unmodified opinion on the basic financial statements. The situation should result in a modified opinion on the supplementary information as expressed in a separate section of the auditor's report with the heading ""Supplementary Information."" | |
| Choice ""B"" is incorrect. Auditing standards require the auditor to expand his or her report when required supplementary information is not fairly stated relative to the basic financial statements taken as a whole. | |
| Choices ""C"" and ""A"" are incorrect. Since supplementary information is outside the basic financial statements, an unmodified opinion on the basic financial statements is still appropriate." | |
| "A limitation on the scope of an audit sufficient to preclude an unmodified opinion will usually result when the client: A. | |
| Refuses to disclose in the notes to the financial statements a significant related party transaction. | |
| B. | |
| Omits the statement of cash flows. | |
| C. | |
| Asks the auditor to report on the balance sheet and not the other basic financial statements. | |
| D. | |
| Does not make the minutes of the Board of Directors meetings available to the auditor.","Choice ""D"" is correct. Failure to make the minutes available is a scope limitation sufficient to preclude an unmodified opinion. | |
| Choices ""B"" and ""A"" are incorrect. Omission of the statement of cash flows and refusal to disclose a significant related party transaction are examples of GAAP violations, but they do not constitute a limitation on the scope of the audit. | |
| Choice ""C"" is incorrect. Reporting on only one financial statement and not the others simply involves a limited reporting objective. The auditor should obtain an understanding of the purpose for which the financial statement is prepared, the intended users, and the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances. As long as these steps are taken by the auditor, auditing a single financial statement would not constitute a limitation on the scope of the audit." | |
| "An auditor’s report under U.S. auditing standards that refers to a scope limitation that is material but not pervasive contains the words, “In our opinion, except for the below-mentioned limitation on the scope of our audit . . . ."" This is considered a(n): | |
| A. | |
| Qualified opinion | |
| B. | |
| Example of inappropriate wording | |
| C. | |
| Adverse opinion | |
| D. | |
| Disclaimer of opinion","Choice “B” is correct. ""In our opinion, except for the below-mentioned limitation on the scope of our audit . . ."" is an example of inappropriate wording. When the auditor expresses a qualified opinion due to a scope limitation, the auditor should state in the opinion paragraph that the qualification pertains to the possible effects of the matter on the financial statements and not to the scope limitation itself. The wording used should be, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . . .” | |
| Choice “A” is incorrect. A qualified opinion due to a scope limitation should include the phrase, “In our opinion, except for the possible effects of the matter described in the Basis for Qualified Opinion section . . . .” | |
| Choice “C” is incorrect. An adverse opinion would include the phrase, “. . . do not present fairly . . . .” | |
| Choice “D” is incorrect. A disclaimer of opinion should include the phrase, ""Because of the significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on these financial statements.""" | |
| "In order to address an auditor's responsibilities regarding subsequent events during an audit of a nonissuer, the auditor should: | |
| A. | |
| Read the minutes of all of the nonissuer's board of directors' meetings that occurred from the start of the fiscal year through the date of the financial statements. | |
| B. | |
| Determine that all subsequent events that require adjustment of, or disclosure in, the financial statements have been identified. | |
| C. | |
| Modify the auditor's opinion when subsequent events are identified by the auditor and confirmed by discussions with management. | |
| D. | |
| Perform audit testing of significant transactions occurring from the date of the auditor's report to the release date of the auditor's report.","Choice ""B"" is correct. The auditor has an active responsibility to investigate certain subsequent events during the subsequent period. This responsibility includes both recognized and nonrecognized subsequent events. | |
| Choice ""A"" is incorrect. As part of the auditor's procedures to identify subsequent events, the auditor will read minutes of the meetings during the subsequent period. Reading the minutes from throughout the year under audit is not done to identify subsequent events. | |
| Choice ""C"" is incorrect. The auditor's opinion does not need to be modified when subsequent events are identified by the auditor and confirmed by management. Instead, the auditor would verify that the financial statements appropriately reflect the subsequent event. | |
| Choice ""D"" is incorrect. The audit test work that the auditor performs in the subsequent period is from the date of the financial statements through the report date." | |
| "Which of the following is a condition that must be met in order for an auditor to issue an opinion on supplementary information in relation to the financial statements as a whole? | |
| A. | |
| The auditor must consider subsequent events with respect to supplementary information. | |
| B. | |
| A modified opinion was not issued on the financial statements. | |
| C. | |
| The supplementary information must be in a separate document from the audited financial statements. | |
| D. | |
| The supplementary information was derived from and relates directly to the information used to prepare the financial statements.","Choice “D” is correct. A condition that must be met in order for an auditor to issue an opinion on supplementary information is that the supplementary information was derived from and relates directly to the information used to prepare the financial statements. | |
| Choice “A” is incorrect. An auditor is not required to consider subsequent events with respect to supplementary information. | |
| Choice “B” is incorrect. An auditor may issue an opinion on supplementary information if a qualified opinion is issued on the financial statements. However, the auditor may not issue an opinion on supplementary information if an adverse or disclaimer of opinion was issued on the financial statements. | |
| Choice “C” is incorrect. An auditor may issue an opinion on supplementary information if it is in the same document as the audited financial statements. There is no requirement that the supplementary information be included in a separate document from the audited financial statements. If supplementary information is included in a separate document from the audited financial statements, then the auditor should report on supplementary information in a separate report." | |
| "Under which of the following circumstances would an entity be expected to accrue a loss contingency for the period under audit? | |
| A. | |
| A reasonable estimate was determined for a liability incurred after the balance sheet date. | |
| B. | |
| Legal counsel communicated that an unfavorable judgment from current litigation was reasonably possible. | |
| C. | |
| The entity recorded the amount of an asset impaired as of the balance sheet date. | |
| D. | |
| Before the issuance of the audit report, the entity estimated the amount of a claim that had a probable adverse outcome related to a product sold during the year under audit.","Choice “D” is correct. Since the underlying event (product sale) relates to the year under audit and it has a probable adverse outcome, the entity should accrue a loss contingency for the period under audit. This is considered a recognized subsequent event. | |
| Choice “A” is incorrect. A liability that was incurred after the balance sheet date would not require an accrual for the period under audit (nonrecognized subsequent event). | |
| Choice “B” is incorrect. GAAP requires an accrual for a loss contingency for an unfavorable judgment that can be estimated and is probable, not reasonably possible. | |
| Choice “C” is incorrect. An impairment loss, not a contingency loss, would be recorded for an asset that is impaired as of the balance sheet date. (A contingency is an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss that will be ultimately determined when a future event occurs or fails to occur.)" | |
| "For which of the following events would an auditor issue a report that omits any reference to consistency? | |
| A. | |
| A change from an accounting principle that is not generally accepted to one that is generally accepted that has a material impact on the financial statements. | |
| B. | |
| A material change in the method of accounting for inventories. | |
| C. | |
| A change in the useful life used to calculate the provision for depreciation expense. | |
| D. | |
| Management's lack of reasonable justification for a change in accounting principle.","Choice ""C"" is correct. A change in accounting estimate (such as a change in the useful life of a depreciable asset) is accounted for prospectively and does not affect the comparability of financial statements between periods. Because the auditor's unmodified opinion implies that consistency exists, no modification to the report is necessary. | |
| Choice ""A"" is incorrect. This change would be considered a correction of a material misstatement rather than a change in accounting principle because the original accounting principle was not in accordance with the applicable reporting framework. Therefore, an emphasis-of-matter (explanatory) paragraph that would reference consistency would be required. | |
| Choice ""B"" is incorrect. A material change in accounting principle results in the addition of an emphasis-of-matter (explanatory) paragraph in the auditor's report because this type of change affects consistency (or comparability of the financial statements from year to year). | |
| Choice ""D"" is incorrect. The lack of reasonable justification for a change in accounting principle may give rise to a report modification based on a material misstatement of the financial statements. " | |
| "An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should: | |
| A. | |
| State that the presentation is prepared in accordance with a special purpose framework. | |
| B. | |
| Indicate that the data are subject to prospective results that may not be achieved. | |
| C. | |
| Be limited to data derived from the entity's audited financial statements. | |
| D. | |
| Restrict the use of the report to those specified users within the entity.","Choice ""C"" is correct. When the audit engagement includes reporting on selected financial data, the report prepared by the auditor should be limited to the data that was obtained from the financial statements | |
| Choice ""A"" is incorrect. The presentation of selected financial data is not prepared in accordance with a special purpose framework. | |
| Choice ""B"" is incorrect. The presentation of selected financial data is not a form of prospective financial statement. | |
| Choice ""D"" is incorrect. The report is not required to be restricted to specific individuals within the organization." | |
| "An auditor issued an audit report that was dual dated for a subsequent event occurring after the original date of the auditor's report but before issuance of the related financial statements. The auditor's responsibility for events occurring subsequent to the original report date was: | |
| A. | |
| Limited to include only events occurring up to the date of the last subsequent event referenced. | |
| B. | |
| Limited to the specific event referenced. | |
| C. | |
| Extended to subsequent events occurring through the later date. | |
| D. | |
| Extended to include all events occurring since the original report date.","Choice ""B"" is correct. When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor's report, but before issuance of the related financial statements, the auditor's responsibility for events occurring subsequent to the original report date is limited to the specific event referenced. | |
| Choice ""A"" is incorrect. A dual-dated report only extends responsibility for the particular subsequent event and not for all events taking place up to that event. The example wording would read ""January 21, 20X2, except for Note 2, which is as of February 3, 20X2."" | |
| Choice ""C"" is incorrect. The later date only applies to the particular subsequent event and not all events taking place up to that date. | |
| Choice ""D"" is incorrect. The responsibility is only extended for the particular event when a report is dual dated. " | |
| "An auditor decides to issue a qualified opinion on an entity's financial statements because a major inadequacy in its computerized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor's report should state that the qualification pertains to: | |
| A. | |
| A departure from generally accepted auditing standards. | |
| B. | |
| The possible effects on the financial statements. | |
| C. | |
| A client-imposed scope limitation. | |
| D. | |
| Inadequate disclosure of necessary information.","Choice ""B"" is correct. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. | |
| Choice ""A"" is incorrect. A scope limitation is a departure from generally accepted auditing standards. However, when an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. | |
| Choice ""C"" is incorrect. When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself. | |
| Choice ""D"" is incorrect. Inadequate disclosure of necessary information is a departure from GAAP, rather than a scope limitation." | |
| "Wilson, CPA, obtained sufficient appropriate audit evidence to render an opinion on Abco's December 31, Year 1, financial statements on March 6, Year 2. A subsequent event requiring adjustment to the Year 1 financial statements occurred on April 10, Year 2. Wilson decides not to dual date the report and completes the extended audit procedures for subsequent events on April 24, Year 2. If the adjustment is made without disclosure of the event, Wilson's report ordinarily should be dated: | |
| A. | |
| Using dual dating. | |
| B. | |
| March 6, Year 2. | |
| C. | |
| April 24, Year 2. | |
| D. | |
| April 10, Year 2.","Choice ""C"" is correct. Adjustments or disclosures made after the original report date require the auditor to dual date or extend the date of the auditor's report. Since Wilson decided not to dual date the report, his report should be dated April 24, Year 2, the date on which sufficient appropriate audit evidence (including procedures related to subsequent events) was obtained. | |
| Choice ""A"" is incorrect. Wilson decided not to use dual dating. | |
| Choice ""B"" is incorrect. If adjustment or disclosure of the financial statements are made after the original date of the auditor's report, the auditor may dual date or use a later date. Since Wilson elected not to dual date the report, Wilson's report should be dated as of April 24, Year 2, the date on which sufficient appropriate audit evidence (including procedures for subsequent events) was obtained. | |
| Choice ""D"" is incorrect. Since the financial statements are adjusted, Wilson's report should be dated as of April 24, Year 2, the date when sufficient appropriate audit evidence (including procedures related to subsequent events) was obtained." | |
| "Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events? | |
| A. | |
| Trace information from shipping documents to sales invoices and sales journal transactions. | |
| B. | |
| Verify inventory pledged under loan agreements by confirming the details with financial institutions. | |
| C. | |
| Compare the financial statements being reported on with those of the prior year. | |
| D. | |
| Inquire about the current status of transactions that were recorded on the basis of preliminary data.","Choice ""D"" is correct. The auditor is likely to inquire about the current status of transactions that were recorded on the basis of preliminary data when obtaining evidence about the occurrence of subsequent events. The additional information may affect the amount and/or disclosures in the financial statements that are under audit. | |
| Choice ""A"" is incorrect. An auditor most likely will trace information from shipping documents to sales invoices and sales journal transactions to provide evidence of completeness of sales. The auditor is unlikely to perform this procedure to obtain evidence about the occurrence of subsequent events. | |
| Choice ""B"" is incorrect. An auditor is likely to verify inventory pledged under loan agreements by confirming the details with financial institutions when the auditor is obtaining evidence about the rights and obligations of inventory. The auditor is unlikely to perform this procedure to obtain evidence about the occurrence of subsequent events. | |
| Choice ""C"" is incorrect. An auditor is likely to compare the financial statements being reported on with those of the prior year in the planning stage of the audit when the auditor is performing analytical procedures. The auditor is unlikely to perform this procedure to obtain evidence about the occurrence of subsequent events." | |
| "n the audit of a nonissuer, reference in a group engagement partner's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the: | |
| A. | |
| Different opinions the auditors are expressing on the components of the financial statements that each audited. | |
| B. | |
| Group engagement partner's recognition of the component auditor's competence, reputation, and professional certification. | |
| C. | |
| Lack of materiality of the portion of the financial statements audited by the other auditor. | |
| D. | |
| Divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.","Choice ""D"" is correct. Reference to a component auditor indicates division of responsibility for the audits of the components of the overall financial statements. | |
| Choice ""A"" is incorrect. The reference to the component auditor would be made regardless of what type of opinion is expressed by each auditor. | |
| Choice ""B"" is incorrect. The reference in the report is not meant to recognize the qualifications of the other auditor, but simply to divide the responsibility between the two auditors. | |
| Choice ""C"" is incorrect. Reference to a component auditor would not generally be made if the component auditor's portion of the financial statements is immaterial." | |
| "In which of the following sections of an auditor's report for a nonissuer does an auditor communicate the nature of the engagement and the specific financial statements covered by the audit? | |
| A. | |
| Opinion | |
| B. | |
| Scope | |
| C. | |
| Basis for Opinion | |
| D. | |
| Emphasis-of-matter","Choice ""A"" is correct. The auditor's Opinion section indicates the nature of the engagement (i.e., audit), the financial statements covered in the (audit) engagement, the name of the entity whose financial statements have been audited, and the dates covered by each financial statement. | |
| Choice ""B"" is incorrect. There is no scope paragraph in a nonissuer audit report. | |
| Choice ""C"" is incorrect. The Basis for Opinion section references GAAS, auditor independence, and states whether or not the auditor believes sufficient appropriate evidence was obtained to provide a basis for the auditor's opinion. | |
| Choice ""D"" is incorrect. Emphasis-of-matter paragraphs are used when required by SAS or when the auditor believes they are necessary. They are used when referring to a matter that is appropriately presented or disclosed in the financial statements and is of such importance that it is fundamental to the users' understanding of the financial statements. This paragraph does not affect the auditor's opinion." | |
| "An auditor may issue a qualified opinion under which of the following circumstances? | |
| Lack of sufficient | |
| appropriate | |
| audit evidence | |
| Restrictions of the | |
| scope of the audit | |
| A. | |
| No | |
| No | |
| B. | |
| Yes | |
| No | |
| C. | |
| No | |
| Yes | |
| D. | |
| Yes | |
| Yes","Choice ""D"" is correct. Yes - Yes. | |
| An auditor may issue a qualified opinion (or a disclaimer, depending on materiality) when there is a lack of sufficient appropriate audit evidence, or when there are restrictions on the scope of the audit. | |
| Choice ""A"" is incorrect. A qualified opinion can be issued when material, but not pervasive, audit or financial statement issues are identified. | |
| Choice ""B"" is incorrect. A qualified opinion can be issued when a scope limitation exists and it is determined to be material, but not pervasive, to the financial statements. | |
| Choice ""C"" is incorrect. A qualified opinion can be issued when there is a financial statement issue that is determined to be material, but not pervasive, to the financial statements." | |
| "An annual shareholders’ report includes audited financial statements and contains a report by management on operations. The audited financial statements are fairly stated. The auditor is not engaged to report on the other information included in the annual report, but the auditor notices that there is a material inconsistency between the amount of revenue reported by management in the report on operations and the amount of revenue reported in the audited financial statements. If management refuses to make the revision to the revenue included in management’s report on operations, the auditor least likely would: | |
| A. | |
| Withhold the use of the auditor’s report. | |
| B. | |
| Withdraw from the engagement. | |
| C. | |
| Modify the opinion on the audited financial statements to a qualified or adverse opinion. | |
| D. | |
| Include in the auditor’s report a separate section with the heading ""Other Information"" describing the inconsistency.","Choice “C” is correct. The auditor’s opinion on the audited financial statements relates to the basic financial statements and related footnotes. The information included in the financial statements is fairly stated; therefore, the opinion related to these financial statements and footnotes should not be modified. | |
| Choice “A” is incorrect. If management refuses to revise other information, the auditor may withhold the use of the auditor’s report. | |
| Choice “B” is incorrect. If management refuses to revise other information, the auditor may withdraw from the engagement. | |
| Choice “D” is incorrect. If management refuses to revise other information, the auditor may include a separate ""Other Information"" section describing the inconsistency." | |
| "For a nonissuer, which of the following procedures would an auditor most appropriately perform to provide an opinion on whether supplementary information presented with financial statements is fairly stated in relation to the financial statements? | |
| A. | |
| Inquire of management about the purpose of the supplementary information and the criteria used by management to prepare the information. | |
| B. | |
| Obtain verbal representations from management about any significant assumptions or interpretations underlying the measurement of the supplementary information. | |
| C. | |
| Obtain verbal representations from management stating that it acknowledges its responsibility for the presentation of the supplementary information. | |
| D. | |
| Evaluate the appropriateness, but not the completeness, of the supplementary information.","Choice ""A"" is correct. The auditor should inquire of management regarding the purpose of the supplementary information and the criteria used to prepare the information. This is done in addition to the procedures performed during the audit of the financial statements. | |
| Choice ""B"" is incorrect. The auditor should inquire regarding any significant assumptions underlying the preparation or presentation of the supplementary information. | |
| Choice ""C"" is incorrect. The auditor should obtain written representations from management regarding the supplementary information. | |
| Choice ""D"" is incorrect. The auditor should evaluate both the appropriateness and the completeness of the supplementary information." | |
| "An auditor most likely would add an other-matter paragraph when: | |
| A. | |
| The auditor concludes that substantial doubt remains about the entity’s ability to continue as a going concern for a reasonable amount of time. | |
| B. | |
| Current period financial statements are audited and presented in comparative form with reviewed financial statements from the prior period. | |
| C. | |
| A change in a reporting entity results in financial statements which, in effect, are those of a different reporting entity. | |
| D. | |
| The entity changes the depreciable life of an asset from eight years to five years.","Choice “B” is correct. An auditor would add an other-matter paragraph when current period financial statements are audited and presented in comparative form with compiled or reviewed financial statements from the prior period or in comparative form with prior period financial statements that were not audited, reviewed, or compiled. | |
| Choice “A” is incorrect. An auditor would include a separate section with the heading ""Substantial Doubt About the Entity's Ability to Continue as a Going Concern"" when the auditor concludes that there is substantial doubt about the entity’s ability to continue as a going concern for a reasonable amount of time. | |
| Choice “C” is incorrect. An auditor would add an emphasis-of-matter paragraph when there is an item that affects the consistency of the financial statements, such as a change in a reporting entity that results in financial statements which, in effect, are those of a different reporting entity. | |
| Choice “D” is incorrect. A change in estimate does not require an other-matter or emphasis-of-matter paragraph." | |
| "Which of the following is true? | |
| A. | |
| The auditor may issue an unmodified opinion when a correction of an error in accounting principle occurs. | |
| B. | |
| When a material accounting change has been properly accounted for and disclosed, the auditor may not issue an unmodified opinion. | |
| C. | |
| If an auditor believes there is substantial doubt about an entity's ability to continue as a going concern remains, and management has properly disclosed the situation, the auditor may not issue an unmodified opinion. | |
| D. | |
| When an auditor includes a paragraph emphasizing a significant related party transaction, the opinion would be considered a qualified opinion.","Choice ""A"" is correct. When a correction occurs related to a previously incorrect application of an accounting principle, consistency is affected and the auditor may issue an unmodified opinion with an emphasis-of-matter paragraph. | |
| Choice ""B"" is incorrect. A lack of consistency that has a material effect must be disclosed in an emphasis-of-matter paragraph. If all the acceptability criteria for the accounting change are met, the auditor may issue an unmodified opinion. In evaluating the acceptability of the accounting change, the auditor should consider whether the newly adopted accounting principle is in accordance with the applicable financial reporting framework, the method of accounting for the change is acceptable, the disclosures related to the change are appropriate and adequate, and the entity has justified that the alternative accounting principle is preferable. | |
| Choice ""C"" is incorrect. If the auditor concludes that substantial doubt remains but is satisfied that the going concern disclosures by management are adequate, an unmodified (unqualified) opinion with a separate section with the heading ""Substantial Doubt About the Entity's Ability to Continue as a Going Concern"" (nonissuer) or explanatory paragraph (issuer) can be issued. | |
| Choice ""D"" is incorrect. An auditor may decide to use an emphasis-of-matter paragraph, but this does not constitute a qualified opinion. This is still an unmodified form of the opinion." | |
| "Which of the following events occurring after the issuance of an auditor's report most likely would cause the auditor to make further inquiries about the previously issued financial statements? | |
| A. | |
| The entity's sale of a subsidiary that accounts for 30% of the entity's consolidated sales. | |
| B. | |
| The discovery of information regarding a contingency that existed before the financial statements were issued. | |
| C. | |
| The final resolution of a lawsuit explained in a separate paragraph of the auditor's report. | |
| D. | |
| A technological development that could affect the entity's future ability to continue as a going concern.","Choice ""B"" is correct. With respect to events occurring after the issuance of an auditor's report, the auditor is only responsible for information that existed at the audit report date. | |
| Choice ""A"" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry. | |
| Choice ""C"" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry. | |
| Choice ""D"" is incorrect. Since the information did not exist at the report date, the auditor has no obligation to make any further inquiry." | |
| "An annual shareholders' report includes audited financial statements and contains supplementary information required by GAAP. Is it permissible for the auditor to report on such information? | |
| A. | |
| No, because such reporting may lead to the belief that the auditor is responsible for the information. | |
| B. | |
| No, because the auditor has no responsibility to read the other information in a document containing audited financial statements. | |
| C. | |
| Yes, provided the report provides negative assurance only. | |
| D. | |
| Yes, provided the auditor performs sufficient audit procedures to determine whether the information is fairly stated, in all material respects, in relation to the financial statements.","Choice ""D"" is correct. If the auditor performs sufficient procedures, he or she may report on whether the information is fairly stated, in all material respects, in relation to the financial statements. | |
| Choice ""A"" is incorrect. The auditor may report on the information and should state that the information is the responsibility of management. | |
| Choice ""B"" is incorrect. The auditor does have responsibility to read the information. | |
| Choice ""C"" is incorrect. The report provides positive assurance about whether the information is fairly stated, in all material respects, in relation to the financial statements." | |
| "Which of the following statements is not true regarding the auditor's responsibility for subsequent events? | |
| A. | |
| The auditor has an active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted. | |
| B. | |
| The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report. | |
| C. | |
| The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report. | |
| D. | |
| The auditor has an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained.","Choice ""A"" is correct. The auditor has no active responsibility to make continuing inquiries between the date of the auditor's report and the date on which the report is submitted. The auditor's active responsibility stops on the date of the auditor's report. | |
| Choice ""B"" is incorrect. The auditor has no active responsibility to make continuing inquiries after the date of the auditor's report. | |
| Choice ""C"" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date of the auditor's report. | |
| Choice ""D"" is incorrect. The auditor does have an active responsibility to make continuing inquiries between the date of the financial statements and the date on which sufficient appropriate audit evidence has been obtained." | |
| "An auditor completed an audit of a nonissuer's December 31, Year 3, financial statements and dated the audit report as of March 13, Year 4. On March 14, Year 4, prior to the release of the audit report, an event occurred that required management to revise the Year 3 financial statements and describe the event in a note. The auditor's report on the revised Year 3 financial statements was newly dated as of April 11, Year 4, and released on April 12, Year 4. In this situation, the auditor has taken responsibility for all subsequent events that occurred from January 1, Year 4, until: | |
| A. | |
| April 11, Year 4. | |
| B. | |
| April 12, Year 4. | |
| C. | |
| March 14, Year 4. | |
| D. | |
| March 13, Year 4.","Choice ""A"" is correct. Since the auditor's report was newly dated as of April 11, Year 4, the auditor is responsible for subsequent events until that date. The period between the date of the financial statements and the date of the auditor's report is the subsequent period, during which the auditor is responsible for investigating certain subsequent events. | |
| Choice ""B"" is incorrect. April 12, Year 4, is the new report release date. The auditor is responsible until the date of the auditor's report, which is April 11, Year 4. | |
| Choice ""C"" is incorrect. March 14, Year 4, is the date of the event requiring management to revise the financial statements, so the auditor revised the report and is then responsible until the new date of April 11, Year 4. | |
| Choice ""D"" is incorrect. March 13, Year 4, was the original report date. If the auditor's report was revised with a new date, the auditor is responsible until the new date of April 11, Year 4." | |
| "In planning the audit, the auditor should consider materiality for the financial statements as a whole in terms of:A. | |
| The largest aggregate level of misstatement that could be considered material to any one of the financial statements. | |
| B. | |
| The largest aggregate level of misstatement that could be considered material to the financial statements taken as a whole. | |
| C. | |
| The smallest aggregate level of misstatement that could be considered material to any one of the financial statements. | |
| D. | |
| The smallest aggregate level of misstatement that could be considered material to the financial statements taken as a whole.","Choice ""C"" is correct. Because the financial statements are interrelated, the auditor should consider materiality in terms of the smallest aggregate level of misstatement that could be material to any one of the financial statements. | |
| Choices ""B"" or ""A"" are incorrect. The auditor is concerned with identifying the smallest aggregate level of misstatement that would affect the judgment of a reasonable person, not the largest such level. The smallest level provides a cutoff beneath which the auditor need not consider; the largest level provides no such cutoff. | |
| Choice ""D"" is incorrect. Because the financial statements are interrelated, the auditor should consider materiality in terms of the smallest aggregate level of misstatement that could be material to any one of the financial statements." | |
| "Which of the following statements concerning the auditor’s use of the work of a specialist is correct? A. | |
| If the specialist is related to the client, the auditor is not permitted to use the specialist's findings as corroborative evidence. | |
| B. | |
| The auditor need not obtain an understanding of the methods and assumptions used by the specialist. | |
| C. | |
| The auditor should refer to the work or findings of the specialist in the auditor’s report when an unmodified opinion is issued. | |
| D. | |
| The auditor may engage a specialist and use that specialist's work as audit evidence in performing substantive tests to evaluate material financial statement assertions.","Choice ""D"" is correct. The auditor may use the work of a specialist to obtain appropriate audit evidence. | |
| Choice ""A"" is incorrect. A specialist who is related to the client may be acceptable in some circumstances, but the auditor may choose to perform additional procedures in those cases. The auditor may still use the specialist's findings in such situations. | |
| Choice ""B"" is incorrect. The auditor should understand the methods and assumptions used by the specialist. | |
| Choice ""C"" is incorrect. Generally the auditor should not refer to the work or findings of the specialist when an unmodified opinion is issued." | |
| "An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes, but containing columns for: A. | |
| Expense and revenue summaries. | |
| B. | |
| Reconciliations and tickmarks. | |
| C. | |
| Reclassifications and adjustments. | |
| D. | |
| Accruals and deferrals.","Choice ""C"" is correct. An auditor's working trial balance generally contains columns for reclassifications and adjustments. | |
| Choice ""A"" is incorrect. Expense and revenue summaries are included within audit documentation, but would not necessarily be shown in columns on the working trial balance. | |
| Choice ""B"" is incorrect. Reconciliations and tickmarks are included within audit documentation, but would not necessarily be shown in columns on the working trial balance. | |
| Choice ""D"" is incorrect. Accruals and deferrals are included within audit documentation, but would not necessarily be shown in columns on the working trial balance." | |
| "Which of the following is not true about audit documentation? A. | |
| Audit documentation should demonstrate that sufficient appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued. | |
| B. | |
| Audit documentation should include identification of the staff who performed the audit work. | |
| C. | |
| Audit documentation should include a separate page for each material account balance or transaction class. | |
| D. | |
| Audit documentation should include information related to the selection and application of accounting principles.","Choice ""C"" is correct. There is no requirement that documentation related to each material account balance or transaction class be included on a separate page. In fact, it is common for related accounts to be audited and documented together. | |
| Choice ""A"" is incorrect. Audit documentation should demonstrate that appropriate audit evidence has been obtained to support the conclusions reached and the report to be issued. | |
| Choice ""B"" is incorrect. Audit documentation should include identification of the staff who performed the audit work. | |
| Choice ""D"" is incorrect. Audit documentation should include significant audit findings, such as matters that are related to the selection and application of accounting principles." | |
| "Whitney, CPA, is assessing the auditability of Nissen Manufacturing, a possible new client. Which of the following would be least likely to cause Whitney to reject Nissen as a new client? A. | |
| Management of Nissen is unable to provide financial records for the second half of the year due to a computer malfunction. | |
| B. | |
| Management of Nissen is unwilling to provide all financial records to Whitney, due to a desire to keep such information confidential. | |
| C. | |
| Management of Nissen is unwilling to send accounts receivable confirmations, due to a desire not to trouble customers. | |
| D. | |
| Management of Nissen expresses a disregard for maintaining an adequate internal control environment.","Choice ""C"" is correct. If a potential client is unwilling to send accounts receivable confirmations, the auditor may perform alternative procedures, such as reviewing subsequent cash receipts. | |
| Choices ""A"" and ""B"" are incorrect. If a potential client is unable or unwilling to provide the financial information needed by the auditor to complete the audit, the auditor may not be willing to accept the engagement. | |
| Choice ""D"" is incorrect. Management's disregard for its responsibility to maintain an adequate internal control environment compromises its ability to provide reasonable assurance regarding reliable financial reporting and may lead the auditor to decide not to accept a new engagement because the risk of financial statement misstatement is too high." | |
| "Which of the following are elements of a firm's quality control that should be considered in establishing its quality control policies and procedures? A. | |
| Assigning personnel, client acceptance, and professional development. | |
| B. | |
| Assigning personnel, professional development, and analytical review. | |
| C. | |
| Client acceptance, professional development, and analytical review. | |
| D. | |
| Assigning personnel, client acceptance, and analytical review.","Choice ""A"" is correct. Assigning personnel to engagements and providing for professional development are part of the human resources element of quality control. Engagement/client acceptance and continuance is another element of quality control. | |
| Choices ""C"", ""B"", or ""D"" are incorrect. Analytical review procedures are not an element of a firm's system of quality control." | |
| "In order to have an effective system of internal controls, the Integrated Framework requires that each of the following exists, except that: | |
| A. | |
| Strategic objectives are supported by operating, reporting, and compliance objectives. | |
| B. | |
| The components operate together as an integrated system. | |
| C. | |
| The components and associated principles are “functioning” as designed. | |
| D. | |
| The components and associated principles are “present” in the system.","Choice “A” is correct. Strategic objectives are established as part of enterprise risk management. The objectives included in the Internal Control—Integrated Framework are the operating, reporting, and compliance objectives only. | |
| Choice “B” is incorrect. An effective system of internal controls has all five components operating together in an integrated system. | |
| Choice “C” is incorrect. An effective system of internal controls has all components and associated principles “functioning” as designed in the system. | |
| Choice “D” is incorrect. An effective system of internal controls has all components and associated principles “present” in the system." | |
| "Which of the following statements best describes an audit strategy? | |
| A. | |
| An audit strategy identifies the relevant assertions for material account balances. | |
| B. | |
| An audit strategy identifies the risks of material misstatement. | |
| C. | |
| An audit strategy forms the basis for a more detailed audit plan. | |
| D. | |
| An audit strategy describes the professional responsibility to comply with generally accepted auditing standards.","Choice ""C"" is correct. The audit strategy outlines the scope of the engagement, objectives, timing of the audit, required communications, and other factors that determine the focus of the audit. All of this information helps the auditor create a more detailed audit plan. | |
| Choice ""A"" is incorrect. An audit strategy does not identify relevant assertions for material account balances. Material account balances may be considered when establishing the audit strategy. | |
| Choice ""B"" is incorrect. An audit strategy does not identify the risks of material misstatement. The risks of material misstatement are assessed after the audit strategy has been established. | |
| Choice ""D"" is incorrect. An audit strategy does not describe an auditor's professional responsibility. The professional responsibility to comply with generally accepted auditing standards is assumed when establishing the audit strategy." | |
| "In assessing the competence, objectivity, and application of a systematic and disciplined approach by the entity's internal audit function, an independent auditor would least likely consider information obtained from: | |
| A. | |
| Discussions with management personnel. | |
| B. | |
| External quality reviews of the internal auditor's activities. | |
| C. | |
| Previous experience with the internal auditor. | |
| D. | |
| The results of analytical procedures.","Choice ""D"" is correct. Analytical procedures may be used to enhance the auditor's understanding of the client's business or to evaluate financial statement assertions, but generally would not be helpful in assessing competence, objectivity, and application of a systematic and disciplined approach by the entity's internal audit function. | |
| Choice ""A"" is incorrect. In assessing competence, objectivity, and application of a systematic and disciplined approach by the entity's internal audit function, the auditor usually considers information obtained from discussions with management personnel. | |
| Choice ""B"" is incorrect. In assessing competence, objectivity, and application of a systematic and disciplined approach by the entity's internal audit function, the auditor usually considers information obtained from external quality reviews of internal audit activities. | |
| Choice ""C"" is incorrect. In assessing competence, objectivity, and application of a systematic and disciplined approach by the entity's internal audit function, the auditor usually considers information obtained from previous experience with the internal audit function." | |
| "Which of the following statements is most accurate regarding principles and components within the Internal Control—Integrated Framework? | |
| A. | |
| Identifying and assessing changes falls within monitoring activities. | |
| B. | |
| Specifying objectives falls within the control environment. | |
| C. | |
| Policy and procedure deployment falls within (existing) control activities. | |
| D. | |
| Communication of deficiencies falls within information and communication.","Choice “C” is correct. Creating policies and procedures related to internal controls and then subsequently deploying them is a principle that falls under the (existing) control activities component. | |
| Choice “A” is incorrect. Identifying and assessing changes falls within the risk assessment component. | |
| Choice “B” is incorrect. Specifying objectives falls within the risk assessment component. | |
| Choice “D” is incorrect. Communication of deficiencies falls within the monitoring activities component." | |
| "Inherent risk and control risk differ from detection risk in that they: | |
| A. | |
| May be assessed in either quantitative or nonquantitative terms. | |
| B. | |
| Arise from the misapplication of auditing procedures. | |
| C. | |
| Exist independently of the financial statement audit. | |
| D. | |
| Can be changed at the auditor's discretion.","Choice ""C"" is correct. Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk is related to the auditor's procedures and can be changed at the auditor's sole discretion. | |
| Choice ""A"" is incorrect. Both the risk of material misstatement (including control risk and inherent risk) and detection risk may be assessed in quantitative terms, such as percentages, or in nonquantitative terms that range, for example, from a minimum to a maximum. | |
| Choice ""B"" is incorrect. Inherent risk and control risk exist independently of the audit and do not arise from misapplication of auditing procedures. | |
| Choice ""D"" is incorrect. The auditor cannot change inherent risk or control risk since they exist independently of the financial statement audit. Only detection risk can be changed at the auditor's discretion." | |
| "The Treadway Commission was established to study factors that lead to fraudulent financial reporting. The Treadway Commission was established by: | |
| A. | |
| Sarbanes-Oxley Act of 2002. | |
| B. | |
| Securities and Exchange Commission. | |
| C. | |
| Private sponsoring organizations. | |
| D. | |
| Treadway Foundation.","Choice ""C"" is correct. The Committee on Sponsoring Organizations (COSO), an independent private sector initiative, was initially established in the mid 1980's to study the factors that can lead to fraudulent financial reporting. The COSO is sometimes referred to as the Treadway Commission after its original Chairman, James Treadway, Jr., an executive in the private sector. The private ""sponsoring organizations"" included the five major financial professional associations in the United States: the American Accounting Association (AAA), the American Institute of Certified Public Accountants (AICPA), the Financial Executives Institute (FEI), the Institute of Internal Auditors (IIA), and the Institute of Management Accountants (IMA). | |
| Choice ""A"" is incorrect. The Sarbanes-Oxley Act of 2002 did not establish the Treadway Commission. The Sarbanes-Oxley Act is a federal law enacted with the intent of improving the accuracy and reliability of financial information disclosed by public companies. | |
| Choice ""B"" is incorrect. The Securities and Exhange Commission (SEC) did not establish the Treadway Commission. The SEC is a U.S. government agency created by Congress with the overall purpose of protecting investors. | |
| Choice ""D"" is incorrect. The Treadway Foundation did not establish the Treadway Commission." | |
| "The Gotham Corporation regularly produces budget vs. actual data for its managers. The company is particularly sensitive to personnel costs, and division variances of greater than five percent for any period are promptly investigated to determine if budgeted positions have not been filled or if there has been extraordinary overtime. Timely exception resolution of this character illustrates the information and communication principles typically associated with: | |
| A. | |
| Internal Communication. | |
| B. | |
| External Communication. | |
| C. | |
| Financial Reporting Information. | |
| D. | |
| Obtain and Use Information.","Choice ""D"" is correct.The principle of obtain and use information is applied when the organization obtains or generates and uses relevant, high-quality information to support the functioning of the control. In this case, management is using the exception report (information) to support the control of monitoring overtime costs. | |
| Choice ""A"" is incorrect. Internal communications anticipate that communications enable and support understanding and execution of internal control objectives, processes, and individual responsibilities. Variance analysis specifically supports internal control, not simply internal communications generally. | |
| Choice ""B"" is incorrect. External communications anticipate that matters affecting the achievement of financial reporting are communicated with outside parties. | |
| Choice ""C"" is incorrect. Financial reporting information is not a principle of COSO." | |
| "In an audit of a nonissuer, the auditor plans to recalculate the nonissuer's year-end employee vacation accrual using a management-provided list of employees' salaries and banked vacation hours. In order to validate the completeness of the employees' information, the auditor would most appropriately: | |
| A. | |
| Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department. | |
| B. | |
| Use the payroll system to validate a sample of employee salaries. | |
| C. | |
| Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation. | |
| D. | |
| Agree the number of employees included in the vacation-accrual calculation to the final payroll register.","Choice ""D"" is correct. To test the completeness of the employees' information in the vacation-accrual calculation, the auditor would likely verify that all the active employees are included in the calculation. Confirming that no employees are excluded tests the completeness of the employees. | |
| Choice ""A"" is incorrect. Verifying the number of vacation hours for each employee tests the accuracy of the calculation, not the completeness. This procedure also does not test the employees' information. | |
| Choice ""B"" is incorrect. Using the payroll system to validate a sample of the employee salaries will test the accuracy of the salaries, but it does not address the completeness of the employees' information. | |
| Choice ""C"" is incorrect. Reviewing a list of employees who were terminated and making sure that they have been removed from the calculation tests the existence of the employees included in the calculation, not the completeness." | |
| "In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? | |
| A. | |
| The risk that the internal control system will not detect a material misstatement of a financial statement assertion. | |
| B. | |
| The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. | |
| C. | |
| The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls. | |
| D. | |
| The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee.","Choice ""C"" is correct. Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls. | |
| Choice ""A"" is incorrect. Control risk (not inherent risk) is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity's internal control. | |
| Choice ""B"" is incorrect. Detection risk (not inherent risk) is the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion. | |
| Choice ""D"" is incorrect. Evaluation of inherent risk is based on the nature of the assertion, and is unrelated to the objectivity of the internal audit department." | |
| "In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following? | |
| A. | |
| The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee. | |
| B. | |
| The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. | |
| C. | |
| The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls. | |
| D. | |
| The risk that the internal control system will not detect a material misstatement of a financial statement assertion.","Choice ""C"" is correct. Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls. | |
| Choice ""A"" is incorrect. Evaluation of inherent risk is based on the nature of the assertion, and is unrelated to the objectivity of the internal audit department. | |
| Choice ""B"" is incorrect. Detection risk (not inherent risk) is the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion. | |
| Choice ""D"" is incorrect. Control risk (not inherent risk) is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity's internal control." | |
| "Controls are likely to fail for any of the following reasons, except: | |
| A. | |
| They are designed and implemented properly, but their operation changes in some way. | |
| B. | |
| They are designed and implemented properly, and their design changes as processes change. | |
| C. | |
| They are designed and implemented properly as static controls, but the environment in which they operate changes. | |
| D. | |
| They are not designed and implemented properly at the outset.","Choice “B” is correct. Controls that are designed and implemented properly, including the ability for their design to adapt as processes change, will have the lowest chance of failure. | |
| Choice “A” is incorrect. If controls are designed and implemented properly but their operation changes in some way, there is a greater chance the controls may fail. | |
| Choice “C” is incorrect. When controls are designed and implemented as static controls, any change in the operating environment will increase the likelihood of their failure. | |
| Choice “D” is incorrect. Controls that are not designed or implemented properly at the outset will not function, with failure inevitable." | |
| "Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? | |
| A. | |
| The results of the initial assessment of control risk. | |
| B. | |
| The assertions that are embodied in the financial statements. | |
| C. | |
| The entity's financial statements of the prior year. | |
| D. | |
| The anticipated sample size for planned substantive tests.","Choice ""C"" is correct. The auditor would most likely use the entity's financial statements of the prior year in the preliminary determination of materiality. The prior year financial statements would be a good starting point in estimating the current year's expected results, especially for a continuing client. | |
| Choice ""A"" is incorrect. The assessment of control risk affects the design of audit procedures but is not relevant in determining materiality. | |
| Choice ""B"" is incorrect. Management assertions embodied in the financial statements have little relationship to materiality. | |
| Choice ""D"" is incorrect. The anticipated sample size for planned substantive tests is set after the preliminary materiality level is determined." | |
| "Which of the following statements is true regarding internal control objectives of information systems? | |
| A. | |
| Control objectives primarily emphasize output distribution issues. | |
| B. | |
| Primary responsibility of viable internal control rests with the internal audit division. | |
| C. | |
| An entity's corporate culture is irrelevant to the objectives. | |
| D. | |
| A secure system may have inherent risks due to management's analysis of trade-offs identified by cost-benefit studies.","Choice ""D"" is correct. One of the limitations of even a well-designed internal control system is management's ability to override those controls. One reason management may override them is that the benefit of doing so exceeds the cost, which represents an inherent risk of even the strongest systems. | |
| Choice ""A"" is incorrect. Objectives within the internal control integrated framework include operations, reporting, and compliance objectives. Output distribution issues are just one aspect of what may be covered through the establishment of these objectives. | |
| Choice ""B"" is incorrect. Senior management and the board of directors have primary responsibility for establishing, implementing, and enforcing internal controls. Internal Audit is a partner in the process, but it does not have primary responsibility. | |
| Choice ""C"" is incorrect. The corporate culture (or ""tone at the top"") is extremely critical to the process of establishing and enforcing objectives." | |
| "Which of the following statements is not correct about materiality? | |
| A. | |
| An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. | |
| B. | |
| The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. | |
| C. | |
| Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. | |
| D. | |
| An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.","Choice ""A"" is correct. Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. | |
| Choice ""B"" is incorrect. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with GAAP, while other matters are not important. | |
| Choice ""C"" is incorrect. Materiality judgments are made in light of the surrounding circumstances and necessarily involve both quantitative and qualitative considerations. | |
| Choice ""D"" is incorrect. The auditor's consideration of materiality is influenced by his or her perception of the needs of a reasonable person relying on the financial statements." | |
| "Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls? | |
| A. | |
| A journal entry made to record recurring periodic accounting estimates. | |
| B. | |
| A journal entry recorded as a post-closing entry that has no explanation or description. | |
| C. | |
| A journal entry made to a seldom-used account. | |
| D. | |
| A journal entry made by an individual who does not typically make journal entries.","Choice ""A"" is correct. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. Periodic, recurring accounting estimates are least likely to be subject to management override since they are expected and occur regularly. | |
| Choice ""B"" is incorrect. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. A journal entry recorded after closing without an appropriate explanation or description might be indicative of such management override. | |
| Choice ""C"" is incorrect. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. A journal entry made to a seldom-used account might be indicative of such management override. | |
| Choice ""D"" is incorrect. Inappropriate or unauthorized journal entries are often used to override controls and manipulate the financial reporting process. A journal entry made by a person who generally does not have that responsibility might be indicative of such management override." | |
| "The COSO Cube is used to illustrate the relationship between: | |
| A. | |
| Risk management strategies, internal control components, and the elements of the Audit Framework. | |
| B. | |
| The five components of internal control, the three categories of objectives, and the 17 principles. | |
| C. | |
| Internal controls, enterprise risk management, and Sarbanes-Oxley requirements. | |
| D. | |
| Categories of objectives, internal control components, and entity organizational levels.","Choice “D” is correct. The COSO Cube shows the three categories of objectives as columns, the five internal control components as rows, and the four levels of an entity’s organization as the third dimension. | |
| Choice “A” is incorrect. Risk management strategies and the elements of the Audit Framework are not reflected on the COSO Cube. | |
| Choice “B” is incorrect. The 17 principles that fall into the five components of internal control are not reflected on the COSO Cube. | |
| Choice “C” is incorrect. Enterprise risk management and Sarbanes-Oxley are not reflected on the COSO Cube." | |
| "Which type of audit procedures would an auditor use to test a client’s financial statement assertions at the account, transaction, or disclosure level? | |
| A. | |
| Substantive procedures and test of controls. | |
| B. | |
| Test of controls (only). | |
| C. | |
| Analytical procedures (only). | |
| D. | |
| Substantive procedures (only).","Choice ""A"" is correct. The auditor uses substantive procedures and tests of controls at the relevant assertion level to test a client’s significant account balances, transaction classes, and disclosure items in the financial statements. | |
| Choice ""B"" is incorrect. Although an auditor may use test of controls as an audit procedure to test a client’s financial statement assertions, substantive procedures would also be used by the auditor. | |
| Choice ""C"" is incorrect. Analytical procedures are a form of substantive procedures. There may be certain situations when using analytical procedures may be a more effective means of gathering evidence than tests of controls. | |
| Choice ""D"" is incorrect. While the auditor would use substantive procedures to test a client’s financial statement assertions, test of controls may also be performed." | |
| "Choice ""A"" is correct. The auditor uses substantive procedures and tests of controls at the relevant assertion level to test a client’s significant account balances, transaction classes, and disclosure items in the financial statements. | |
| Choice ""B"" is incorrect. Although an auditor may use test of controls as an audit procedure to test a client’s financial statement assertions, substantive procedures would also be used by the auditor. | |
| Choice ""C"" is incorrect. Analytical procedures are a form of substantive procedures. There may be certain situations when using analytical procedures may be a more effective means of gathering evidence than tests of controls. | |
| Choice ""D"" is incorrect. While the auditor would use substantive procedures to test a client’s financial statement assertions, test of controls may also be performed.","Choice ""B"" is correct. In an audit of financial statements, substantive procedures will always be necessary for all relevant assertions related to significant transaction classes. | |
| Choice ""A"" is incorrect. An auditor is not required to determine the effectiveness of controls in a financial statement audit. | |
| Choice ""C"" is incorrect. The auditors are responsible for their own assessment of risk and response to risks. They should not discuss strategies to eliminate risks with top management. | |
| Choice ""D"" is incorrect. Considering the appropriateness of risk assessment procedures does not adequately respond to the fact that the auditor's assessment of risk is always subjective rather than objective. The appropriate response is to perform substantive procedures for all relevant assertions related to each significant class of transactions." | |
| "The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the: | |
| A. | |
| Evidence to be gathered to provide a sufficient basis for the auditor's opinion. | |
| B. | |
| Timing of inventory observation procedures to be performed. | |
| C. | |
| Pending legal matters to be included in the inquiry of the client's attorney. | |
| D. | |
| Procedures to be undertaken to discover litigation, claims, and assessments.","Choice ""B"" is correct. In order to observe the physical inventory count, the auditor would have to coordinate schedules with the client. This timing is usually agreed upon before implementation of the audit strategy. | |
| Choice ""A"" is incorrect. It would not be appropriate for the client to be involved in determining the amount of evidence necessary to provide a basis for an opinion. | |
| Choice ""C"" is incorrect. Determination of the pending legal matters to be included in a letter to the client's attorney would not generally be made during the planning stage of the audit. | |
| Choice ""D"" is incorrect. It would not be appropriate for the client to be involved in determining the procedures necessary to obtain evidence about litigation, claims and assessments." | |
| "Communication related to the inherent limitations of internal control of a nonissuer is required in which of the following documents? | |
| A. | |
| An engagement letter | |
| B. | |
| A review report | |
| C. | |
| A management letter | |
| D. | |
| A letter of inquiry sent to the client's attorney","Choice ""A"" is correct. The engagement letter should include a statement saying that, because of the inherent limitations of an audit, together with the inherent limitations of internal control, an unavoidable risk exists that some material misstatements may not be detected, even if the audit is properly planned and performed. | |
| Choice ""B"" is incorrect. A review report does not include a reference to the inherent limitations of internal control. | |
| Choice ""C"" is incorrect. A management letter does not include a reference to the inherent limitations of internal control. | |
| Choice ""D"" is incorrect. A letter of inquiry sent to the client's attorney does not include a reference to the inherent limitations of internal control." | |
| "Which of the following is an element of a CPA firm's quality-control policies and procedures applicable to the firm's auditing practice? | |
| A. | |
| Efficiency of organizational structures | |
| B. | |
| Computer information processing | |
| C. | |
| Professional skepticism of management | |
| D. | |
| Acceptance of a client relationship","Choice ""D"" is correct. Acceptance of a client relationship is an element of a CPA firm's quality-control policies and procedures applicable to the firm's auditing practice. The elements of a CPA firm's quality control are human resources, engagement/client acceptance and continuance, leadership responsibilities, performance of the engagement, monitoring, and ethical requirements (HELP ME mnemonic). | |
| Choice ""A"" is incorrect. Efficiency of organizational structures is not an element of a CPA firm's quality-control policies and procedures applicable to the firm's accounting and auditing practice. | |
| Choice ""B"" is incorrect. Computer information processing is not an element of a CPA firm's quality-control policies and procedures applicable to the firm's accounting and auditing practice. | |
| Choice ""C"" is incorrect. Professional skepticism of management relates to the conduct of an individual engagement rather than the CPA firm's quality-control policy." | |
| "What is the maximum number of days in which a nonissuer’s auditor should complete the assembly of the final audit file following the report release date? | |
| A. | |
| 30 days | |
| B. | |
| 14 days | |
| C. | |
| 60 days | |
| D. | |
| 75 days","Choice “C” is correct. A nonissuer auditor should complete the assembly of the audit file within 60 days following the report release date. | |
| Choice “A” and “D” are incorrect, per the above explanation. | |
| Choice “B” is incorrect. An auditor should complete the assembly of the audit file within 14 days for an issuer, not a nonissuer." | |
| "According to COSO, management should be concerned with the effectiveness of the monitoring processes of an entity regarding internal controls over financial statement preparation for each of the following reasons, except: | |
| A. | |
| Effective monitoring assists those charged with governance to ensure that the entity meets its operating and financial expectations. | |
| B. | |
| Effective monitoring allows those charged with governance to identify and correct deficiencies before they materially affect financial statements. | |
| C. | |
| Effective monitoring enables those charged with governance to determine whether the control processes continue to operate effectively over time. | |
| D. | |
| Effective monitoring provides incentive for employees to perform their duties properly over time.","Choice “A” is correct. Monitoring is the process of assessing the quality of control performance over time by assessing the design and operation of controls on a timely basis and taking the necessary corrective actions. | |
| There is no assurance that an entity will meet its operating and financial expectations, and controls are not put into place to ensure that these expectations are met. Expectations often differ from actual results, and controls are not designed to prevent those differences from occurring. | |
| Choice “B” is incorrect. The ongoing evaluations to ascertain whether controls are present and functioning is one of the principles of the monitoring component of the Internal Control—Integrated Framework. | |
| Choice “C” is incorrect. Effective monitoring does help show whether processes continue to operate effectively over time. | |
| Choice “D” is incorrect. Monitoring does serve to provide incentives for employees to perform their duties properly over time." | |
| "In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the: | |
| A. | |
| Tests of control activities that could detect errors and fraud. | |
| B. | |
| Materiality of the accounts recently inspected by the internal auditors. | |
| C. | |
| Internal auditing standards developed by The Institute of Internal Auditors. | |
| D. | |
| Results of the tests of transactions recently performed by the internal auditors.","Choice ""C"" is correct. Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence. In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors). | |
| Choice ""A"" is incorrect. Tests of control activities that could detect errors and fraud would not help the CPA assess the objectivity of the internal auditor. | |
| Choice ""B"" is incorrect. The materiality of the accounts recently inspected by the internal auditors would not help the CPA assess the objectivity of the internal auditor. | |
| Choice ""D"" is incorrect. Results of the tests of transactions recently performed by the internal auditor would aid the auditor in evaluating the internal auditor's competence rather than his or her objectivity." | |
| "As part of communicating the overall strategy for an audit of an issuer's internal control over financial reporting, an auditor should communicate which of the following matters to the audit committee? | |
| A. | |
| The extent of interim testing to be performed | |
| B. | |
| The accounts that will be tested exclusively by substantive tests | |
| C. | |
| The effect of specific internal controls on the financial statements | |
| D. | |
| The extent to which the auditor plans to use the work of company personnel","Choice ""D"" is correct. Communicating the overall audit strategy is done in the engagement letter. This written agreement reduces the risk that either the auditor or the client may be unclear on the needs or expectations of the other party. If an auditor plans to use the work of company personnel, it is helpful to include a reference to these plans in the letter so that the client is aware and can plan. | |
| Choice ""A"" is incorrect. The auditor does not communicate the extent of interim or year-end testing to be performed to management or those charged with governance. This topic is more detailed than is required or expected in communication with the audit committee. | |
| Choice ""B"" is incorrect. The auditor does not communicate to the audit committee the accounts that will be tested or how the accounts will be tested. This topic is more detailed than is required or expected in communication with the audit committee. | |
| Choice ""C"" is incorrect. The auditor does not communicate how specific internal controls effect the financial statements during the communication of overall audit strategy. This topic is more detailed than is required or expected in the engagement letter." | |
| "Which of the following is not true about the report release date? | |
| A. | |
| It is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such. | |
| B. | |
| It is often the date on which the report is delivered to the client. | |
| C. | |
| It is used to define the beginning of the retention period. | |
| D. | |
| It is the date on which the auditor grants the client permission to use the report.","Choice ""A"" is correct. The documentation completion date (and not the report release date) is defined as the date after which existing documentation must not be deleted, and additions to the documentation file must be documented as such. | |
| Choice ""B"" is incorrect. The report release date is often the date on which the report is delivered to the client. | |
| Choice ""C"" is incorrect. The report release date is used to define the beginning of the retention period. | |
| Choice ""D"" is incorrect. The report release date is the date on which the auditor grants the client permission to use the report." | |
| "A company has established and communicated baseline expectations for performance to all employees. The company's action demonstrates a focus on which of the following components of the COSO Internal Control framework? | |
| A. | |
| Monitoring activities | |
| B. | |
| Information and communication | |
| C. | |
| Control activities | |
| D. | |
| Control environment","Choice ""D"" is correct. The control environment component of the Internal Control framework represents the processes, structures, and standards that provide the foundation for the establishment of an entity's internal control system. Baseline expectations for employee performance are included in the accountability principle within the control environment. | |
| Choice ""A"" is incorrect. Monitoring activities involve assessing internal control performance in a timely manner and taking corrective actions if necessary. Baseline performance expectations would not be included in the monitoring component of the framework. | |
| Choice ""B"" is incorrect. The information and communication component of the framework involves the identification, capture, and exchange of information. Baseline performance expectations would not be included in the monitoring component of the framework. | |
| Choice ""C"" is incorrect. Control activities are established by an entity's policies and procedures and would not include performance expectations." | |
| "Which of the following controls is least likely to be relevant to a financial statement audit? | |
| A. | |
| Use of computer passwords to limit access to data files. | |
| B. | |
| Procedures that prevent the excess use of materials in production. | |
| C. | |
| Generation of production statistics used to evaluate variances. | |
| D. | |
| Policies that relate to compliance with income tax regulations.","Choice ""B"" is correct. Procedures to reduce inefficiency on the production line relate to operational objectives, and not necessarily to financial reporting objectives. | |
| Choice ""A"" is incorrect. Use of computer passwords to limit access to data files would be important to the reliability of financial reporting. | |
| Choice ""C"" is incorrect. The generation of production statistics used to evaluate variances would be important to the reliability of financial reporting. | |
| Choice ""D"" is incorrect. Policies related to compliance with income tax regulations would be important to the reliability of financial reporting. " | |
| "During the end of a client audit, one member of the audit engagement team does not agree with the conclusion reached by the remaining audit team members on a key client accounting issue. Under this scenario, the dissenting auditor may take any of the following actions, except for: | |
| A. | |
| Consulting with the engagement partner on the matter. | |
| B. | |
| Accepting the engagement team’s conclusion despite reservation after orally discussing the concern with the audit supervisor. | |
| C. | |
| Disassociating from the audit conclusion in the event there is not an adequate resolution to the dispute. | |
| D. | |
| Requesting that his or her dissenting opinion be documented.","Choice ""B"" is correct. When there is a disagreement on an accounting or auditing issue at the end of the audit, the dissenting auditor should first consult with the engagement partner on this matter. If an adequate resolution is not obtained, the dissenting auditor should be allowed to disassociate from the resolution. The dissenting auditor should document their dissociation from the final accounting issue resolution. To accept the audit engagement team’s conclusion despite continued reservation on this accounting issue after an oral discussion with the audit supervisor is not an acceptable course of action. | |
| Choice ""A"" is incorrect. This is the initial step that the dissenting auditor should take to attempt to resolve the accounting issue difference with the engagement team. | |
| Choice ""C"" is incorrect. If an acceptable resolution is not obtained, the dissenting auditor should disassociate from the engagement’s team conclusion, which includes documenting the basis for the disassociation. | |
| Choice ""D"" is incorrect. Documenting the dissenting auditor’s disagreement is an acceptable course of action under the above scenario." | |
| "Which of the following statements regarding the risk of material misstatement is correct? | |
| A. | |
| The risk of material misstatement includes the auditor’s assessment of inherent risk as well as control risk. | |
| B. | |
| Only factual misstatements should be considered when making the assessment of risk and the determination of any adjustments that may need to be made. | |
| C. | |
| Detection risk is the risk that a material misstatement will not be detected by the entity’s controls. | |
| D. | |
| The risk that a material misstatement may occur due to complex calculations, faulty estimates, or high volume transactions is known as control risk.","Choice ""A"" is correct. Inherent and control risk are both components of the risk of material misstatement. | |
| Choice ""B"" is incorrect. Factual, judgmental, and projected misstatements should be considered when assessing risk and determining what adjustments to make. | |
| Choice ""C"" is incorrect. The risk described in this statement is control risk. | |
| Choice ""D"" is incorrect. The risk described in this statement is inherent risk." | |
| "Which of the following is true? | |
| A. | |
| If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk. | |
| B. | |
| Audit risk and fraud risk are synonymous terms. | |
| C. | |
| Fraud risk is comprised of the risk of material misstatement and detection risk. | |
| D. | |
| If fraud risk is assessed at a minimum level, audit risk will also be minimal.","Choice ""A"" is correct. As part of planning, the auditor should assess overall fraud risk, and design audit procedures in light of this assessment. The auditor should also respond to specifically identified fraud risks by altering the nature, timing, or extent of audit procedures. If the assessed level of fraud risk is high, audit procedures would be appropriately designed to minimize detection risk. This helps ensure that the auditor will obtain reasonable assurance about whether the financial statements are free of material misstatement caused by fraud. | |
| Choice ""B"" is incorrect. Audit risk and fraud risk are not synonymous terms. Audit risk is the risk that the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated. Fraud risk is the risk that misstatements will arise from fraudulent financial reporting or misappropriation of assets. For example, insufficient audit work may give rise to audit risk, but would not affect fraud risk, which exists independently of the audit. | |
| Choice ""C"" is incorrect. Audit risk (not fraud risk) is comprised of the risk of material misstatement and detection risk. | |
| Choice ""D"" is incorrect. Fraud risk contributes to overall audit risk, but it is not the only factor affecting audit risk. For example, if the auditor is unable to perform certain audit procedures, audit risk may increase (through an increase in detection risk), while fraud risk would be unaffected. The occurrence of unintentional errors (perhaps due to a weakness in internal control) might also increase audit risk while not affecting fraud risk." | |
| "An auditor is evaluating a client's controls. Which of the following situations would be the most difficult control issue for an auditor to detect? | |
| A. | |
| The technology department writes a program that does not properly implement the control, due to a lack of understanding. | |
| B. | |
| Someone erroneously disables edit checks in a software program designed to identify control exceptions. | |
| C. | |
| The accounting staff neglects the control, due to increased transactions to be processed. | |
| D. | |
| Two employees, who work in different departments, are circumventing a control.","Choice ""D"" is correct. Collusion among two employees, who work in different departments, would be the most difficult internal control issue to detect. | |
| Choice ""A"" is incorrect. An auditor would be able to detect a control that is not properly implemented when testing the design effectiveness of controls. | |
| Choice ""B"" is incorrect. An auditor would be able to detect if a software program failed to identify control exceptions when testing the operating effectiveness of the control. | |
| Choice ""C"" is incorrect. An auditor would be able to detect whether an accounting staff member neglects the control when testing the operating effectiveness of the control." | |
| "A successor auditor ordinarily should request to review the predecessor's audit documentation relating to: | |
| Contingencies | |
| Internal control | |
| A. | |
| Yes | |
| No | |
| B. | |
| No | |
| No | |
| C. | |
| No | |
| Yes | |
| D. | |
| Yes | |
| Yes","Choice ""D"" is correct. A review of the predecessor's audit documentation related to matters of continuing accounting and auditing significance would be permitted. This would include documentation concerning contingencies and internal controls. | |
| Choice ""A"" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls. | |
| Choice ""B"" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to internal controls and contingencies. | |
| Choice ""C"" is incorrect. It is appropriate for the successor auditor to review the predecessor's audit documentation relating to contingencies as they may have an impact on the current year financial statements." | |
| "In assessing the need for a stronger system of internal controls, management will most likely use the Internal Control—Integrated Framework to do all of the following, except: | |
| A. | |
| Define rules that must be followed throughout the organization. | |
| B. | |
| Apply controls throughout all levels of the organization. | |
| C. | |
| Identify and analyze risks and risk mitigation strategies. | |
| D. | |
| Eliminate inefficient and ineffective controls.","Choice “A” is correct. The Integrated Framework is built on a principles-based (rather than rules-based) approach, which allows management to use judgment and flexibility in applying internal controls. | |
| Choice “B” is incorrect. Internal controls are ideally applied throughout all levels of the organization. | |
| Choice “C” is incorrect. The Integrated Framework can be used to identify/analyze risk and to establish risk mitigation strategies. | |
| Choice “D” is incorrect. The Integrated Framework is often used to eliminate inefficient and ineffective controls." | |
| "Which of the following is an effective electronic access control for an on-line-real-time hotel reservation computer system? | |
| I. | |
| Restricted access to the hotel's front desk area. | |
| II. | |
| The existence of a hot site to be used in the event of disaster recovery being required. | |
| III. | |
| A system of passwords to allow access to the system (passwords are changed on a regular basis). | |
| IV. | |
| A firewall that prevents unauthorized access to the network. | |
| A. | |
| II and III only. | |
| B. | |
| III and IV only. | |
| C. | |
| II, III, and IV only. | |
| D. | |
| I and III only.","Choice ""B"" is correct. Passwords and firewalls are both examples of electronic access controls. | |
| Choices ""C"", ""A"", ""D"" are incorrect: | |
| The correct answer should exclude I. Restricted access to the hotel's front desk is a physical access control. | |
| The correct answer should exclude II. A hot site is a part of the disaster recovery plan; it is not an electronic access control. | |
| The correct answer should include III. Passwords are electronic access controls that authenticate user access to a system, its applications and data. | |
| The correct answer should include IV. A firewall is an electronic access control that prevents unauthorized access to a system, its applications and data." | |
| "Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when: | |
| A. | |
| External policies established by parties outside the entity affect its accounting practices. | |
| B. | |
| Management is dominated by one individual who is also a shareholder. | |
| C. | |
| Internal auditors have direct access to the board of directors and the entity's management. | |
| D. | |
| Those charged with governance are active in overseeing the entity's financial reporting policies.","Choice ""B"" is correct. When management is dominated by one individual who is also a shareholder, there may be an opportunity for management to override control procedures. | |
| Choice ""A"" is incorrect. Influence of external parties serves an oversight role that strengthens the control environment and minimizes the effect of management's attitude. | |
| Choice ""C"" is incorrect. Existence of internal auditors with direct access to the board of directors strengthens the control environment and lessens the effect of management's attitude. | |
| Choice ""D"" is incorrect. Active participation of those charged with governance serves an oversight role that strengthens the control environment and lessens the effect of management's attitude." | |
| "Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should: | |
| A. | |
| Consider the likelihood of assessing the risk of incorrect rejection too low. | |
| B. | |
| Project sampling risk at the maximum for tests covering the remaining period. | |
| C. | |
| Ascertain that accounts receivable are immaterial to the financial statements. | |
| D. | |
| Assess the difficulty in controlling the incremental audit risk.","Choice ""D"" is correct. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end. | |
| Choice ""A"" is incorrect. The risk of incorrect rejection relates to the efficiency of audit testing, since an item that is initially (and erroneously) rejected will be subject to additional audit testing that should correct the error. The likelihood of assessing this risk lower than it should be does not affect the auditor's decision regarding the appropriate timing of audit work. | |
| Choice ""B"" is incorrect. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved, but this risk would not necessarily be assessed at the maximum level. | |
| Choice ""C"" is incorrect. Interim testing may be performed on material accounts, as long as the auditor assesses the incremental risk involved and determines whether sufficient alternative procedures exist to extend the interim conclusions to year-end. Immaterial accounts would not need to be tested." | |
| "Which of the following would not be a primary function of an audit strategy? | |
| A. | |
| Provide a preliminary assessment of materiality and tolerable misstatement. | |
| B. | |
| Outline reporting objectives. | |
| C. | |
| Provide the scope of the audit. | |
| D. | |
| Outline the nature, extent and timing of audit procedures.","Choice ""D"" is correct. Although the audit strategy and audit plan are linked together, the audit plan (not the audit strategy) outlines the nature, extent, and timing of the audit procedures that will be performed by the auditors on an engagement. | |
| Choice ""A"" is incorrect. The audit strategy would include a preliminary assessment of materiality and tolerable misstatement for the current audit. | |
| Choice ""B"" is incorrect. The audit strategy would outline reporting objectives. | |
| Choice ""C"" is incorrect. Providing for the scope of the audit is a primary function of the overall audit strategy." | |
| "Under which of the following circumstances would an auditor be considered to be using the work of a specialist? | |
| A. | |
| The client engages an outside computer service organization to prepare its payroll. | |
| B. | |
| A tax expert employed by the auditor's CPA firm reviews the client's tax accruals. | |
| C. | |
| The auditor makes inquiries of the client's lawyer regarding pending litigation. | |
| D. | |
| The auditor engages a lawyer to interpret the provisions of a complex contract.","Choice ""D"" is correct. An auditor engaging a lawyer to interpret the provisions of a complex contract would be considered to be using the work of a specialist. GAAS defines a specialist as a person or firm with special skills in a field other than accounting or auditing (e.g., actuaries, appraisers, attorneys, or engineers). | |
| Choice ""A"" is incorrect. An outside computer service organization engaged by the client to prepare its payroll would not be considered to be using the work of a specialist in an audit. The client is engaging the payroll services, not the auditor. | |
| Choice ""B"" is incorrect. A tax expert employed by the auditor does not meet the definition of a specialist because the tax expert's skills are in accounting. | |
| Choice ""C"" is incorrect. Making inquiries of the client's lawyer is a standard audit procedure, and is not considered using the work of a specialist." | |
| "Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements? | |
| A. | |
| The existence of related party transactions. | |
| B. | |
| The complexity of the information system relevant to financial reporting. | |
| C. | |
| The adequacy of the accounting records. | |
| D. | |
| The operating effectiveness of controls.","Choice ""C"" is correct. Inadequate financial records may preclude the auditor from obtaining sufficient appropriate audit evidence. | |
| Choice ""A"" is incorrect. The existence of related party transactions generally would not influence the auditor's determination of auditability. | |
| Choice ""B"" is incorrect. The complexity of the client's information system generally would not influence an auditor's determination of auditability, although it might indicate the need for an information technology expert. | |
| Choice ""D"" is incorrect. The operating effectiveness of internal controls is determined long after the decision about auditability is made." | |
| "When there is a group audit, the group engagement team should make a preliminary assessment of materiality. Which of the following is not an accurate statement of the engagement team’s responsibilities when assessing materiality? | |
| A. | |
| Ascertain materiality levels for specific classes of transactions, balances, or disclosures for group financial statements for which misstatements of lesser amounts than the group financial statements taken as a whole could influence user’s economic decisions. | |
| B. | |
| Assess materiality for the group financial statements as a whole, without an assessment of performance materiality. | |
| C. | |
| Determine component materiality for those components on which the group engagement team will perform an audit. | |
| D. | |
| Develop a threshold at which anything above would not be considered trivial to the group financial statements.","Choice ""B"" is correct. The group engagement team should assess the materiality of the group financial statements as a whole as well as performance materiality. | |
| Choices ""C"", ""A"", and ""D"" are incorrect as each should be performed by the group engagement team when making a preliminary assessment on a group audit." | |
| "The acceptable level of detection risk is inversely related to the: | |
| A. | |
| Assurance provided by substantive tests. | |
| B. | |
| Preliminary judgment about materiality levels. | |
| C. | |
| Risk of misapplying auditing procedures. | |
| D. | |
| Risk of failing to discover material misstatements.","Choice ""A"" is correct. The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests. | |
| Choice ""B"" is incorrect. The acceptable level of detection risk is determined independently of the preliminary judgment about materiality levels (tolerable error). | |
| Choice ""C"" is incorrect. The acceptable level of detection risk is determined independently of the risk of misapplying auditing procedures (non-sampling risk). | |
| Choice ""D"" is incorrect. The acceptable level of detection risk is directly related to the risk of failing to discover material misstatements (audit risk)." | |
| "The auditor is in the process of assessing the risk of material misstatement for selected client transactions and account balances considered to be significant. If the auditor decides to change the level of detection risk based on new information pertaining to the risk of material misstatement, he or she may do all of the following, except for: | |
| A. | |
| Eliminating the use of substantive procedures for certain relevant assertions if the assessed risk of material misstatements sufficiently declines. | |
| B. | |
| Changing the nature of testing by using more or less effective substantive audit procedures. | |
| C. | |
| Modifying the timing of the substantive tests by including year-end testing. | |
| D. | |
| Changing the sample size used in the related substantive procedures.","Choice ""A"" is correct. This would not be done by the auditor to accommodate a change in detection risk. Even when the assessed risk of material misstatement declines to a low level warranting a change in detection risk, substantive procedures are necessary for all relevant assertions pertaining to a client’s significant transactions and account balances. | |
| Choice ""B"" is incorrect. By changing the nature of the substantive procedures used, the auditor can effectively deal with an increase or decrease in detection risk during the audit. | |
| Choice ""C"" is incorrect. The auditor can change the level of detection risk by modifying the timing of the substantive procedures. | |
| Choice ""D"" is incorrect. If the auditor decides to decrease (increase) detection risk, the sample size can be increased (decreased)." | |
| "Which of the following is a preventive supervisory and monitoring control? | |
| A. | |
| Hiring guidelines | |
| B. | |
| Mandatory vacations | |
| C. | |
| Performance reviews | |
| D. | |
| Audits","Choice ""A"" is correct. Hiring guidelines are considered a preventive supervisory and monitoring control. Organizations develop strict hiring guidelines so that only competent and capable employees are hired to perform key business processes. | |
| Choices ""C"", ""B"", and ""D"" are incorrect. All these controls are detective supervisory and monitoring controls." | |
| "When a client makes extensive use of information technology, the auditor should consider the effect this may have on internal control. Which of the following is least likely to be affected? A. | |
| The audit objectives with respect to evaluating internal control. | |
| B. | |
| The audit procedures used to evaluate controls. | |
| C. | |
| The assessed level of control risk. | |
| D. | |
| The five components of internal control.","Choice ""A"" is correct. The client's extensive use of information technology generally would not affect the auditor's objectives, although it might affect how those objectives are achieved. | |
| Choice ""B"" is incorrect. An entity's use of information technology will affect the appropriate audit procedures to apply. For example, the extent and complexity of computer operations may require the use of computer-assisted audit techniques. | |
| Choice ""C"" is incorrect. An entity's use of information technology may create additional internal control risks, such as the risk of unauthorized access to data. | |
| Choice ""D"" is incorrect. An entity's use of information technology may affect any of the five components of internal control." | |
| "Which of the following are required as part of an auditor's planning process? Understanding | |
| the design of | |
| controls | |
| Determining | |
| whether | |
| controls have been | |
| implemented | |
| Evaluating | |
| the operating | |
| effectiveness of | |
| controls | |
| Documenting | |
| the understanding | |
| of internal | |
| control | |
| A. | |
| Yes | |
| Yes | |
| No | |
| Yes | |
| B. | |
| No | |
| Yes | |
| Yes | |
| No | |
| C. | |
| No | |
| No | |
| Yes | |
| No | |
| D. | |
| Yes | |
| No","Choice ""A"" is correct. As part of planning, the auditor is required to obtain an understanding of the design of controls and determine whether they have been implemented, as well as to document this understanding. The auditor is not required to evaluate the operating effectiveness of controls during the planning process. | |
| Choices ""D"", ""C"", and ""B"" are incorrect, based on the above explanation." | |
| "Which of the following constitutes a weakness in control related to the revenue cycle? A. | |
| The cash receipts clerk prepares a credit memo. | |
| B. | |
| The billing clerk prepares a sales invoice. | |
| C. | |
| The accounts receivable clerk prepares an aging schedule. | |
| D. | |
| The shipping clerk prepares a bill of lading.","Choice ""A"" is correct. Allowing the cash receipts clerk to prepare a credit memo constitutes an inadequate segregation of duties, because the clerk can misappropriate cash and cover the theft by issuing a credit memo. | |
| Choice ""B"" is incorrect. The billing clerk should prepare a sales invoice. | |
| Choice ""C"" is incorrect. The accounts receivable clerk should prepare an aging schedule. | |
| Choice ""D"" is incorrect. The shipping clerk should prepare a bill of lading." | |
| "Which of the following economic indicators tends to occur as a result of economic activity? | |
| A. | |
| Average new unemployment claims. | |
| B. | |
| Average duration of unemployment. | |
| C. | |
| Building permits for residences. | |
| D. | |
| Manufacturing and trade sales.","Choice ""B"" is correct. The average duration of unemployment is a lagging economic indicator. Lagging economic indicators tend to follow economic activity, or occur as a result of economic activity. If the average duration of unemployment increases, it is likely a result of employers being reluctant to hire due to economic results. Other lagging indicators include the prime rate charged by banks and bank loans outstanding. Lagging indicators give signals after the fact. | |
| Choice ""A"" is incorrect. The average new unemployment claims is an example of a leading economic indicator. Leading indicators tend to occur before the fact or predict economic activity. An increase in the number of new unemployment claims is a signal that the economy is heading for falling economic activity and growth. Other leading indicators include the average length of the workweek, money supply, prices of selected stocks, orders for goods, price changes of materials and index of consumer expectations. | |
| Choice ""C"" is incorrect. Building permits for new residences is an example of a leading economic indicator. Leading indicators tend to occur before the fact or predict economic activity. A decrease in the number of new building permits is one factor that would tend to signal the economy is heading toward a downturn. | |
| Choice ""D"" is incorrect. Manufacturing and trade sales are coincident indicators and occur contemporaneously with economic activity. Industrial production is another example of a coincident indicator." | |
| "Which of the following procedures would an auditor most likely perform regarding litigation? | |
| A. | |
| Confirm directly with the clerk of the court that the client's litigation is properly disclosed. | |
| B. | |
| Confirm the details of pending litigation with the client's adversaries' legal representatives. | |
| C. | |
| Inspect the legal documents in the client's lawyer's possession regarding pending litigation. | |
| D. | |
| Discuss with management its policies and procedures for identifying and evaluating litigation.","Choice ""D"" is correct. The auditor should discuss with management the controls adopted to identify, evaluate, and account for litigation. | |
| Choice ""A"" is incorrect. The clerk of the court would not have any information regarding whether or not litigation is properly disclosed in the financial statements. | |
| Choice ""B"" is incorrect. It would be inappropriate for the auditor to contact the legal representatives of the client's adversaries. | |
| Choice ""C"" is incorrect. The auditor does not generally inspect documents held by the client's lawyer, but rather relies on the lawyer's written response to the audit inquiry letter." | |
| "In evaluating the reasonableness of an entity's accounting estimates, an auditor most likely concentrates on methods and significant assumptions that are: | |
| A. | |
| Deviations from historical patterns. | |
| B. | |
| Stable and not sensitive to variation. | |
| C. | |
| Similar to industry guidelines. | |
| D. | |
| Objective and not susceptible to bias.","Choice ""A"" is correct. In evaluating the reasonableness of estimates, the auditor focuses on assumptions that are significant to the estimate, sensitive to variations, deviations from historical patterns, or subjective and susceptible to misstatement or bias. | |
| Choice ""B"" is incorrect. In evaluating the reasonableness of estimates, the auditor would not normally concentrate on assumptions that are stable and insensitive to variation. Estimates based on such assumptions are less likely to be misstated. | |
| Choice ""C"" is incorrect. In evaluating the reasonableness of estimates, the auditor would not normally concentrate on assumptions that are similar to industry guidelines. Estimates based on such assumptions are less likely to be misstated. | |
| Choice ""D"" is incorrect. In evaluating the reasonableness of estimates, the auditor would not normally concentrate on assumptions that are objective and not susceptible to bias. Estimates based on such assumptions are less likely to be misstated." | |
| "An auditor of a nonissuer used an audit data analytic to perform tests of details, which resulted in the identification of a high number of possible misstatements. In this situation, the auditor would most appropriately: | |
| A. | |
| Conclude that the account contains misstatements that are not clearly inconsequential in the aggregate. | |
| B. | |
| Group possible misstatements by similar characteristics and perform further analysis on each group. | |
| C. | |
| Refine and reperform the analytic until the number of possible misstatements identified is low. | |
| D. | |
| Manually test each possible misstatement identified to determine whether it is an actual misstatement.","Choice ""B"" is correct. After performing an audit data analytic procedure, the auditor should group the data for items that have common characteristics. For the groups that contain possible misstatements that are not clearly inconsequential (in aggregate), the auditor should perform further analysis of the groups to determine whether they may represent actual misstatements. | |
| Choice ""A"" is incorrect. After the auditor performs the audit data analytic procedure, the auditor should group the data for items that have common characteristics. It would be premature to reach a conclusion on the whole account without further analysis. | |
| Choice ""C"" is incorrect. After the auditor performs the audit data analytic procedure, the results cannot be ignored. It is important that the auditor ensures that the ADA technique fits the intended purpose and objectives. | |
| Choice ""D"" is incorrect. It is not practical for an auditor to manually test each possible misstatement. Rather, the auditor would group data for items that have common characteristics and then perform further analysis on each group." | |
| "When applying analytical procedures during an audit, which of the following is the best approach for developing expectations? | |
| A. | |
| Identifying reasonable explanations for unexpected differences before talking to client management. | |
| B. | |
| Considering unaudited account balances and ratios to calculate what adjusted balances should be. | |
| C. | |
| Considering the pattern of several unusual changes without trying to explain what caused them. | |
| D. | |
| Comparing client data with client-determined expected results to reduce detailed tests of account balances.","Choice ""A"" is correct. Identifying reasonable explanations for unexpected differences before talking to client management helps the auditor in assessing if management's explanation is reasonable. Management's explanation should always be corroborated with other evidence. | |
| Choice ""B"" is incorrect. Unaudited account balances are less reliable. | |
| Choice ""C"" is incorrect. Analytical procedures assume that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Conditions that might cause variations in these relationships include unusual events. Expectations cannot be developed when there is no explanation of what caused a pattern of unusual changes. | |
| Choice ""D"" is incorrect. Since the data is obtained from sources within the entity, it is not as reliable for developing expectations." | |
| "Kane, CPA, concludes that there is substantial doubt about Lima Co.'s ability to continue as a going concern for a reasonable period of time. If Lima's financial statements adequately disclose its financial difficulties, Kane's auditor's report is required to include a separate report section that specifically uses the phrase(s): | |
| ""Possible | |
| discontinuance | |
| of operations"" ""Reasonable period | |
| of time, not to | |
| exceed one year"" | |
| A. | |
| Yes | |
| Yes | |
| B. | |
| Yes | |
| No | |
| C. | |
| No | |
| Yes | |
| D. | |
| No | |
| No","Choice ""D"" is correct. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include a separate section with the heading ""Substantial Doubt About the Entity's Ability to Continue as a Going Concern"" to reflect that conclusion. This conclusion should be expressed through the use of the phrase ""substantial doubt about its (the entity's) ability to continue as a going concern"" [or similar wording that includes the terms ""substantial doubt"" and ""going concern""]. The ""reasonable period...not to exceed one year"" is inherent in the definition of going concern and is not explicitly stated in the audit report. The phrase ""possible discontinuation of operations"" may be included in the going concern disclosure but is not specifically required. | |
| Choices ""A"", ""B"", and ""C"" are incorrect, as per the above explanation." | |
| "Which of the following statements extracted from a client's lawyer's letters concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? | |
| A. | |
| ""I believe that the action can be settled for less than the damages claimed."" | |
| B. | |
| ""I believe that the possible liability to the company is nominal in amount."" | |
| C. | |
| ""I believe that the plaintiff's case against the company is without merit."" | |
| D. | |
| ""I believe that the company will be able to defend this action successfully.""","Choice ""A"" is correct. The auditor is concerned with preventing an understatement of contingent liabilities. The auditor would therefore request clarification before determining that a reduction in such liability (from damages claimed to some lesser amount) is reasonable. | |
| Choices ""B"", ""C"", and ""D"" are incorrect. When a lawyer asserts that a contingent liability is immaterial (""nominal"") or improbable (""without merit"" and ""successful defense likely""), it is unlikely that the auditor would require further clarification." | |
| "An auditor of an issuer concludes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the entity's disclosures concerning this matter are adequate, the audit report may include a(an): | |
| Disclaimer | |
| of opinion ""Except for"" | |
| qualified opinion | |
| A. | |
| Yes | |
| Yes | |
| B. | |
| No | |
| No | |
| C. | |
| No | |
| Yes | |
| D. | |
| Yes | |
| No","Choice ""D"" is correct. Yes - No. | |
| If an auditor concludes that there is substantial doubt about an entity's ability to continue as a going concern and that the entity's disclosures are adequate, then the audit report may be either: | |
| Unqualified with explanatory paragraph, or | |
| Disclaimed. | |
| Generally, an unqualified opinion is issued, but the auditor is not prohibited from choosing to issue a disclaimer. | |
| Choice ""A"" is incorrect. An ""except for"" qualified opinion would be appropriate if the entity's disclosures were inadequate. | |
| Choice ""B"" is incorrect. While an unqualified opinion is generally issued, the auditor is not prohibited from choosing to issue a disclaimer; for example, in areas involving a high degree of uncertainty. | |
| Choice ""C"" is incorrect, based on the explanation above." | |
| "Under which of the following circumstances would an auditor of a non-issuer issue an unmodified opinion and have the option of including an emphasis-of-matter paragraph related to substantial doubt about the entity's ability to continue as a going concern? | |
| A. | |
| The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern remains, and related disclosures are adequate. | |
| B. | |
| The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern has been alleviated, but related disclosures are inadequate. | |
| C. | |
| The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern has been alleviated, and related disclosures are adequate. | |
| D. | |
| The going concern basis of accounting is appropriate, substantial doubt about the entity's ability to continue as a going concern remains, but related disclosures are inadequate.","Choice ""C"" is correct. If management's plans have alleviated the substantial doubt about the entity's ability to continue as a going concern and the related disclosures are adequate, the auditor has the option of including an emphasis-of-matter paragraph in the auditor's report. | |
| Choice ""A"" is incorrect. If management's plans have not alleviated the substantial doubt about the entity's ability to continue as a going concern and the related disclosures are adequate, a separate section with the heading ""Substantial Doubt About the Entity's Ability to Continue as a Going Concern"" must be added to the auditor's report rather than an emphasis-of-matter paragraph. | |
| Choices ""B"" and ""D"" are incorrect. Inadequate disclosure is a GAAP departure and may result in a qualified or adverse opinion. " | |
| "Which of the following parties should request inquiry of a client's lawyer? | |
| A. | |
| The stockholders. | |
| B. | |
| Client management. | |
| C. | |
| The auditor's attorney. | |
| D. | |
| The auditor.","Choice ""B"" is correct. The letter of inquiry to the client's attorneys is a request made by client management. Due to attorney-client privilege, the attorney would not be able to respond to such a request made by any other party. Note that management would request the attorney to respond directly to the auditor. | |
| Choice ""A"" is incorrect. The stockholders would not have any involvement in the letter of audit inquiry. | |
| Choice ""C"" is incorrect. The auditor's attorney would not have any involvement in the letter of audit inquiry related to specific client engagements. | |
| Choice ""D"" is incorrect. The auditor may request that the client include certain matters in the letter, but technically speaking, the request itself comes from client management." | |
| "In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches? | |
| A. | |
| Review and test the process used to develop the estimate. | |
| B. | |
| Review subsequent events or transactions occurring prior to audit completion. | |
| C. | |
| Develop an independent expectation of the estimate. | |
| D. | |
| Review the minutes of board of directors and shareholder meetings for discussion of the estimate.","Choice ""D"" is correct. Even if estimates were discussed during board meetings and/or shareholder meetings, it is unlikely that review of such discussion would provide evidence that the estimate is reasonable. | |
| Choices ""B"", ""C"", and ""A"" are incorrect. Reviewing subsequent events, developing an independent expectation, and reviewing and testing the process used to develop the estimate are all appropriate methods used to evaluate the reasonableness of an accounting estimate." | |
| "When testing the completeness assertion for a given transaction cycle, the auditor may perform all of the following audit procedures except for: | |
| A. | |
| Observing processes and procedures. | |
| B. | |
| Tracing a sample of transactions from the source documents to the accounting entries and financial statements. | |
| C. | |
| Performing analytical review procedures. | |
| D. | |
| Inspecting documents that support a transaction.","Choice ""D"" is correct. The primary audit procedures used to test the completeness assertion are observation, tracing, and performing analytical review procedures. Inspecting documents that support a transaction may be done when testing the: rights and obligations assertion; understandability and classification assertion; and, valuation, allocation, and accuracy assertion. | |
| Choice ""A"" is incorrect. This is an audit procedure that the auditor may perform when testing the completeness assertion. For example, the auditor may observe the client’s year-end physical inventory count. | |
| Choice ""B"" is incorrect. This is a procedure that the auditor may perform when testing the completeness assertion. It should be noted that this is a directional test that begins with the source documents (opposite of vouching). | |
| Choice ""C"" is incorrect. This is a procedure that the auditor may perform when testing the completeness assertion. Depending on the transaction cycle being audited, an auditor would consider how certain items may be omitted from the account balance." | |
| "Although regression analysis has the same objective as trend analysis, ratio analysis, and nonstatistical predictive modeling, which is to identify the potential for material misstatement, regression analysis has the following advantage over the other methods: | |
| A. | |
| Provides direct and quantitative measures of the precision of expectation. | |
| B. | |
| Provides a very high level of precision for forming an expectation. | |
| C. | |
| May use multiple sources of data, including financial and nonfinancial, in forming an expectation. | |
| D. | |
| Is a simple statistical technique used to form an expectation.","Choice ""A"" is correct. Unlike trend analysis, ratio analysis, and nonstatistical predictive modeling, regression analysis provides direct and quantitative measures of the precision of expectation. | |
| Choice ""B"" is incorrect. The other methods may also provide a high level of precision for forming an expectation. | |
| Choice ""C"" is incorrect. The other methods may also use multiple sources of data in forming an expectation. | |
| Choice ""D"" is incorrect. Regression analysis is considered an advanced statistical technique that often requires the use of software." | |
| "Which of the following procedures most likely could assist an auditor in identifying related party transactions? | |
| A. | |
| Scanning the accounting records for recurring transactions. | |
| B. | |
| Reviewing confirmations of compensating balance arrangements. | |
| C. | |
| Evaluating the reasonableness of management's accounting estimates. | |
| D. | |
| Performing tests of controls concerning the segregation of duties.","Choice ""B"" is correct. Compensating balance arrangements may be maintained by or for related parties. | |
| Choice ""A"" is incorrect. Related party transactions are more likely to be nonrecurring than recurring. | |
| Choice ""C"" is incorrect. Evaluating the reasonableness of management's accounting estimates would not provide any evidence of transactions with affiliates, owners, or management. | |
| Choice ""D"" is incorrect. Performing tests of controls concerning the segregation of duties relates to the allocation of responsibilities among company employees; related party transactions typically relate to transactions with affiliates, owners, or management." | |
| "An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the: | |
| A. | |
| Notes to the financial statements fail to disclose the employees' actions. | |
| B. | |
| Employees' actions affect the auditor's ability to rely on management's representations. | |
| C. | |
| Audit evidence that is necessary to prove that the acts of noncompliance with laws and regulations were committed does not exist. | |
| D. | |
| Client receives financial assistance from a federal government agency.","Choice ""B"" is correct. When an auditor cannot rely on management's representations, he or she should withdraw from the engagement. | |
| Choice ""A"" is incorrect. The auditor should evaluate the adequacy of disclosure in the financial statements with respect to the potential effects of an act of noncompliance with laws and regulations . If the auditor concludes that disclosure is inadequate, he or she should express a qualified or adverse opinion, but would not necessarily need to withdraw from the engagement (unless the client refused to accept the modified report). | |
| Choice ""C"" is incorrect. If there is no evidence that an act of noncompliance with laws and regulations was committed, management may be unable to take remedial action against the related employees. As long as the act of noncompliance with laws and regulations is immaterial and the auditor is satisfied that management's response is appropriate in the circumstances, there would be no reason for the auditor to withdraw. | |
| Choice ""D"" is incorrect. As long as the client takes appropriate remedial action, the auditor would not need to withdraw from the engagement simply because the client receives federal financial assistance. However, the auditor would be subject to a variety of reporting requirements related to this discovery." | |
| "While performing procedures in planning an audit, the auditor's comparison of expectations with recorded amounts yield unusual and unexpected relationships. The auditor should consider the results of the analytical procedures in which of the following? | |
| A. | |
| Determining planning materiality and acceptable error. | |
| B. | |
| Identifying the risks of material misstatement due to fraud. | |
| C. | |
| Identifying acts of noncompliance. | |
| D. | |
| Determining which controls to test.","Choice ""B"" is correct. The auditor should consider the results of analytical procedures performed in the planning stage of the audit in identifying the risks of material misstatement due to fraud. This is one of the primary purposes of performing analytical procedures during the planning stage. | |
| Choice ""A"" is incorrect. Planning materiality is generally not based on the results of analytical procedures. Planning materiality is usually based on factors such as annualized revenue or prior period financial results. | |
| Choice ""C"" is incorrect. Analytical procedures are not effective in identifying acts of noncompliance with laws and regulations. | |
| Choice ""D"" is incorrect. The auditor typically decides which controls to test based on the auditor's understanding of the design and implementation of internal control rather than on analytical procedures performed during the planning stage." | |
| "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: | |
| A. | |
| The probable outcome of asserted claims and pending or threatened litigation. | |
| B. | |
| The attorney's opinion of the entity's historical experience in recent similar litigation. | |
| C. | |
| Matters to which the attorney has given substantive attention in the form of legal representation. | |
| D. | |
| An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.","Choice ""C"" is correct. The scope of an audit is not restricted when an attorney's response is limited to matters to which the attorney has given substantive attention in the form of legal representation. The attorney may also limit his or her response to matters that are considered individually or collectively to be material. | |
| Choices ""D"", ""B"", and ""A"" are incorrect. The scope of an audit may be restricted when an attorney's response is limited to: | |
| D. | |
| An evaluation of the likelihood of an unfavorable outcome of the matter disclosed by the entity. (The attorney's response should also address the nature of the claim, the progress to date, and the intended response.) | |
| B. | |
| The attorney's opinion of the entity's historical experience in recent similar litigation. (The attorney's response should address the current situation, which may not parallel historical experience). | |
| A. | |
| The probable outcome of asserted claims and pending or threatened litigation. (The attorney's response should also address the nature of the claim, the progress to date, and the intended response, as well as unasserted claims)." | |
| "Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements? | |
| A. | |
| Inquire about the existence of related party transactions. | |
| B. | |
| Confirm inventories at locations outside the entity. | |
| C. | |
| Determine whether accounting estimates deviate from historical patterns. | |
| D. | |
| Review the lawyer's letter for information about litigation.","Choice ""D"" is correct. The auditor should inquire of management concerning pending or threatened litigation, and should obtain a letter from the client's lawyer to corroborate this information. Included in this letter is either an identification of the omission of any pending or threatened litigation, claims, and assessments, or a statement that the list of such matters (as provided by management) is complete. | |
| Choice ""A"" is incorrect. Accounting estimates generally are not associated with the existence of related party transactions. | |
| Choice ""B"" is incorrect. Accounting estimates generally are not associated with the existence of inventories at locations outside the entity. | |
| Choice ""C"" is incorrect. Evaluating deviations from historical patterns assists an auditor in determining if a recorded estimate is reasonable, but it does not provide assurance that management has identified all material accounting estimates." | |
| "Which of the following definitions best describes a business cycle? | |
| A. | |
| Activity that alternates periods of growth and decline in an economy's GDP. | |
| B. | |
| Activity where GDP declines, inflation moderates, and unemployment increases. | |
| C. | |
| Activity marked by a relatively high level of GDP, full employment, and inflation. | |
| D. | |
| Activity where the decline in the economy's real gross domestic product (GDP) persists for at least a half-year.","Choice ""A"" is correct. Business cycles represent the rise and fall of economic activity relative to long-term growth trends. As economic activity is frequently measured using a country's gross domestic product (GDP), business cycles show GDP rising and falling over time. | |
| Choice ""B"" is incorrect. This describes a contractionary phase, which is a component of a business cycle, but it does not represent the best description of a business cycle. | |
| Choice ""C"" is incorrect. This describes the expansionary phase, which is a component of a business cycle, but it does not represent the best description of a business cycle. | |
| Choice ""D"" is incorrect. At least two consecutive quarters (half of the year) of GDP declines are indicative of a recession." | |
| "In addition to making management inquiries, an auditor should perform the following procedures to identify client contingencies with the exception of: | |
| A. | |
| Discussing sales contracts with the sales manager. | |
| B. | |
| Reviewing the status of long-term leases. | |
| C. | |
| Reviewing derivative transactions reflected on the quarter-end balance sheet. | |
| D. | |
| Obtaining a client representation letter.","Choice ""C"" is correct. A client is expected to report material contingencies in the footnotes as they have not yet happened and are not reflected in the actual financial statements. Derivatives that are actually reflected on the client’s balance sheet at quarter end are not contingencies (the amount is provided and there is no possible or probable outcome). As a result, reviewing any type of transaction that is already recorded on the balance sheet will not identify a contingency. | |
| Choice ""A"" is incorrect. By discussing the sales contracts with the sales manager, the auditor may identify contingencies pertaining to the client’s future revenue recognition. | |
| Choice ""B"" is incorrect. The auditor should review the status of long-term leases to identify possible future contingencies related to these leases. | |
| Choice ""D"" is incorrect. The auditor should obtain a client representation letter which would identify client contingencies." | |
| "An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that: | |
| A. | |
| Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. | |
| B. | |
| The annual provision for credit loss expense was inadequate because of worsening economic conditions. | |
| C. | |
| Unrealized gains from increases in the value of available-for-sale debt securities were recorded in the income account for trading securities. | |
| D. | |
| Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year.","Choice ""C"" is correct. Unrealized gains on available-for-sale debt securities should properly be recorded in other comprehensive income. If such gains were erroneously recorded in the income account for trading securities, this might be discovered through comparison of the current year and prior year revenues and expenses (assuming the error occurred only in the current year, and not in the prior year). | |
| Choice ""A"" is incorrect. If payroll taxes were properly accrued and recorded, there is unlikely to be a significant change in revenues and expenses for the current year as compared to the prior year. Payables would not be part of the comparison of revenues and expenses. | |
| Choice ""B"" is incorrect. In times of worsening economic conditions, one would expect the annual provision for credit losses to increase. Since this answer option indicates that the provision was inadequate, it would appear that the client did not increase the provision appropriately. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the provision would likely result in there being little change between the two years. | |
| Choice ""D"" is incorrect. An increase in property tax rates should cause a corresponding increase in accrued property tax expense; however, the question indicates that the appropriate increase was not recorded in the current year. Investigating changes in revenues and expenses would not be likely to identify this error, since failing to increase the expense would likely result in there being little change between the two years." | |
| "Which of the following tests of details most likely would help an auditor determine whether revenues have been misstated? | |
| A. | |
| Testing for unrecorded discounts given to customers | |
| B. | |
| Testing for inventory purchases that were recorded after the end of the accounting period | |
| C. | |
| Testing for equipment depreciation expenses that were not recorded | |
| D. | |
| Testing for liabilities that were recorded in the financial records of unconsolidated, related entities","Choice ""A"" is correct. Testing for unrecorded discounts given to customers is related to testing revenue recognition. Discounts provided to customers will reduce the amount of revenue, so if these discounts are not recorded, revenues could be overstated. | |
| Choice ""B"" is incorrect. Testing for inventory purchases that were recorded after the end of the accounting period focuses on cut-off testing related to inventory and cost of goods sold, not revenues. | |
| Choice ""C"" is incorrect. Testing for equipment depreciation expenses that were not recorded focuses on ensuring that depreciation expenses are properly recorded in the financial statements, not revenues. | |
| Choice ""D"" is incorrect. Testing for liabilities recorded in the financial records of unconsolidated, related entities would pertain to testing liabilities, not revenues." | |
| "Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? | |
| A. | |
| The auditor's allowable risk of assessing control risk is too low. | |
| B. | |
| The amount of accounts receivable write-offs in the prior year. | |
| C. | |
| Preliminary judgments about materiality levels. | |
| D. | |
| The size of the intercompany receivable balance.","Choice ""C"" is correct. When planning a sample for a test of subsequent cash receipts, the auditor should consider preliminary judgments about materiality levels. | |
| Choice ""A"" is incorrect. The auditor's allowable risk of assessing control risk too low relates to tests of controls and is not a consideration in planning for a sample for a test of subsequent cash receipts. A test of subsequent cash receipts is a substantive test of details. | |
| Choice ""B"" is incorrect. The amount of accounts receivable write-offs in the prior year is not a consideration in planning for a sample for a test of subsequent cash receipts. A test of subsequent cash receipts is performed to assess the valuation of customer/trade accounts receivable. | |
| Choice ""D"" is incorrect. The size of the intercompany accounts receivable balance is not a consideration in planning a sample for a test of subsequent cash receipts. Intercompany accounts receivable are eliminated upon consolidation and do not impact the valuation of accounts receivable." | |
| "Which of the following audit procedures would be most appropriate to test the valuation of the collateral of a delinquent loan receivable? | |
| A. | |
| Reviewing the debtor's purchase records to test the historical value of the collateral. | |
| B. | |
| Obtaining a current value appraisal of the collateral. | |
| C. | |
| Performing a site visit to physically inspect the collateral. | |
| D. | |
| Sending a positive confirmation letter to the debtor to confirm the loan balance.","Choice ""B"" is correct. Obtaining a current value appraisal of the collateral is the most appropriate audit procedure to test the valuation of the collateral of a delinquent loan receivable. | |
| Choice ""A"" is incorrect. The auditor is concerned with the current market value of the collateral, not the historical value of the collateral. | |
| Choice ""C"" is incorrect. Performing a site visit to physically inspect the collateral provides evidence that the collateral exists but does not provide information on the actual value of asset. | |
| Choice ""D"" is incorrect. Sending a positive confirmation letter to the debtor to confirm the loan balance does not provide evidence of valuation because the customer may confirm the balance owed despite an inability to pay." | |
| "During the course of an audit, the auditor performs an assessment of risks at the assertion level and financial statement level. Which of the following is an accurate statement regarding either of these identified risks? | |
| A. | |
| Assertion level risk only pertains to risks identified with specific transactions and account balances. | |
| B. | |
| Financial statement level risk would include a client improperly disclosing its derivatives activity for the reporting period. | |
| C. | |
| Identified financial statement level risks could also have a potential impact on many of the client’s relevant assertions. | |
| D. | |
| When assessing risk of material misstatement at the assertion level, the auditor should only focus on whether the controls in place are designed appropriately to prevent, detect, and correct any material misstatements from the identified risk.","Choice ""C"" is correct. This represents an accurate statement. Although financial statement risks have a direct impact on the financial statements taken as whole, they could affect many relevant assertions as well. | |
| Choice ""A"" is incorrect. Although assertion level risks include risks identified for specific transactions and account balances, they also include risks for disclosures at the relevant assertion level. | |
| Choice ""B"" is incorrect. The client’s improper disclosure of derivative activity would pertain to (disclosure) assertion level risk instead of financial statement level risk. | |
| Choice ""D"" is incorrect. If the auditor assesses risk of material misstatement at the assertion level, he or she would need to assess both the control risk and the inherent risk." | |
| "In evaluating the reasonableness of an accounting estimate, an auditor would be least likely to use which of the following approaches? | |
| A. | |
| Review and test the process used to develop the estimate. | |
| B. | |
| Review the minutes of board of directors and shareholder meetings for discussion of the estimate. | |
| C. | |
| Develop an independent expectation of the estimate. | |
| D. | |
| Review subsequent events or transactions occurring prior to audit completion.","Choice ""B"" is correct. Even if estimates were discussed during board meetings and/or shareholder meetings, it is unlikely that review of such discussion would provide evidence that the estimate is reasonable. | |
| Choices ""D"", ""C"", and ""A"" are incorrect. Reviewing subsequent events, developing an independent expectation, and reviewing and testing the process used to develop the estimate are all appropriate methods used to evaluate the reasonableness of an accounting estimate." | |
| "An auditor is in the process of gathering evidence during the current audit. Which of the following would not be considered corroborating evidence? | |
| A. | |
| Sales invoices | |
| B. | |
| Board minutes | |
| C. | |
| Inquiries | |
| D. | |
| Confirmations","Choice ""A"" is correct. If an auditor reviews a client’s invoices, he or she would be examining the underlying accounting records of the client. Other underlying accounting records the auditor may review include contracts, ledgers, worksheets, checks, and journal entries. | |
| Choice ""B"" is incorrect. Examining the minutes of a board meeting would be corroborating evidence. | |
| Choice ""C"" is incorrect. Performing inquiries of client management or outside parties would be considered corroborating evidence. | |
| Choice ""D"" is incorrect. Obtaining audit evidence through confirmations represents corroborating evidence." | |
| "When applying analytical procedures during an audit, which of the following is the best approach for developing expectations? | |
| A. | |
| Comparing client data with client-determined expected results to reduce detailed tests of account balances. | |
| B. | |
| Considering the pattern of several unusual changes without trying to explain what caused them. | |
| C. | |
| Identifying reasonable explanations for unexpected differences before talking to client management. | |
| D. | |
| Considering unaudited account balances and ratios to calculate what adjusted balances should be.","Choice ""C"" is correct. Identifying reasonable explanations for unexpected differences before talking to client management helps the auditor in assessing if management's explanation is reasonable. Management's explanation should always be corroborated with other evidence. | |
| Choice ""A"" is incorrect. Since the data is obtained from sources within the entity, it is not as reliable for developing expectations. | |
| Choice ""B"" is incorrect. Analytical procedures assume that plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary. Conditions that might cause variations in these relationships include unusual events. Expectations cannot be developed when there is no explanation of what caused a pattern of unusual changes. | |
| Choice ""D"" is incorrect. Unaudited account balances are less reliable." | |
| "As part of audit procedures performed on a client’s transactions, the auditor reconciles supporting schedules to the corresponding general ledger entries. The auditor would most likely be testing which of the following assertions? | |
| A. | |
| Understandability of presentation and classification. | |
| B. | |
| Cutoff. | |
| C. | |
| Existence and occurrence. | |
| D. | |
| Valuation, allocation, and accuracy.","Choice ""D"" is correct. If the auditor performs a reconciliation of supporting schedules to the client’s general ledger entries, the auditor would most likely be testing the valuation, allocation, and accuracy assertion for a particular transaction cycle. | |
| Choices ""B"", ""C"", and ""A"" are incorrect as other auditing procedures would be used to test the cutoff, existence and occurrence, and understandability of presentation and classification assertions." | |
| "In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the: | |
| I. | |
| Likely rate of deviations. | |
| II. | |
| Allowable risk of assessing control risk too high. | |
| A. | |
| I only. | |
| B. | |
| II only. | |
| C. | |
| Both I and II. | |
| D. | |
| Either I or II.","Choice ""A"" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected. | |
| Choices ""B"", ""C"", and ""D"" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high." | |
| "At the peak of a business cycle, which of the following conditions is most true? | |
| A. | |
| The overall price level is likely to be falling. | |
| B. | |
| Capacity constraints and labor shortages are likely to put upward pressure on the overall price level. | |
| C. | |
| There is likely to be an excess supply of labor and business inventories are likely to be high. | |
| D. | |
| Output (GDP) tends to be below the potential level of output.","Choice ""B"" is correct. The peak of a business cycle marks the highest point of economic activity. At that point, firms are likely to face capacity constraints and labor shortages, which will put upward pressure on the overall price level. | |
| Choice ""A"" is incorrect. The overall price level is likely to be rising not falling. | |
| Choice ""C"" is incorrect. Business inventories are likely to be low, not high, and there is likely to be excess demand for labor not an excess supply of labor. | |
| Choice ""D"" is incorrect. GDP is likely to be above, not below, its potential level." | |
| "PCAOB has established risk assessment standards for issuer audits. Which of the following is not a financial statement assertion as recognized by PCAOB standards? | |
| A. | |
| Occurrence. | |
| B. | |
| Disclosure. | |
| C. | |
| Cutoff. | |
| D. | |
| Presentation.","Choice ""C"" is correct. Cutoff is not a financial statement assertion recognized by PCAOB standards. PCAOB standards include the assertions of Existence or Occurrence, Completeness, Valuation or Allocation, Rights and Obligations, and Presentation and Disclosure. Cuttoff testing would be covered by the Existence or Occurrence and the Completeness assertions. | |
| Choices ""A"", ""B"", and ""D"" are incorrect as each represents a financial statement assertion as recognized by PCAOB standards." | |
| "Which of the following errors most likely would be detected by analyzing financial totals? | |
| A. | |
| A transposition error on one employee's paycheck on a weekly payroll run. | |
| B. | |
| A missing digit in an invoice number in a batch of daily sales. | |
| C. | |
| Malfeasance resulting from a receivable clerk's pocketing of a customer's payment and altering of the related records. | |
| D. | |
| A purchase order mistakenly entered into two different batches.","Choice ""A"" is correct. A manual total will be calculated for each transaction file and compared to a computer-generated batch control total. Any financial discrepancies (such as an error on an employee paycheck) will be identified and resolved as part of this process. | |
| Choice ""B"" is incorrect. Analyzing financial totals would not capture missing digits on invoice numbers. | |
| Choice ""C"" is incorrect. A company should have other controls in place to ensure that all payments received are accounted for appropriately, as controls would not necessarily catch this activity. | |
| Choice ""D"" is incorrect. A company should have other controls in place to prevent this, as a financial total is only designed to ensure that what is in the purchase order itself is appropriately reconciled to the computer-generated control total." | |
| "Which of the following is not a reason an auditor may apply audit data analytics (ADAs) when concluding an audit? | |
| A. | |
| The auditor will have a deeper knowledge of the entity being audited and may reperform tests done in the risk assessment process. | |
| B. | |
| To update existing analytics with numbers that were revised during the audit. | |
| C. | |
| To verify the assertions of accuracy and occurrence for all material transactions. | |
| D. | |
| To gain comfort that no material misstatements went unidentified during the audit.","Choice ""C"" is correct. These assertions are tested as part of substantive procedures. | |
| Choice ""A"" is incorrect. When concluding the audit, the auditor will have advanced knowledge of the entity being audited and the nature of the environment in which the entity operates. This deeper knowledge allows the auditor to apply ADAs, similar to risk assessment procedures but with a new perspective. | |
| Choice ""B"" is incorrect. Using ADAs as concluding procedures may also involve updated financial figures or disclosure information that were discovered during the audit. | |
| Choice ""D"" is incorrect. Using ADAs to assist when forming an overall conclusion allows the auditor to gain comfort that no material misstatements went unidentified or unassessed during the course of the audit." | |
| "Each of the following is a qualitative factor that an auditor of a nonissuer may consider relevant when evaluating whether misstatements are material, except: | |
| A. | |
| The risk of incorrect acceptance of a misstatement. | |
| B. | |
| The significance of the financial statement element affected by the misstatement. | |
| C. | |
| The potential effect of the misstatement on the entity's compliance with a contractual agreement. | |
| D. | |
| The masking effect of the misstatement on a change in earnings in the context of industry conditions.","Choice ""A"" is correct. The risk of incorrect acceptance is an aspect of sampling risk that the auditor considers when designing an audit procedure where sampling is used. This is considered before any potential misstatement is identified. | |
| Choice ""B"" is incorrect. If a misstatement is identified, the auditor may consider the significance of the financial statement element affected by the misstatement. | |
| Choice ""C"" is incorrect. If a misstatement is identified, the auditor may consider the potential effect that it has on the entity's compliance with a contractual agreement. | |
| Choice ""D"" is incorrect. If a misstatement is identified, the auditor may consider the masking effect of the misstatement on a change in earnings." | |
| "Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? | |
| A. | |
| Compare the cash balance in the general ledger with the bank confirmation request. | |
| B. | |
| Inquire about employees' access to recorded but undeposited cash. | |
| C. | |
| Observe the consistency of the employees' use of cash registers and tapes. | |
| D. | |
| Trace the deposits in the cash receipts journal to the cash balance in the general ledger.","Choice ""C"" is correct. Observing the consistent use of cash registers and tapes by employees would provide evidence to the auditor regarding the controls over the completeness of cash receipts. | |
| Choices ""B"", ""D"", and ""A"" are incorrect. The completeness assertion relates to the recording of all transactions. Inquiries about access to recorded cash, tracing from the cash receipts journal, and testing the general ledger balance do not provide evidence regarding possible unrecorded transactions." | |
| "Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal controls? | |
| A. | |
| The amount of time budgeted to complete the engagement. | |
| B. | |
| How frequently the control is performed. | |
| C. | |
| The extent to which other tests provide evidence about the same assertion. | |
| D. | |
| The expected deviation rate from the control.","Choice ""A"" is correct. The extent of the auditor's consideration of the client's controls is affected by a variety of factors, with the primary goal being to obtain a sufficient understanding of the entity and its environment, including its system of internal control. The amount of time budgeted to complete the audit should not be a primary factor in determining the extent of consideration of the client's controls—if more time is needed to adequately consider internal control, then the budget should be revised. | |
| Choice ""B"" is incorrect. How frequently the control is performed would affect the extent of the auditor's consideration of the client's controls. | |
| Choice ""C"" is incorrect. The extent to which other tests provide evidence about the same assertion would affect the extent of the auditor's consideration of the client's controls. | |
| Choice ""D"" is incorrect. The expected deviation rate would affect the extent of the auditor's consideration of the client's controls." | |
| "After determining that a related party transaction has, in fact, occurred, an auditor should: | |
| A. | |
| Substantiate that the transaction was consummated on terms equivalent to an arm's-length transaction. | |
| B. | |
| Obtain an understanding of the business purpose of the transaction. | |
| C. | |
| Perform analytical procedures to verify whether similar transactions occurred, but were not recorded. | |
| D. | |
| Add a separate paragraph to the auditor's standard report to explain the transaction.","Choice ""B"" is correct. After identifying the occurrence of a related party transaction, the auditor should apply the procedures considered necessary to obtain satisfaction concerning the purpose and nature of the transaction and its effect on the financial statements. | |
| Choice ""A"" is incorrect. It will generally not be possible to substantiate representations that the transaction was consummated on terms equivalent to those that would have prevailed in an arm's-length transaction. | |
| Choice ""C"" is incorrect. Analytical procedures are generally not effective in the identification of related party transactions. | |
| Choice ""D"" is incorrect. While an extra paragraph may be added to emphasize a matter, there is no requirement that related party transactions be disclosed via explanatory language added to the auditor's report." | |
| "Which of the following would an auditor most likely calculate as part of audit planning? | |
| A. | |
| Inventory turnover rates for individual products | |
| B. | |
| Expected interest expense for a bond issue | |
| C. | |
| The average age of accounts receivable by customer type | |
| D. | |
| The change in gross profit percentage","Choice ""D"" is correct. During audit planning, an auditor is required to perform analytical procedures. These procedures are frequently done over the balance sheet and income statement. Therefore, it would be reasonable for an auditor to calculate gross profit percentage and the change in that percentage when compared to the prior period. | |
| Choice ""A"" is incorrect. Inventory turnover rates for individual products may be something that an auditor calculates while performing substantive procedures over inventory. An auditor would not typically calculate this during audit planning. | |
| Choice ""B"" is incorrect. Expected interest expense for a bond may be something that an auditor calculates while performing substantive procedures over debt and interest expense. An auditor would not typically calculate this during audit planning. | |
| Choice ""C"" is incorrect. The average age of accounts receivable by customer type may be something that an auditor calculates while performing substantive procedures over accounts receivable. An auditor would not typically calculate this during audit planning." | |
| "When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs: | |
| A. | |
| Tests of controls and extensive tests of property and equipment balances at the end of the year. | |
| B. | |
| Analytical procedures for property and equipment balances at the end of the year. | |
| C. | |
| Analytical procedures for current year property and equipment transactions. | |
| D. | |
| Tests of controls and limited tests of current year property and equipment transactions.","Choice ""D"" is correct. Since control risk is assessed at a low level, tests of controls would be required to evaluate the effectiveness of the controls to support that assessed level. However, the need for some substantive tests of transactions is never eliminated. | |
| Choice ""A"" is incorrect. Extensive tests of property and equipment balances would not typically be required when control risk is assessed at a low level. | |
| Choice ""B"" is incorrect. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion. Year-end balances may therefore be unpredictable. | |
| Choice ""C"" is incorrect. Since control risk is to be assessed at a low level, tests of controls would be required. Analytical procedures would not be particularly useful, since property and equipment transactions are subject to management discretion." | |
| "Which of the following is not a reason justifying the use of accounting estimates? | |
| A. | |
| Data about past events cannot be accumulated in a timely manner. | |
| B. | |
| The valuation or measurement of some accounts is uncertain pending the outcome of future events. | |
| C. | |
| Data about future events cannot be accumulated in a cost-effective manner. | |
| D. | |
| Data about past events cannot be accumulated in a cost-effective manner.","Choice ""C"" is correct. Accounting estimates are not used to measure future events. (Although, the measurement of some accounts may be uncertain pending the outcome of future events.) | |
| Choice ""B"" is incorrect. Valuation of certain historical accounts is uncertain, and may be dependent upon the outcome of future events. Accounting estimates are used in such situations to more properly reflect the account balance. | |
| Choices ""D"" and ""A"" are incorrect. If data about past events cannot be accumulated in a timely, cost-effective manner, accounting estimates may be required." | |
| "Which of the following best describes the purpose of an auditor's external inquiry sent to the client's attorney? | |
| A. | |
| To corroborate information provided by management with respect to litigation, claims, and assessments. | |
| B. | |
| To develop an appropriate understanding of controls in place with respect to the recognition of litigation, claims, and assessments. | |
| C. | |
| To evaluate the operating effectiveness of controls in place with respect to the recognition of litigation, claims, and assessments. | |
| D. | |
| To obtain reasonable assurance from the client's attorney regarding fair presentation of litigation, claims, and assessments in the financial statements.","Choice ""A"" is correct. The primary purpose of an external inquiry of the client's attorney is to obtain corroboration of information provided by management regarding litigation, claims, and assessments. | |
| Choices ""B"" and ""C"" are incorrect. The auditor's external inquiry of the client's attorney provides information about litigation, claims, and assessments, such as the nature of the matter, the progress of the case, the degree of likelihood of an unfavorable outcome, and an estimate of potential loss. It does not provide information about the client's controls with respect to recognizing the financial statement impact of such matters. | |
| Choice ""D"" is incorrect. The client's attorney provides information such as the nature of the matter, the progress of the case, the degree of likelihood of an unfavorable outcome, and an estimate of potential loss, but does not comment or provide advice regarding the fair presentation of such matters in the financial statements." | |
| "As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was: | |
| A. | |
| More than the risk of assessing control risk too low, based on the auditor's sample. | |
| B. | |
| More than the deviation rate in the auditor's sample. | |
| C. | |
| Less than the risk of assessing control risk too low, based on the auditor's sample. | |
| D. | |
| Less than the deviation rate in the auditor's sample.","Choice ""B"" is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, because the control will be less effective than sample results would indicate. | |
| Choice ""A"" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low. | |
| Choice ""C"" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low. | |
| Choice ""D"" is incorrect. If the true deviation rate is lower than the deviation rate in the sample, control risk may be assessed at a rate that is too high, potentially leading to audit inefficiencies." | |
| "Which of the following statements extracted from a client's lawyer's letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification? | |
| A. | |
| ""I believe that the plaintiff's case against the company is without merit."" | |
| B. | |
| ""I believe that the company will be able to defend this action successfully."" | |
| C. | |
| ""I believe that this action has only a remote chance in establishing any liability."" | |
| D. | |
| ""I believe that the plaintiff will have problems establishing any liability.""","Choice ""D"" is correct. The lawyer's comment that the plaintiff ""will have problems establishing any liability"" is vague…it does not provide an evaluation of the likelihood of an unfavorable outcome. Does ""will have problems"" mean a loss is probable, reasonably possible, or remote? The auditor would likely want to request clarification to ensure that the situation has been properly accounted for and disclosed. | |
| Choice ""A"" is incorrect. When a lawyer asserts that a contingent liability is improbable (""without merit""), it is unlikely that the auditor would require further clarification. | |
| Choice ""B"" is incorrect. When a lawyer asserts that a contingent liability is improbable (""able to defend this action successfully""), it is unlikely that the auditor would require further clarification. | |
| Choice ""C"" is incorrect. When a lawyer asserts that a contingent liability is improbable (""remote chance""), it is unlikely that the auditor would require further clarification." | |
| "Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? | |
| A. | |
| The board of directors makes all major financing decisions. | |
| B. | |
| Significant deficiencies in internal control previously communicated to management are not corrected. | |
| C. | |
| Transactions selected for testing are not supported by proper documentation. | |
| D. | |
| Management places little emphasis on meeting earnings projections.","Choice ""C"" is correct. Vouching recorded transactions to supporting documentation provides support for the occurrence assertion. The lack of supporting documentation calls into question the occurrence of the transactions under examination. | |
| Choice ""A"" is incorrect. As the representatives of shareholder interests, an active board of directors is considered a positive control. | |
| Choice ""B"" is incorrect. The existence of significant deficiencies in internal control may represent a conscious decision by management to accept that degree of risk because of cost or other considerations. Therefore, although failure to correct such deficiencies is considered a fraud risk factor, the auditor is more likely to be concerned about transactions that are not supported by proper documentation. | |
| Choice ""D"" is incorrect. Little emphasis on meeting earnings projections would be considered a positive factor in preventing material misstatements from occurring." | |
| "The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the: | |
| A. | |
| Marketability of assets that management plans to sell. | |
| B. | |
| Ability to expand operations into new product lines in the future. | |
| C. | |
| Feasibility of plans to purchase leased equipment at less than market value. | |
| D. | |
| Committed arrangements to convert preferred stock to long-term debt.","Choice ""A"" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time. | |
| Choices ""B"", ""C"", and ""D"" are incorrect. Evidence regarding the ability to expand operations into new product lines in the future, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to long-term debt would not be sufficient to mitigate doubts about an entity's ability to continue as a going concern, unless it could also be demonstrated that the events would provide adequate cash flow to fund operations for at least the next year." | |
| "An auditor's analytical procedures most likely would be facilitated if the entity: | |
| A. | |
| Corrects material weaknesses in internal control before the beginning of the audit. | |
| B. | |
| Develops its data from sources solely within the entity. | |
| C. | |
| Uses a standard cost system that produces variance reports. | |
| D. | |
| Segregates obsolete inventory before the physical inventory count.","Choice ""C"" is correct. An auditor's analytical procedures are facilitated when an entity uses a standard cost system with variance reports because the comparison of actual to budget will already have been performed. In addition, it is likely that management will already be aware of significant variations from budget and will be better able to address any questions the auditor may have. | |
| Choice ""A"" is incorrect. Correction of internal control weaknesses prior to the beginning of the audit would not affect analytical procedures. | |
| Choice ""B"" is incorrect. Analytical procedures using data developed solely within the entity are not as reliable as analytical procedures using data developed externally. | |
| Choice ""D"" is incorrect. Segregation of obsolete inventory would not be an important factor in determining whether analytical procedures would be effective." | |
| "In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on methods and significant assumptions that are: | |
| A. | |
| Consistent with prior periods. | |
| B. | |
| Similar to industry guidelines. | |
| C. | |
| Objective and not susceptible to bias. | |
| D. | |
| Deviations from historical patterns.","Choice ""D"" is correct. In evaluating the reasonableness of an estimate, an auditor would normally concentrate on methods and assumptions that are significant or complex, susceptible to management bias, or that have changed compared to previous estimates. | |
| Choice ""A"" is incorrect. The auditor need not concentrate on methods or assumptions that are consistent with those of prior periods, since estimates based on such assumptions are less likely to be misstated. | |
| Choice ""B"" is incorrect. The auditor need not concentrate on methods or assumptions that are similar to industry guidelines, since estimates based on such assumptions are less likely to be misstated. | |
| Choice ""C"" is incorrect. The auditor need not focus on methods or assumptions that are objective and not susceptible to bias, since estimates based on such assumptions are less likely to be misstated." | |
| "The auditor of a nonissuer would most appropriately use reperformance to obtain audit evidence for which of the following purposes? | |
| A. | |
| To determine whether the aging categories on the aged accounts payable trial balance are accurate. | |
| B. | |
| To determine the mathematical accuracy of the extended cost amount shown on an invoice sent to a customer. | |
| C. | |
| To test the operating effectiveness of a bank reconciliation control. | |
| D. | |
| To test whether the amount of FICA tax withheld from an employee's paycheck is appropriate.","Choice ""C"" is correct. Reperformance occurs when an auditor independently performs procedures or controls to ensure that they were performed appropriately. This would be an effective procedure in testing the operating effectiveness of controls over bank reconciliations to ensure that the auditor reaches the same results and conclusions when reperforming the process. | |
| Choice ""A"" is incorrect. Vouching or inspection, rather than reperformance, would be more appropriate for testing the accuracy of the aging categories on the aged accounts payable trial balance. | |
| Choice ""B"" is incorrect. Recalculation, rather than reperformance, would be more appropriate for determining the mathematical accuracy of the extended cost amount shown on an invoice. | |
| Choice ""D"" is incorrect. Recalculation, rather than reperformance, would be more appropriate for testing the accuracy of the amount of tax withheld from an employee's paycheck." | |
| "Green, CPA, concludes that substantial doubt about JKL Co.'s, a nonissuer, ability to continue as a going concern remains. If JKL's financial statements adequately disclose its financial difficulties, Green's auditor's report under U.S. auditing standards should: | |
| Include an | |
| emphasis-of-matter | |
| paragraph Specifically | |
| use the | |
| words ""going | |
| concern"" Specifically | |
| use the | |
| words | |
| ""substantial | |
| doubt"" | |
| A. | |
| Yes | |
| Yes | |
| Yes | |
| B. | |
| Yes | |
| No | |
| Yes | |
| C. | |
| Yes | |
| Yes | |
| No | |
| D. | |
| No | |
| Yes | |
| Yes","Choice ""D"" is correct. ""No - Yes - Yes."" | |
| When a CPA concludes that there is substantial doubt about an entity's ability to continue as a going concern and that doubt remains (is not alleviated by management's plans) and the entity adequately discloses its financial difficulties, an unmodified opinion is appropriate. A separate section with the heading ""Substantial Doubt About the Entity's Ability to Continue as a Going Concern,"" rather than an emphasis-of-matter paragraph, should be added to the auditor's report. This paragraph should include the phrases ""substantial doubt"" and ""going concern."" | |
| Choices ""C"", ""B"", and ""A"" are incorrect, per above." | |
| "The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider? | |
| A. | |
| Explanations provided by the client. | |
| B. | |
| Interrelationships of financial information. | |
| C. | |
| Nonfinancial information that may affect financial information. | |
| D. | |
| The nature of the assertion tested.","Choice ""D"" is correct. When evaluating whether and to what extent analytical procedures should be used, the auditor should consider the nature of the assertion tested. The other factors the auditor considers are the plausibility and predictability of the data relationship, availability and reliability of data used to develop the expectation, and the precision of the expectation. | |
| Choice ""A"" is incorrect. Explanations provided by management is not a direct factor when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider their explanations when evaluating the results of analytical procedures. | |
| Choice ""B"" is incorrect. Interrelationships of financial information is not a direct factor that the auditor considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider this when forming an expectation. | |
| Choice ""C"" is incorrect. The consideration of nonfinancial information and its effect on the financial information is not a direct factor that the auditor considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider this when forming an expectation." | |
| "Frank wants to evaluate Copeland Distributor's year-end allowance for credit losses. Frank obtains a listing of all customers with open balances as of the end of the fiscal period. Frank decides to age the data to evaluate the reasonableness of the allowance for credit losses balance. What type of data analytic is Frank executing? | |
| A. | |
| Descriptive analytic | |
| B. | |
| Predictive analytic | |
| C. | |
| Prescriptive analytic | |
| D. | |
| Diagnostic analytic","Choice ""A"" is correct. Descriptive analytics describe what happened within the data. Aging the accounts receivable data would summarize and describe the data and therefore be a descriptive analytic. | |
| Choice ""B"" is incorrect. Predictive analytics provide expected or predicted outcomes based on historical data. The analytic Frank uses is only providing a simple descriptive output. | |
| Choice ""C"" is incorrect. Prescriptive analytics prescribe or recommend actions to be taken based on advanced analytics to reach a desired goal. The analytic Frank uses is only providing a simple descriptive output. | |
| Choice ""D"" is incorrect. Diagnostic analytics explain why something happened. The analytic Frank uses provides a simple descriptive output and does not explain the drivers or underlying causes of the value of the output." | |
| "An audit partner is developing an office training program to familiarize his professional staff with statistical decision models applicable to the audit of dollar value balances. He wishes to demonstrate the relationship of sample sizes to population size and variability and the auditor's specifications as to tolerable misstatement and risk of incorrect acceptance. The partner prepared the following table to show comparative population characteristics and audit specifications of two populations. | |
| Characteristics of | |
| Population 1 Relative | |
| to Population 2 | |
| Audit Specifications as to as Sample | |
| from Population 1 Relative to a | |
| Sample from Population 2 | |
| Size | |
| Variability | |
| Specified | |
| Tolerable | |
| Misstatement | |
| Specified Risk | |
| of Incorrect | |
| Acceptance | |
| Case 1 | |
| Equal | |
| Equal | |
| Equal | |
| Lower | |
| Case 2 | |
| Equal | |
| Larger | |
| Larger | |
| Equal | |
| Case 3 | |
| Larger | |
| Equal | |
| Smaller | |
| Higher | |
| Case 4 | |
| Smaller | |
| Smaller | |
| Equal | |
| Higher | |
| Case 5 | |
| Larger | |
| Equal | |
| Equal | |
| Lower | |
| You are to indicate for the specified case from the above table the required sample size to be selected from population 1 relative to the sample from population 2. | |
| In case 4 the required sample size from population 1 is: | |
| A. | |
| Equal to the required sample size from population 2. | |
| B. | |
| Smaller than the required sample size from population 2. | |
| C. | |
| Larger than the required sample size from population 2. | |
| D. | |
| Indeterminate relative to the required sample size from population 2.","Choice ""B"" is correct. There are two changes occurring, but they both have the same effect on sample size. A decrease in population variability and an increase in the risk of incorrect acceptance both result in a decrease in the required sample size. Note that the number of items in the population is generally assumed to have virtually no effect on sample size. | |
| Choices ""C"", ""A"", and ""D"" are incorrect, based on the above explanation." | |
| "Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk? | |
| A. | |
| Management's attitude toward information processing and accounting departments. | |
| B. | |
| The organization's recruiting and hiring practices. | |
| C. | |
| The suitability of the client's lines of reporting. | |
| D. | |
| Physical proximity of the accounting function to upper management.","Choice ""C"" is correct. The suitability of the client's lines of reporting is an important part of the organizational structure, which in turn is a key component of the control environment. Since the control environment has a pervasive effect on the auditor's risk assessment, consideration of the suitability of the client's lines of reporting is quite relevant in evaluating control risk. | |
| Choice ""A"" is incorrect. Management's attitude toward the information processing and accounting departments may have some impact on the auditor's assessment of control risk (especially if management tends to override controls), but it is not particularly relevant with respect to consideration of the client's organizational structure. | |
| Choice ""B"" is incorrect. The organization's recruiting and hiring practices are not particularly relevant with respect to consideration of the client's organizational structure. | |
| Choice ""D"" is incorrect. The physical proximity of the accounting function to upper management is not particularly relevant with respect to consideration of the client's organizational structure, especially since electronic communications are commonly used." | |
| "Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling? | |
| A. | |
| The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. | |
| B. | |
| Overstated units have a lower probability of sample selection than units that are understated. | |
| C. | |
| The sampling distribution should approximate the normal distribution. | |
| D. | |
| The sampling interval is calculated by dividing the number of physical units in the population by the sample size.","Choice ""A"" is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable misstatement, risk of incorrect acceptance (reliability factor), and the recorded amount of the population being sampled. | |
| Choice ""B"" is incorrect. Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size). | |
| Choice ""C"" is incorrect. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used. | |
| Choice ""D"" is incorrect. In PPS sampling, the sampling interval is calculated by dividing the recorded amount of the population (not the number of physical units) by the sample size." | |
| "Which of the following is an accurate statement regarding audit evidence? | |
| A. | |
| Internal evidence obtained is considered more reliable than external evidence. | |
| B. | |
| Examining a photocopy of a document is less reliable than obtaining a description of a transaction procedure by client management. | |
| C. | |
| Inspecting a sample of a client’s physical inventory is considered more reliable evidence than observing a client’s inventory count. | |
| D. | |
| More assurance can be placed on audit evidence when the results are consistent from multiple sources.","Choice ""D"" is correct. This is an accurate statement. If an auditor obtains audit evidence from multiple sources that produce consistent results, he or she can place more assurance on that audit evidence. | |
| Choice ""A"" is incorrect. This is an inaccurate statement. Obtaining external audit evidence is more reliable than gathering internal audit evidence (which is more reliable than oral evidence). | |
| Choice ""B"" is incorrect. This is an inaccurate statement. If the auditor obtains a description of a transaction procedure from client management, he or she is gathering oral evidence. Audit evidence in documentary form, such as examining the original document or a photocopy, is deemed more reliable evidence than oral evidence. | |
| Choice ""C"" is incorrect. This is an inaccurate statement. Both the inspection of inventory and the observation of inventory counts is audit evidence obtained directly by the auditor. Both are considered the most reliable form of evidence." | |
| "A country recently experienced a drop in consumer purchases and a rise in business inventories of durable goods. Wages grew slowly and unemployment increased. Business investment in plant and equipment dropped sharply and profits fell. Both interest rates and stock prices fell. Which of the following statements best represents the country's current economy? | |
| A. | |
| Entering an economic ""stagflation."" | |
| B. | |
| Exiting a depression period. | |
| C. | |
| Exiting an inflationary period. | |
| D. | |
| Amid an economic recession.","Choice ""D"" is correct. A recession occurs when economic activity or output, as measured by GDP, declines. A decline in consumer purchases (likely due to slow wage growth), increased unemployment, and falling stock prices indicate an uncertain economic outlook and a reduction of wealth. Rising inventories, decreases in business investment, and falling profits indicate an economy in decline. Falling interest rates represent an attempt to reduce borrowing costs and to spur economic growth. | |
| Choice ""A"" is incorrect. Stagflation results from a declining output and rising prices. | |
| Choice ""B"" is incorrect. There is no indication that the current state of the economy shows a recovery from a depression. | |
| Choice ""C"" is incorrect. There is no indication in the facts given that this economy has exited an inflationary period." | |
| "Which of the following types of control best describes procedures to ensure appropriate systems software acquisition? | |
| A. | |
| General. | |
| B. | |
| Information-processing. | |
| C. | |
| Physical. | |
| D. | |
| Monitoring.","Choice ""A"" is correct. General controls are policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system. General controls include procedures to ensure appropriate systems software acquisition. | |
| Choice ""B"" is incorrect. Information-processing controls apply to the processing of individual transactions and help to ensure that transactions occurred, are authorized, and are completely and accurately processed and reported. | |
| Choice ""C"" is incorrect. Physical controls relate to safeguarding assets, such as using security devices to limit access to programs and restricted areas. | |
| Choice ""D"" is incorrect. Monitoring controls help assess the quality of control operation." | |
| "Which of the following factors is most relevant when an auditor considers the client's organizational structure in the context of control risk? | |
| A. | |
| Management's attitude toward information processing and accounting departments. | |
| B. | |
| Physical proximity of the accounting function to upper management. | |
| C. | |
| The organization's recruiting and hiring practices. | |
| D. | |
| The suitability of the client's lines of reporting.","Choice ""D"" is correct. The suitability of the client's lines of reporting is an important part of the organizational structure, which in turn is a key component of the control environment. Since the control environment has a pervasive effect on the auditor's risk assessment, consideration of the suitability of the client's lines of reporting is quite relevant in evaluating control risk. | |
| Choice ""A"" is incorrect. Management's attitude toward the information processing and accounting departments may have some impact on the auditor's assessment of control risk (especially if management tends to override controls), but it is not particularly relevant with respect to consideration of the client's organizational structure. | |
| Choice ""B"" is incorrect. The physical proximity of the accounting function to upper management is not particularly relevant with respect to consideration of the client's organizational structure, especially since electronic communications are commonly used. | |
| Choice ""C"" is incorrect. The organization's recruiting and hiring practices are not particularly relevant with respect to consideration of the client's organizational structure." | |
| "What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls? | |
| A. | |
| Perform both tests of controls and substantive tests on inventory. | |
| B. | |
| Assess control risk at a low level. | |
| C. | |
| Perform only substantive tests on inventory. | |
| D. | |
| Perform only tests of controls on inventory.","Choice ""C"" is correct. If it would take less time or be more efficient to perform substantive tests than it would to perform tests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronic processing), the auditor would not be likely to test controls. | |
| Choice ""A"" is incorrect. If it would take less time to perform substantive tests than it would to perform tests of controls, and if there is no other reason to test controls (i.e., if there is not a high degree of electronic processing), the auditor would not be likely to test controls. | |
| Choice ""B"" is incorrect. In order to assess control risk at a low level, tests of controls would need to be performed. However, if it is more efficient to perform substantive tests, the auditor would not be likely to test controls. | |
| Choice ""D"" is incorrect. Substantive procedures are always be necessary for all assertions relevant to material transaction classes, account balances, and disclosures. Assuming inventory is material, tests of controls alone would not be sufficient." | |
| "If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year-end? | |
| A. | |
| Substantive analytical procedures of the period since the interim testing date. | |
| B. | |
| Reconciliation of year-end balances to interim balances. | |
| C. | |
| Tests of details of activity during the period since the interim testing date. | |
| D. | |
| Tests of details for the entire year under audit.","Choice “D” is correct. If interim substantive procedures for an account identified no exceptions, then the auditor does not need to test details for the entire year under audit at year-end. | |
| Choice “A” is incorrect. If substantive procedures are performed at an interim date, the auditor would apply substantive procedures, such as performing substantive analytical procedures, during the period since the interim testing date. Note: Substantive procedures include tests of details and substantive analytical procedures. | |
| Choice “B” is incorrect. An auditor should reconcile year-end balances to interim dates. This procedure is performed as part of the roll-forward procedures. For example, the client may have a revenue amount at interim (01/01–09/30) of $100,000, and then at year-end (the period of 01/01–12/31) the revenue amount is $150,000. The auditor would verify that the amount related to 01/01–09/30 is still $100,000, and then would apply substantive procedures to the remainder, $50,000, which occurred from 10/01–12/31. | |
| Choice “C” is incorrect. If substantive procedures are performed at an interim date, the auditor would apply substantive procedures, such as testing the details, to the period since the interim testing date. Note: Substantive procedures include tests of details and substantive analytical procedures." | |
| "Which of the following is an inaccurate statement as it pertains to the auditor’s consideration of significant risks during an audit? | |
| A. | |
| It exists when the inherent risk is exceptionally high. | |
| B. | |
| The auditor uses professional judgment to identify whether a particular risk of material misstatement is a significant risk. | |
| C. | |
| Inherent risk is the only consideration. | |
| D. | |
| The impact of the client’s controls related to the perceived risk is a determinant for deciding the level of significance.","Choice ""D"" is correct. This represents a false statement. When determining whether a risk is significant or not, the auditor should ignore the impact of the client’s controls related to that risk. | |
| Choice ""A"" is incorrect. When the inherent risk is exceptionally high, the auditor would consider the risk as significant. | |
| Choice ""B"" is incorrect. Ultimately the auditor must use his or her professional judgment when determining if a given risk of material misstatement is a significant risk. | |
| Choice ""C"" is incorrect. The auditor determines whether a risk is significant (or not) by its inherent risk alone." | |
| "PCAOB standards state that the relevance of audit evidences depends on all but which of the following? | |
| A. | |
| Whether the audit procedure is designed to test for an understatement or overstatement. | |
| B. | |
| The timing of the audit procedure. | |
| C. | |
| Whether the audit procedure is designed to directly test an assertion. | |
| D. | |
| The auditor's risk assessment.","Choice ""D"" is correct. The auditor's risk assessment affects the nature, extent, and timing of audit procedures, but does not determine the relevance of audit evidence. | |
| Choice ""A"" is incorrect. The relevance of audit evidence depends in part on whether the audit procedure is designed to test for an understatement or overstatement. | |
| Choice ""B"" is incorrect. The relevance of audit evidence depends in part on the timing of the audit procedure. | |
| Choice ""C"" is incorrect. The relevance of audit evidence depends in part on whether the audit procedure is designed to directly test an assertion. If the audit procedures is designed to directly test an assertion and the evidence doesn't tell us anything about that assertion, then the evidence would not be relevant." | |
| "The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider? | |
| A. | |
| Interrelationships of financial information. | |
| B. | |
| The nature of the assertion tested. | |
| C. | |
| Explanations provided by the client. | |
| D. | |
| Nonfinancial information that may affect financial information.","Choice ""B"" is correct. When evaluating whether and to what extent analytical procedures should be used, the auditor should consider the nature of the assertion tested. The other factors the auditor considers are the plausibility and predictability of the data relationship, availability and reliability of data used to develop the expectation, and the precision of the expectation. | |
| Choice ""A"" is incorrect. Interrelationships of financial information is not a direct factor that the auditor considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider this when forming an expectation. | |
| Choice ""C"" is incorrect. Explanations provided by management is not a direct factor when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider their explanations when evaluating the results of analytical procedures. | |
| Choice ""D"" is incorrect. The consideration of nonfinancial information and its effect on the financial information is not a direct factor that the auditor considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider this when forming an expectation." | |
| "In an audit of a nonissuer's defined benefit pension plan, which of the following procedures most effectively tests that benefit payments to plan participants are paid in accordance with the plan document? | |
| A. | |
| Recalculating benefits for selected participants based on the plan provisions using relevant service and salary history to support the recorded benefits paid to the participants. | |
| B. | |
| Testing the accuracy and completeness of benefit payments made to plan participants and comparing the benefit payments recorded in the general ledger to the benefit payment records in participant records. | |
| C. | |
| Sending confirmations to plan participants to ascertain that the amount paid to them in the fiscal year is the same as recorded in the general ledger account related to benefit payments. | |
| D. | |
| Inquiring of the plan administrator about the internal control procedures in place to ensure that the benefit payments to plan participants are paid in accordance with the plan provisions.","Choice ""A"" is correct. Recalculation of benefits based on the plan provisions would be an effective procedure to provide evidence that benefit plan payments were accurate and appropriate based on the relevant plan documents. | |
| Choice ""B"" is incorrect. Comparing benefit payments to participant records would confirm that the amounts recorded in the general ledger reconcile to the amounts received by participants, but this would not provide evidence that the payments and general ledger amounts were accurate based on the relevant plan documents. | |
| Choice ""C"" is incorrect. Sending confirmation to plan participants would confirm that the amounts recorded in the general ledger reconcile to the amounts received by participants, but this would not provide evidence that the payments and general ledger amounts were accurate based on the relevant plan documents. | |
| Choice ""D"" is incorrect. Inquiry alone would not be sufficient to provide evidence that benefit plan payments were appropriate based on the relevant plan documents." | |
| "An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to: | |
| A. | |
| Measure the sufficiency of the audit evidence obtained. | |
| B. | |
| Minimize the failure to detect errors and fraud. | |
| C. | |
| Reduce the level of audit risk and materiality to a relatively low amount. | |
| D. | |
| Eliminate the risk of nonsampling errors.","Choice ""A"" is correct. Statistical sampling helps the auditor to measure the sufficiency of the audit evidence because the auditor can quantify the audit risk, thus assisting in limiting it to an acceptable level. | |
| Choice ""B"" is incorrect. The use of statistical sampling does not necessarily minimize the failure to detect errors and fraud. | |
| Choice ""C"" is incorrect. Audit risk can be reduced to a relatively low level with non-statistical sampling. Materiality is not affected by the sampling method used. | |
| Choice ""D"" is incorrect. Nonsampling errors relate to the improper evaluation of evidence by the auditor and are not dependent on the sampling method used." | |
| "When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as: | |
| A. | |
| Projected error. | |
| B. | |
| Reliability. | |
| C. | |
| Standard deviation. | |
| D. | |
| Precision.","Choice ""D"" is correct. The statistical concept of precision is used to describe the auditor's evaluation of sampling results by calculating the possible error in either direction. | |
| Choice ""A"" is incorrect. Projected error is the auditor's best estimate of the error in the total population based upon evaluating the actual error rate in the sample results. The auditor then adds an allowance for sampling risk to develop a ""precision interval"" within which the population is expected to fall. | |
| Choice ""B"" is incorrect. Reliability measures how frequently the procedure used will yield differences between the estimated value and the population value. | |
| Choice ""C"" is incorrect. Standard deviation is a measure of the variability of a frequency distribution about its mean." | |
| "Which of the following is an inaccurate statement as it pertains to the auditor’s consideration of significant risks during an audit? | |
| A. | |
| The impact of the client’s controls related to the perceived risk is a determinant for deciding the level of significance. | |
| B. | |
| Inherent risk is the only consideration. | |
| C. | |
| The auditor uses professional judgment to identify whether a particular risk of material misstatement is a significant risk. | |
| D. | |
| It exists when the inherent risk is exceptionally high.","Choice ""A"" is correct. This represents a false statement. When determining whether a risk is significant or not, the auditor should ignore the impact of the client’s controls related to that risk. | |
| Choice ""B"" is incorrect. The auditor determines whether a risk is significant (or not) by its inherent risk alone. | |
| Choice ""C"" is incorrect. Ultimately the auditor must use his or her professional judgment when determining if a given risk of material misstatement is a significant risk. | |
| Choice ""D"" is incorrect. When the inherent risk is exceptionally high, the auditor would consider the risk as significant." | |
| "The auditor requests that client management prepare a letter of inquiry to the client’s outside legal counsel. The auditor sends the letter to the attorney’s office. Because of inherent uncertainties regarding several lawsuits involving the client, the client’s attorneys are unable to form any meaningful conclusions at this time. Under this scenario, what is the auditor’s best course of action? | |
| A. | |
| Withdraw from the audit engagement. | |
| B. | |
| Continue the audit but issue a modified opinion explaining the scope limitation. | |
| C. | |
| Determine if the financial statement disclosure is adequate and issue an unmodified opinion. | |
| D. | |
| Follow up with the client’s attorneys after the audit date and issue a disclaimer of opinion.","Choice ""C"" is correct. There are situations in which the inherent uncertainties regarding litigation make it impossible for outside counsel to predict the outcome of pending lawsuits. Because this is not a scope limitation, the auditor should ensure that financial disclosure regarding the lawsuit contingencies are adequate and issue an unmodified opinion assuming all other aspects of the audit are acceptable. | |
| Choice ""A"" is incorrect. This is too severe an action by the auditor, given there is no scope limitation. | |
| Choice ""B"" is incorrect. There is no scope limitation in this scenario, so a modified opinion is not warranted. | |
| Choice ""D"" is incorrect. While follow up with client attorneys may be an acceptable course of action (assuming there is no objection from the client), there is no need to issue a disclaimer of opinion." | |
| "PCAOB standards state that the relevance of audit evidences depends on all but which of the following? | |
| A. | |
| Whether the audit procedure is designed to test for an understatement or overstatement. | |
| B. | |
| The auditor's risk assessment. | |
| C. | |
| Whether the audit procedure is designed to directly test an assertion. | |
| D. | |
| The timing of the audit procedure.","Choice ""B"" is correct. The auditor's risk assessment affects the nature, extent, and timing of audit procedures, but does not determine the relevance of audit evidence. | |
| Choice ""A"" is incorrect. The relevance of audit evidence depends in part on whether the audit procedure is designed to test for an understatement or overstatement. | |
| Choice ""C"" is incorrect. The relevance of audit evidence depends in part on whether the audit procedure is designed to directly test an assertion. If the audit procedures is designed to directly test an assertion and the evidence doesn't tell us anything about that assertion, then the evidence would not be relevant. | |
| Choice ""D"" is incorrect. The relevance of audit evidence depends in part on the timing of the audit procedure." | |
| "The auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider? | |
| A. | |
| Nonfinancial information that may affect financial information. | |
| B. | |
| The nature of the assertion tested. | |
| C. | |
| Interrelationships of financial information. | |
| D. | |
| Explanations provided by the client.","Choice ""B"" is correct. When evaluating whether and to what extent analytical procedures should be used, the auditor should consider the nature of the assertion tested. The other factors the auditor considers are the plausibility and predictability of the data relationship, availability and reliability of data used to develop the expectation, and the precision of the expectation. | |
| Choice ""A"" is incorrect. The consideration of nonfinancial information and its effect on the financial information is not a direct factor that the auditor considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider this when forming an expectation. | |
| Choice ""C"" is incorrect. Interrelationships of financial information is not a direct factor that the auditor considers when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider this when forming an expectation. | |
| Choice ""D"" is incorrect. Explanations provided by management is not a direct factor when assessing the efficiency and effectiveness of analytical procedures. However, the auditor may consider their explanations when evaluating the results of analytical procedures." | |
| "Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company's notes payable? | |
| A. | |
| Reviewing the details of the company's loan and interest expense accounts to determine that all payments were properly recorded. | |
| B. | |
| Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded. | |
| C. | |
| Sending a confirmation to the lender requesting verification of the loan's outstanding balance. | |
| D. | |
| Performing calculations to determine if the company is in compliance with debt covenants.","Choice ""B"" is correct. Analytical procedures involve developing an expectation (based on plausible relationships) and comparing recorded amounts or ratios based on recorded amounts to that expectation. An example of an analytical procedure related to notes payable is multiplying the average outstanding loan balance by the interest rate (auditor's expected amount) and comparing the result to interest expense actually recorded. | |
| Choice ""A"" is incorrect. Reviewing the details of the company's loan and interest expense accounts to determine that all payments were properly recorded is not an analytical procedure because it does not involve the auditor developing an expectation and comparing it to the actual recorded amount. | |
| Choice ""C"" is incorrect. Sending a confirmation to the lender requesting verification of the loan's outstanding balance is an example of a confirmation, not analytical, procedure. | |
| Choice ""D"" is incorrect. Performing calculations to determine if the company is in compliance with debt covenants is not an analytical procedure because it does not involve the auditor developing an expectation and comparing it to the actual recorded amount." | |
| "Which of the following statements about audit sampling risks is correct for a nonissuer? | |
| A. | |
| Nonsampling risk can arise because an auditor failed to recognize misstatements. | |
| B. | |
| Nonsampling risk arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. | |
| C. | |
| Sampling risk includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective. | |
| D. | |
| Sampling risk is derived from the uncertainty in applying audit procedures to specific risks.","Choice ""A"" is correct. Nonsampling risk includes all aspects of audit risk that are not due to sampling. It is always present and cannot be measured; the auditor can only attempt to reduce this risk to a very low level through adequate planning and supervision of the audit and quality control of all firm practices. Nonsampling risk can arise because an auditor failed to recognize misstatements in documents examined. | |
| Choice ""B"" is incorrect. Sampling risk, not nonsampling risk, arises from the possibility that, when a substantive test is restricted to a sample, conclusions might be different than if the auditor had tested each item in the population. | |
| Choice ""C"" is incorrect. Nonsampling risk, not sampling risk, includes the possibility of selecting audit procedures that are not appropriate to achieve the specific objective. | |
| Choice ""D"" is incorrect. Audit risk, not sampling risk, refers to uncertainty in applying audit procedures to specific risks." | |
| "Which of the following spreadsheets most likely has the highest risk of data integrity errors? | |
| A. | |
| A spreadsheet that displays imported comma-delimited text files from the check payment module and is reviewed by the accounts payable administrator. | |
| B. | |
| A spreadsheet the CFO uses that is directly linked to the company's accounting system database. | |
| C. | |
| A spreadsheet that captures time and attendance transactions from an automated time clock system. | |
| D. | |
| A spreadsheet into which the controller enters summary daily sales data from a printed report of an automated accounting system.","Choice ""D"" is correct. Data integrity relates to the assurance that data is consistent and accurate. Spreadsheets with manual inputs carry a higher risk of errors than those produced from automated processes. A spreadsheet with manual entry inputs from a printed report carries a high risk of data integrity errors. | |
| Choice ""A"" is incorrect. Because the spreadsheet is an output from the check payment module and is reviewed by an administrator in accounts payable who likely is responsible for check payments, the risk of data integrity errors is low. | |
| Choice ""B"" is incorrect. A spreadsheet that has a direct linkage to the accounting system database should have a high degree of data integrity. | |
| Choice ""C"" is incorrect. A spreadsheet with inputs from an automated clock system carries a lower risk of data integrity errors than a spreadsheet created from manual entries." | |
| "Which limitation on response from an attorney in response to auditor’s inquiry may result in a qualified opinion? | |
| A. | |
| The attorney's refusal to respond when the attorney has given substantial attention to the matter. | |
| B. | |
| The attorney limits replies to matters to which he or she has given substantial attention. | |
| C. | |
| An inherent uncertainty making it difficult for a lawyer to form conclusions regarding pending litigation. | |
| D. | |
| The client's refusal to permit inquiry of the attorney.","Choice ""A"" is correct. The attorney's refusal to respond when the attorney has given substantial attention to the matter would represent a scope limitation. Depending on materiality, this may result in a qualified opinion or disclaimer of opinion. | |
| Choice ""B"" is incorrect. Lawyers may limit their replies to matters to which they have given substantial attention. | |
| Choice ""C"" is incorrect. If the auditor is satisfied that financial statement disclosure is adequate, no modification to the opinion would be required. | |
| Choice ""D"" is incorrect. A refusal to permit inquiry will generally result in a disclaimer of opinion or withdrawal from the audit." | |
| "Which of the following is a preventive supervisory and monitoring control? | |
| A. | |
| Hiring guidelines | |
| B. | |
| Mandatory vacations | |
| C. | |
| Performance reviews | |
| D. | |
| Audits","Choice ""A"" is correct. Hiring guidelines are considered a preventive supervisory and monitoring control. Organizations develop strict hiring guidelines so that only competent and capable employees are hired to perform key business processes. | |
| Choices ""C"", ""B"", and ""D"" are incorrect. All these controls are detective supervisory and monitoring controls." | |
| "The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the: A. | |
| Human resources functions from the accounting functions. | |
| B. | |
| Administrative function from the hiring function. | |
| C. | |
| Authorization of transactions from the custody of related assets. | |
| D. | |
| Application controls from the general controls.","Choice ""C"" is correct. The hiring function provides authorization for payment. Distributing payroll is a custodial function. | |
| Choice ""A"" is incorrect. Segregation of duties generally refers to the separation of authorization, recordkeeping and custody, not the separation of various functional units. | |
| Choice ""B"" is incorrect. Hiring is an administrative function. | |
| Choice ""D"" is incorrect. Hiring and payroll distribution are not types of application controls or general controls." | |
| "A report issued on significant deficiencies in internal control noted during a financial statement audit of a nonissuer should contain all of the following except: A. | |
| A restriction on the use of the report. | |
| B. | |
| A statement of compliance with laws and regulations. | |
| C. | |
| The definition of material weaknesses. | |
| D. | |
| An indication that the purpose of the audit was to report on the financial statements.","Choice ""B"" is correct. No statement of compliance with laws and regulations is required in the report. | |
| Choices ""C"", ""A"", and ""D"" are incorrect. The definition of material weaknesses, a restriction on the use of the report, and an indication that the purpose of the audit was to report on the financial statements all should be part of the report." | |
| "Which of the following most likely would be an internal control procedure designed to detect errors and irregularities concerning the custody of inventory? A. | |
| Periodic reconciliation of work in process with job cost sheets. | |
| B. | |
| Independent comparisons of finished goods records with counts of goods on hand. | |
| C. | |
| Segregation of functions between general accounting and cost accounting. | |
| D. | |
| Approval of inventory journal entries by the storekeeper.","Choice ""B"" is correct. Independently comparing inventory records with physical inventory counts may detect discrepancies concerning the custody of inventory. | |
| Choice ""A"" is incorrect. Periodic reconciliation of work in process with job cost sheets relates to the recordkeeping aspects of inventory and not to its physical custody. | |
| Choice ""C"" is incorrect. Segregation of duties between general accounting and cost accounting relates to the recordkeeping aspects of inventory and not to its physical custody. | |
| Choice ""D"" is incorrect. Requiring approval of journal entries relates to the recordkeeping aspects of inventory and not to its physical custody." | |
| "Which of the following is least likely to be used as a substantive test relating to cash balances? A. | |
| Obtain cutoff bank statements and perform bank reconciliations. | |
| B. | |
| Count all cash on hand. | |
| C. | |
| Send cash confirmations to all banks with whom the client has done business. | |
| D. | |
| Verify that cash disbursements have been properly approved.","Choice ""D"" is correct. Verifying that cash disbursements have been properly approved is a test of controls, not a substantive test. | |
| Choices ""C"", ""B"", and ""A"" are incorrect. Cash confirmations, cash counts, and bank reconciliations are all a means of verifying the ending cash balance." | |
| "Which is true about accounts receivable confirmations? A. | |
| Confirmations may be based on single transactions rather than entire customer balances. | |
| B. | |
| The client may mail the confirmations, but they should be returned directly to the auditor. | |
| C. | |
| Confirmations provide evidence about existence, rights, and valuation. | |
| D. | |
| Blank confirmations provide improved response rates but may be less reliable.","Choice ""A"" is correct. The auditor should consider the types of information respondents will be readily able to confirm. For example, it may be easier for certain respondents to confirm individual transactions rather than entire balances. In such cases, the auditor may choose to confirm based on invoice number (i.e., single transactions). | |
| Choice ""B"" is incorrect. The auditor should maintain control over the confirmation requests and responses, which means the auditor should be the one to mail the confirmations, not the client. | |
| Choice ""C"" is incorrect. Accounts receivable confirmations do not provide reliable evidence about valuation. Just because a respondent confirms that he/she owes a certain amount does not mean that he/she has the intent or the ability to pay it. | |
| Choice ""D"" is incorrect. Blank confirmations are those in which the recipient is requested to fill in the balance. They provide improved reliability since the respondent cannot simply sign off without actually verifying the balance. However, since more work is required, response rates are often decreased." | |
| "In testing controls over cash disbursements, an auditor most likely would determine that the person who signs the check also: A. | |
| Approves the voucher for payment. | |
| B. | |
| Returns the checks to accounts payable. | |
| C. | |
| Is denied access to the supporting documents. | |
| D. | |
| Stamps, perforates or otherwise cancels supporting documents.","Choice ""D"" is correct. This prevents duplicate payments of vendor invoices since cancellation occurs immediately after the check is signed. | |
| Choice ""A"" is incorrect. The responsibility for authorization and custody should be separated. | |
| Choice ""B"" is incorrect. Accounts payable should not get the signed checks, since this would allow one group to have both recordkeeping and custodial duties. The check signer should mail the check. | |
| Choice ""C"" is incorrect. The person who signs the check should have access to the supporting documents, as they must be cancelled after payment." | |
| "Which of the following procedures is an auditor most likely to use to test the completeness assertion for fixed assets? A. | |
| Comparison of items listed in the fixed asset ledger to actual assets observed by the auditor. | |
| B. | |
| Recalculation of depreciation on fixed assets. | |
| C. | |
| Comparison of assets acquired during the year to the approved capital budget. | |
| D. | |
| Review of large items charged to repairs and maintenance.","Choice ""D"" is correct. When the auditor reviews large items charged to repairs and maintenance, he/she is looking for items that may have been erroneously expensed instead of capitalized. The completeness assertion focuses on just that -- items that should have been included in fixed assets but were not. | |
| Choice ""A"" is incorrect. Tracing from recorded assets to actual assets tests existence, not completeness. The completeness assertion focuses on assets that are not recorded, so starting with recorded assets will not identify this problem. | |
| Choice ""B"" is incorrect. Recalculation of depreciation addresses the valuation/allocation assertion, not the completeness assertion. | |
| Choice ""C"" is incorrect. Verifying that acquisitions were properly approved does not address the completeness assertion, since it does not help the auditor identify items that should have been capitalized but were not." | |
| "Which of the following is not true about those charged with governance of an organization? A. | |
| Those charged with governance bear responsibility for financial reporting. | |
| B. | |
| Those charged with governance typically include the board of directors. | |
| C. | |
| Those charged with governance bear responsibility for overseeing the strategic direction of the organization. | |
| D. | |
| Those charged with governance typically include the internal audit department of the organization.","Choice ""D"" is correct. The internal audit department of an organization is not typically included in the term ""those charged with governance."" | |
| Choice ""A"" is incorrect. The term ""those charged with governance"" refers to those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity. | |
| Choice ""B"" is incorrect. The term ""those charged with governance"" is broadly interpreted to encompass the terms ""board of directors"" and ""audit committee."" | |
| Choice ""C"" is incorrect. The term ""those charged with governance"" refers to those who bear responsibility to oversee the obligations, financial reporting process, and strategic direction of an entity." | |
| "When performing an audit, a CPA notes that credit loss expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls? | |
| A. | |
| Send monthly statements of account to customers with outstanding balances. | |
| B. | |
| Reconcile accounts receivable in the general ledger with the subsidiary ledger. | |
| C. | |
| Use approved price lists for customer billing. | |
| D. | |
| Require credit checks on all new customers.","Choice ""D"" is correct. Credit checks help the company determine the likelihood of a debtor's ability to pay. Credit checks on new customers may result in the company extending less credit to customers who are unlikely to pay, which may result in a lower credit loss expense. | |
| Choice ""A"" is incorrect. Sending monthly statements to customers with outstanding balances is an important procedure. However, customers who are unlikely or unable to pay probably would not be persuaded by receiving monthly statements. | |
| Choice ""B"" is incorrect. Reconciling accounts receivable in the general ledger with the subsidiary ledger is an important procedure to ensure accuracy of the financial statements; however, it is unlikely to decrease credit loss expense. | |
| Choice ""C"" is incorrect. Using approved price lists for customer billing would help ensure that customers are charged the correct price; however, it is unlikely to decrease credit loss expense." | |
| "An auditor's tests of controls for completeness for the revenue cycle usually include determining whether: | |
| A. | |
| An invoice is prepared for each shipping document. | |
| B. | |
| Each credit memo is properly approved. | |
| C. | |
| Each invoice is supported by a customer purchase order. | |
| D. | |
| Each receivable is collected subsequent to the year end.","Choice ""A"" is correct. The auditor often traces a sample of shipping documents to sales invoices to test completeness of sales. | |
| Choice ""B"" is incorrect. Verifying proper approval of credit memos provides evidence regarding the accuracy of receivables, not the completeness of sales. | |
| Choice ""C"" is incorrect. Vouching sales orders to supporting documentation provides evidence of the existence of sales, not completeness. | |
| Choice ""D"" is incorrect. Subsequent collections are used to verify the existence and valuation of year-end receivables." | |
| "A written communication was sent to management regarding a significant deficiency related to internal controls over accounts payable that was noted during the financial statement audit of a nonissuer. Which of the following should not be included in the communication? | |
| A. | |
| Management’s response. | |
| B. | |
| Definition of significant deficiency. | |
| C. | |
| Restriction on the use of the report. | |
| D. | |
| Description of potential effects.","Choice “A” is correct. For nonissuers, written communication of significant deficiencies should include: definition of significant deficiency; description of the significant deficiency that includes an explanation of the potential effect; sufficient information to enable those charged with governance and management to understand the context of the communication; and a restriction regarding the use of the communication to management, those charged with governance, others within the organization, and any other governmental authority to which the auditor is required to report. Management’s response to the significant deficiency is not included within the communication. | |
| Choice “B” is incorrect. The definition of a significant deficiency should be included in the communication. | |
| Choice “C” is incorrect. A restriction regarding the use of the communication to management, those charged with governance, others within the organization, and any other governmental authority to which the auditor is required to report should be included in the communication. | |
| Choice “D” is incorrect. A description of the significant deficiency that includes an explanation of the potential effect should be included in the communication." | |
| "Which of the following functions represents a weakness in internal control related to cash disbursements? | |
| A. | |
| The Treasurer receives the unpaid voucher packages and then prepares, signs, and mails the checks. | |
| B. | |
| Voucher packages are prepared and approved by the accounts payable department and then forwarded to the Treasurer for payment. | |
| C. | |
| After the checks are mailed, the Treasurer returns the voucher packages to the accounts payable department for cancellation of the voucher and filing of the documents. | |
| D. | |
| The general accounting department posts the payments to the general ledger after receiving the paid vouchers.","Choice ""C"" is correct. This represents a weakness in internal control over cash disbursements. The accounts payable department is responsible for preparing and verifying the accuracy of supporting documents and approving the unpaid voucher. The voucher package is then forwarded to the Treasurer, who reviews the documentation, and signs and mails the checks to the vendors. The Treasurer is responsible for cancelling the voucher packages and maintaining them in a cancelled voucher package file. To have the accounts payable department cancel the voucher packages would be a weakness in internal control, as voucher packages could be resent to the Treasurer again for payment at a later date. | |
| Choices ""D"", ""A"", and ""B"" are incorrect as none of these functions represent a weakness in internal control." | |
| "While auditing the client’s property, plant, and equipment presentation and disclosure, the auditor reviews the notes to the financial statements to determine if the depreciation methods and estimated useful lives used by the client have been sufficiently disclosed. Which of the following assertions would the auditor be testing? | |
| A. | |
| Understandability of presentation and classification. | |
| B. | |
| Rights and obligations, and occurrence. | |
| C. | |
| Completeness. | |
| D. | |
| Valuation, allocation, and accuracy.","Choice ""C"" is correct. By ensuring that all required disclosures related to property, plant, and equipment are adequately disclosed in the footnotes, the auditor would be testing the completion assertion. A key disclosure that should be included in the notes to the financial statements is the depreciation methods used by the client and the estimated useful lives of the fixed assets. | |
| Choice ""A"" is incorrect. To test the understandability of presentation and classification, the auditor would read all required disclosures for understandability and relevance. | |
| Choice ""B"" is incorrect. To test the rights and obligations, and occurrence assertion, the auditor would compare the fixed asset disclosures to other audit evidence to ensure that the disclosed information pertaining to the fixed assets has occurred. | |
| Choice ""D"" is incorrect. The testing of the valuation, allocation, and accuracy assertion would include the auditor verifying that the fixed assets and related information are presented at the appropriate amounts." | |
| "During the current year audit of a nonissuer, the audit team identified the same control deficiencies that were communicated during the prior year audit. These control deficiencies were not significant deficiencies or material weaknesses. Management indicated that these control deficiencies were not corrected in the current year due to cost constraints. How should the auditor communicate these control deficiencies during the current year audit? | |
| A. | |
| In writing. | |
| B. | |
| Either verbally or in writing. | |
| C. | |
| No communication is required. | |
| D. | |
| Verbally.","Choice “C” is correct. For nonissuers, if an auditor has communicated other deficiencies in a prior period and management has chosen not to correct the deficiencies for cost or other reasons, the auditor need not repeat the communication in the current period. | |
| Choices “A”, “D”, and “B” are incorrect, based on the above explanation." | |
| "An auditor's tests of controls for completeness for the revenue cycle usually include determining whether: | |
| A. | |
| Each credit memo is properly approved. | |
| B. | |
| An invoice is prepared for each shipping document. | |
| C. | |
| Each receivable is collected subsequent to the year end. | |
| D. | |
| Each invoice is supported by a customer purchase order.","Choice ""B"" is correct. The auditor often traces a sample of shipping documents to sales invoices to test completeness of sales. | |
| Choice ""A"" is incorrect. Verifying proper approval of credit memos provides evidence regarding the accuracy of receivables, not the completeness of sales. | |
| Choice ""C"" is incorrect. Subsequent collections are used to verify the existence and valuation of year-end receivables. | |
| Choice ""D"" is incorrect. Vouching sales orders to supporting documentation provides evidence of the existence of sales, not completeness." | |
| "An auditor that is auditing accounts receivable would least likely perform which of the following tests? | |
| A. | |
| Vouch cash receipts to the accounts receivables transactions. | |
| B. | |
| Select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices. | |
| C. | |
| Confirm a sample of accounts receivables with the customers that owe the balances. | |
| D. | |
| Obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account.","Choice ""B"" is correct. This would be a test performed during an audit of accounts payable, not accounts receivable. | |
| Choice ""A"" is incorrect. Vouching the cash receipts to the accounts receivables transactions would help to ensure that the cash receipts were properly recorded as collections of accounts. | |
| Choice ""C"" is incorrect. Confirming a sample of accounts receivables with the individual customers is generally considered to be a required auditing procedure that should be performed during the audit of accounts receivables. | |
| Choice ""D"" is incorrect. Tracing the detail of the accounts receivable subsidiary ledger to the general ledger would help to ensure that all amounts were properly reported." | |
| "An auditor is in the process of auditing a client’s derivative transactions. Assuming the client discloses their derivative transactions at fair value, the auditor should perform all of the following procedures with the exception of which of the following? | |
| A. | |
| Evaluate whether the determination of fair value is consistent with the specified valuation method. | |
| B. | |
| Ascertain if the applicable financial framework indicates the method used to determine fair value. | |
| C. | |
| Obtain an understanding of the method used by the broker-dealer to develop fair value estimates when the client obtains fair value estimates directly from a broker-dealer. | |
| D. | |
| Verify the proper financial statement impact by recalculating the gain or loss associated with changes in fair value for a sample of derivative transactions.","Choice ""D"" is correct. This is not a required procedure that the auditor should perform on the client’s derivative transactions. Instead, the auditor should focus on whether the client specifies in their reporting framework the method used to determine fair value and should evaluate if the client’s determination of fair value is consistent with their specified valuation method. Additionally, when fair value estimates are obtained directly from a broker-dealer, the auditor should attempt to gain an understanding of the method used by the broker-dealer to determine fair value. | |
| Choice ""A"" is incorrect. This represents a procedure that the auditor should perform when auditing a client’s derivative transactions. | |
| Choice ""B"" is incorrect. This represents a procedure that the auditor should perform when auditing a client’s derivative transactions. | |
| Choice ""C"" is incorrect. Assuming the client obtains their fair value estimates directly from a broker-dealer, this represents a procedure the auditor should perform when auditing the client’s derivative transactions." | |
| "In performing a search for unrecorded retirements of fixed assets, an auditor most likely would: | |
| A. | |
| Analyze the repair and maintenance account, and then tour the client's facilities. | |
| B. | |
| Tour the client's facilities, and then inspect the property ledger and the insurance and tax records. | |
| C. | |
| Inspect the property ledger and the insurance and tax records, and then tour the client's facilities. | |
| D. | |
| Tour the client's facilities, and then analyze the repair and maintenance account.","Choice ""C"" is correct. In a search for unrecorded disposals, the auditor would vouch a sample of assets on the property ledger to those on hand in the client's facility. | |
| Choice ""A"" is incorrect. Analysis of the repair and maintenance account is useful in identifying transactions that should have been capitalized versus expensed (i.e., unrecorded additions). | |
| Choice ""B"" is incorrect. By touring the facility first, and then comparing assets found to those recorded on the property ledger, the auditor is testing the completeness of the property ledger, a procedure used to search for unrecorded additions. | |
| Choice ""D"" is incorrect. Analysis of the repair and maintenance account is useful in identifying transactions that should have been capitalized versus expensed (i.e., unrecorded additions)." | |
| "Which of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? | |
| A. | |
| Inventory is properly presented in the financial statements. | |
| B. | |
| Inventory is complete. | |
| C. | |
| Inventory is properly valued. | |
| D. | |
| The entity has rights to the inventory.","Choice ""B"" is correct. In order to determine whether the actual inventory on hand is reflected in the ending inventory balance by the client, the auditor would test the completeness of inventory. This is done in conjunction with inventory observation, through testing the physical inventory report by tracing test counts to the report to verify that reported inventory is complete. | |
| Choice ""A"" is incorrect. Testing for this management assertion would not satisfy the audit objective because inventory can be properly presented in the financial statements without the inventory amounts being accurate. | |
| Choice ""C"" is incorrect. Testing whether management properly valued its inventory would not satisfy the audit objective, but testing for completeness would. | |
| Choice ""D"" is incorrect. The verification of legal right to the inventory is not a test that would satisfy this audit objective." | |
| "An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about: | |
| A. | |
| Rights and obligations. | |
| B. | |
| Existence. | |
| C. | |
| Understandability of presentation and classification. | |
| D. | |
| Valuation and allocation.","Choice ""D"" is correct. Assertions about valuation and allocation deal with whether asset, liability, revenue, and expense components have been included in the financial statements at appropriate amounts, and any resulting valuation adjustments are appropriately recorded. For example, management asserts that trade accounts receivable included in the balance sheet are stated at net realizable value. | |
| Choice ""A"" is incorrect. Assertions about rights and obligations deal with whether assets are the rights of the entity and liabilities are the obligations of the entity at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. | |
| Choice ""B"" is incorrect. Assertions about existence deal with whether assets, liabilities, and equity interest of the entity exist at a given date. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion. | |
| Choice ""C"" is incorrect. Assertions about understandability of presentation and classification deal with whether financial information is appropriately presented and described, and disclosures are clearly expressed. Reviewing credit ratings of delinquent customers does not provide evidence about this type of assertion." | |
| "To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace: | |
| A. | |
| Inventory tags noted during the auditor's observation to items listed in receiving reports and vendors' invoices. | |
| B. | |
| Inventory tags noted during the auditor's observation to items listed in the inventory-listing schedule. | |
| C. | |
| Items listed in receiving reports and vendors' invoices to the inventory-listing schedule. | |
| D. | |
| Items listed in the inventory-listing schedule to inventory tags and the auditor's recorded count sheets.","Choice ""D"" is correct. Tracing from the inventory schedule to the inventory tags and the auditor's recorded count sheets verifies the validity (existence) of the items. Note that the correct term for the directional test for existence is ""vouch."" However, in practice (and on the CPA Exam), the term trace is sometime used interchangeably with the term vouch. | |
| Choice ""A"" is incorrect. Tracing to receiving reports and to vendors' invoices from the inventory tags might be used to verify completeness of purchases or payables. | |
| Choice ""B"" is incorrect. Tracing from inventory tags to the inventory listing schedule verifies the completeness of the schedule, not the existence (or validity) of the items. | |
| Choice ""C"" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are cutoff procedures used to verify completeness of the inventory listing." | |
| "The most likely result of ineffective internal control policies and procedures in the revenue cycle is that: | |
| A. | |
| Omission of shipping documents could go undetected, causing an understatement of inventory. | |
| B. | |
| Fictitious transactions could be recorded, causing an understatement of revenues and overstatement of receivables. | |
| C. | |
| Final authorization of credit memos by personnel in the sales department could permit an employee defalcation scheme. | |
| D. | |
| Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped.","Choice ""C"" is correct. The most likely result of ineffective internal control policies and procedures in the revenue cycle is that final authorization of credit memos by personnel in the sales department could permit a salesman to sell, collect, and pocket the collection, then cover it up by issuing a credit memo. Final authorization of credit memos should be performed by an employee who is independent of the sales department such as the credit manager in the treasury department. | |
| Choice ""A"" is incorrect. If shipping documents are omitted, then the inventory levels would be overstated since the reduction of inventory would not be recorded. | |
| Choice ""B"" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated. | |
| Choice ""D"" is incorrect. The shipment of goods is an activity that takes place before the transaction is recorded. Irregularities in recording transactions in the subsidiary accounts therefore would have no impact on the timeliness of the goods being shipped." | |
| "Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion regarding: | |
| A. | |
| Understandability of presentation and classification. | |
| B. | |
| Cutoff. | |
| C. | |
| Accuracy. | |
| D. | |
| Existence.","Choice ""B"" is correct. Cutoff tests are designed to determine whether transactions have been recorded in the proper period. Tests to detect credit sales made before the end of the year that have been (improperly) recorded in the subsequent year provide assurance about both cutoff and completeness (i.e., whether all current year sales have been properly included). | |
| Choice ""A"" is incorrect. Cutoff tests do not determine whether the components of the financial statements are properly presented, described and disclosed (understandability of presentation and classification). | |
| Choice ""C"" is incorrect. The cutoff testing described is designed to identify sales recorded in the subsequent year that more properly belong in the current year. This relates to the timing of the entry, not to its accuracy. | |
| Choice ""D"" is incorrect. To test existence, the auditor would need to start with sales that were recorded in the current year, not those recorded in the subsequent year." | |
| "In testing plant and equipment balances, an auditor examines new additions listed on an analysis of plant and equipment. This procedure most likely obtains evidence concerning management's assertion of: | |
| A. | |
| Completeness. | |
| B. | |
| Existence. | |
| C. | |
| Understandability of presentation and classification. | |
| D. | |
| Valuation and allocation.","Choice ""B"" is correct. By examining the assets listed as new additions on an analysis of plant and equipment, an auditor obtains evidence concerning management's assertion of existence. | |
| Choice ""A"" is incorrect. Examining new additions that are already listed on the analysis does not provide evidence of completeness. The assertion of completeness relating to fixed assets might be tested by reviewing large repair and maintenance charges to determine if the cost should more properly have been capitalized (i.e., to evaluate whether fixed asset additions are complete). | |
| Choice ""C"" is incorrect. Understandability of presentation and classification deals with whether the components of the financial statements are properly presented, described, and disclosed. Examination of new assets does not provide evidence regarding this assertion. | |
| Choice ""D"" is incorrect. Valuation and allocation pertains to presentation of balances at their proper amounts. Examination of new assets does not provide evidence regarding this assertion." | |
| "The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to: | |
| A. | |
| Analytically compare the current-year inventory balance to the prior-year balance. | |
| B. | |
| Observe physical counts of the inventory items. | |
| C. | |
| Trace the total on the inventory listing to the general ledger inventory account. | |
| D. | |
| Obtain a confirmation from the client indicating inventory ownership.","Choice ""B"" is correct. The auditor's personal observation is generally one of the most reliable forms of evidence. Observing physical inventory counts provides reliable evidence that the inventory actually exists. | |
| Choice ""A"" is incorrect. Analytical comparisons of current year to prior year inventory balances might provide some evidence regarding completeness, existence, and valuation, but this is not as reliable a procedure for verifying existence as is the auditor's direct personal observation. | |
| Choice ""C"" is incorrect. Tracing totals from the inventory listing to the general ledger inventory account provides evidence of completeness, not existence. | |
| Choice ""D"" is incorrect. A confirmation from the client indicating ownership provides some evidence regarding rights and obligations, but does not provide evidence of existence." | |
| "Which of the following statements properly matches the financial statement assertion with the potential misstatement and relevant audit procedure? | |
| A. | |
| An auditor may obtain confirmations of accounts receivable in order to test the completeness assertion to ensure that the receivables have not been overstated. | |
| B. | |
| An auditor may observe the client’s physical count of inventory to test the rights assertion to ensure that the client owned the inventory reported at year-end. | |
| C. | |
| An auditor may physically examine a sample of the physical inventory count in order to test the existence assertion to ensure that the inventory amounts have not been overstated. | |
| D. | |
| An auditor may perform confirmations of accounts payable in order to test the existence assertion to ensure that the payables have not been understated.","Choice ""C"" is correct. Inventory is an asset, thus there may be the risk of a client overstating the inventory on their financial statements. To test for this risk related to the existence assertion, the auditor may physically examine the inventory to ensure that what they have counted exists and has not been overstated. | |
| Choice ""A"" is incorrect. Accounts receivable confirmation is a test of existence (overstatement), not a test of completeness (understatement). | |
| Choice ""B"" is incorrect. Although the rights assertion is tested to ensure that the client owned inventory, this is generally not tested by observing a physical count of inventory, as some inventory that can be physically counted may not be owned by the provider (e.g., inventory held on consignment). | |
| Choice ""D"" is incorrect. The existence assertion is generally not tested for liabilities such as accounts payable, because there is little risk that the client would overstate an item like liabilities. Confirmation is not an effective test of understatement." | |
| "In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? | |
| A. | |
| A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances. | |
| B. | |
| A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. | |
| C. | |
| A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. | |
| D. | |
| A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.","Choice ""D"" is correct. The use of negative confirmations most likely would be justified when there are a small number of accounts that may be in dispute and the accounts receivable balance arises from sales to many customers with small balances (e.g., utility consumer customers). | |
| Choice ""A"" is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute. | |
| Choice ""B"" is incorrect. Positive (not negative) confirmations should be used when a substantial number of accounts are expected to be in dispute, or if the accounts receivable balance is comprised of accounts from a few major customers. | |
| Choice ""C"" is incorrect. Positive (not negative) confirmations should be used when the accounts receivable balance is comprised of accounts from a few major customers." | |
| "Which of the following procedures best addresses the adequacy of presentation and disclosure for inventory of a nonissuer? | |
| A. | |
| Obtaining confirmation of inventories that are pledged under loan agreements. | |
| B. | |
| Examining the inventory turnover ratio and determining whether it is in line with similar companies in the industry. | |
| C. | |
| Observing the company's physical inventory-taking procedures. | |
| D. | |
| Tracing the test counts during the physical inventory to the final inventory listing.","Choice ""A"" is correct. In addressing the adequacy of presentation and disclosure for inventory, the auditor should determine that inventory-related obligations, such as inventory pledged under loan agreements, have been properly disclosed. | |
| Choice ""B"" is incorrect. Examining and comparing the inventory turnover ratio may be used by an auditor to better understand the performance of a company, but it would not address the adequacy of the presentation and disclosure of inventory. | |
| Choice ""C"" is incorrect. Observing the physical inventory-taking procedures would better support the existence of the inventory account balance. | |
| Choice ""D"" is incorrect. Tracing the test counts to the final inventory listing would better support the completeness of the inventory account balance." | |
| "Which of the following matters is an auditor not required to communicate to those charged with governance? | |
| A. | |
| The degree of reliance the auditor placed on the management representation letter. | |
| B. | |
| The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates. | |
| C. | |
| The level of responsibility assumed by the auditor under generally accepted auditing standards. | |
| D. | |
| Significant adjustments arising from the audit that were recorded by management.","Choice ""A"" is correct. The auditor is not required to communicate to those charged with governance the degree of reliance placed on the management representation letter. | |
| Choice ""B"" is incorrect. The auditor should communicate qualitative aspects of the process used by management in formulating sensitive accounting estimates, which would likely include discussion of the basis for the auditor's conclusions regarding the reasonableness of those estimates. | |
| Choice ""C"" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming under GAAS. | |
| Choice ""D"" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments arising from the audit, regardless of whether or not management recorded them." | |
| "When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations: | |
| A. | |
| Lists of the customers' recent payments that the client has already recorded. | |
| B. | |
| Client-prepared statements of account that show the details of the account balances. | |
| C. | |
| Copies of the customers' purchase orders that support the account balances. | |
| D. | |
| Copies of the client's shipping documents that support the account balances.","Choice ""B"" is correct. When confirming the total accounts receivable balance, it is beneficial to include a client-prepared statement of account that shows the details of the account balances so that the confirmation recipients can more easily verify the receivable balance. | |
| Choice ""A"" is incorrect. Listing client payments that had already been recorded would generally not be relevant in confirming unpaid invoices. | |
| Choice ""C"" is incorrect. The customer's purchase orders would not generally be helpful to allow a respondent to be able to confirm an existing balance. | |
| Choice ""D"" is incorrect. The client's shipping documents would not generally be helpful to allow a respondent to be able to confirm an existing balance." | |
| "An auditor tests an entity's control of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of: | |
| A. | |
| Existence. | |
| B. | |
| Completeness. | |
| C. | |
| Valuation and allocation. | |
| D. | |
| Rights and obligations.","Choice ""C"" is correct. By ensuring that credit approval is obtained before goods are shipped to customers, the auditor is testing management's assertion that accounts receivable are collectible (valuation or allocation). | |
| Choice ""A"" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the existence assertion. | |
| Choice ""B"" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the completeness assertion. | |
| Choice ""D"" is incorrect. Ensuring that credit approval is obtained before goods are shipped does not support the rights and obligations assertion." | |
| "Which of the following procedures would be most appropriate for testing the completeness assertion as it applies to inventory? | |
| A. | |
| Tracing inventory items from the tag listing back to the physical inventory quantities. | |
| B. | |
| Performing cutoff procedures for shipping and receiving. | |
| C. | |
| Examining paid vendor invoices. | |
| D. | |
| Scanning perpetual inventory, production, and purchasing records.","Choice ""B"" is correct. Performing cutoff procedures provides assurance that goods in transit (shipped or received) are appropriately included or excluded from inventory and this procedure is most appropriate for testing the completeness assertion. | |
| Choice ""A"" is incorrect. Tracing items from the tag listing back to the physical inventory quantities is a test for the existence of the inventory on the tag listing. For the completeness assertion, the auditor should trace from the physical inventory quantities to the tag listing. | |
| Choice ""C"" is incorrect. Examining paid vendor invoices would exclude invoices from vendors for goods received but not yet billed by the vendor. | |
| Choice ""D"" is incorrect. Scanning perpetual inventory, production, and purchasing records would only include transactions that have been recorded. The completeness assertion is focused on unrecorded transactions." | |
| "The primary responsibility of a bank acting as registrar of capital stock is to: | |
| A. | |
| Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. | |
| B. | |
| Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation. | |
| C. | |
| Account for stock certificates by comparing the total shares outstanding to the total in the shareholders subsidiary ledger. | |
| D. | |
| Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation.","Choice ""B"" is correct. Large companies often use a registrar to provide registration services and maintain the stockholder list. The primary responsibility of the registrar is to verify that stock is issued only with proper authorization. | |
| Choice ""A"" is incorrect. A registrar does not have the described responsibility with respect to mergers, acquisitions, and the sale of treasury stock. | |
| Choice ""C"" is incorrect. Since the company's management is responsible for maintaining accurate accounting records, a responsible company employee (not the registrar) would periodically compare the recorded number of shares outstanding (per company records) with the total in the shareholders' subsidiary ledger (per the registrar). | |
| Choice ""D"" is incorrect. The company's board of directors bears responsibility for proper declaration of dividends, not the stock registrar." | |
| "Which of the following matters would an auditor most likely include in a management representation letter? | |
| A. | |
| The reasonableness of significant assumptions used in making accounting estimates. | |
| B. | |
| Communications with those charged with governance concerning weaknesses in internal control. | |
| C. | |
| Plans to acquire or merge with other entities in the subsequent year. | |
| D. | |
| Management's acknowledgment of its responsibility for the detection of employee fraud.","Choice ""A"" is correct. Specific written representations obtained by the auditor should include a statement that the significant assumptions used by management in making accounting estimates are reasonable. | |
| Choice ""B"" is incorrect. Communications with those charged with governance are generally not included in the management representation letter, whereas communications from regulatory agencies regarding noncompliance with, or deficiencies in, financial reporting practices would be included. | |
| Choice ""C"" is incorrect. Management's subsequent plans need not be included in the management representation letter, unless they will affect the carrying value or classification of assets and liabilities. | |
| Choice ""D"" is incorrect. Management acknowledges its responsibility for the design, implementation, and maintenance of internal control to prevent and detect fraud, but does not acknowledge its responsibility to detect fraud." | |
| "To which of the following matters would materiality limits not apply when obtaining written client representations? | |
| A. | |
| Information about related party transactions. | |
| B. | |
| Disclosure of line-of-credit arrangements. | |
| C. | |
| Violations of state labor regulations. | |
| D. | |
| Instances of fraud involving management.","Choice ""D"" is correct. Materiality limits do not apply to client representations involving management fraud. The management representation letter generally indicates that ""we have no knowledge of fraud or suspected fraud involving management"" (without reference to materiality). The only mention of material fraud relates to situations involving parties other than management. | |
| Choice ""A"" is incorrect. Since GAAP requires disclosure of material related party transactions, materiality limits do apply to representations about such matters. | |
| Choice ""B"" is incorrect. Since GAAP requires disclosure of material line-of-credit arrangements, materiality limits do apply to representations about such matters. | |
| Choice ""C"" is incorrect. Materiality limits do apply to violations of state labor regulations. The management representation letter generally indicates that there are no violations of regulations ""whose effects should be considered for financial statement disclosure""−and only material effects would typically be considered for disclosure." | |
| "Which of the following procedures would an auditor most likely perform in searching for unrecorded payables? | |
| A. | |
| Reconcile receiving reports with related cash payments made just prior to the year-end. | |
| B. | |
| Compare cash payments made after the balance sheet date with the accounts payable trial balance. | |
| C. | |
| Review the responses of accounts receivable confirmations for indications of disputes with customers. | |
| D. | |
| Examine a sample of creditor balances to supporting invoices, receiving reports, and purchase orders.","Choice ""B"" is correct. An auditor most likely would compare cash payments made after the balance sheet date with the accounts payable trial balance in searching for unrecorded payables. The auditor is looking for items that should have been recorded as of the balance sheet date, but were not. | |
| Choice ""A"" is incorrect. Reconciling receiving reports with related cash payments made just prior to year-end would not help the auditor search for unrecorded payables. Cash payments for items received should result in the payable being eliminated. | |
| Choice ""C"" is incorrect. Reviewing the responses of accounts receivable confirmations for indications of disputes with customers is a substantive procedure related to the revenue cycle, not the expenditure cycle. | |
| Choice ""D"" is incorrect. An auditor most likely would compare a sample of creditor balances to supporting invoices, receiving reports, and purchase orders to verify that the accounts payable exist. The search for unrecorded payables is primarily used to support the completeness assertion." | |
| "A test of a payroll system involved comparing an individual's number of overtime hours a week with an average of weekly overtime during a similar period in a prior year and evaluating the results. This is an example of what type of test? | |
| A. | |
| Reasonableness test. | |
| B. | |
| Category test. | |
| C. | |
| Detail test. | |
| D. | |
| Range test.","Choice ""A"" is correct. In a reasonableness test, data in two or more fields are checked for consistency. Comparing overtime hours in the current period to a prior period is one type of reasonableness test. | |
| Choice ""B"" is incorrect. A category test is not a commonly used term when discussing application controls. | |
| Choice ""C"" is incorrect. A test of details is one in which specific details are evaluated, whereas in a reasonableness test, two different fields are compared. A test of details with respect to overtime hours might involve looking at time sheets for that week, for example. | |
| Choice ""D"" is incorrect. A range test identifies amounts that fall outside a predetermined range." | |
| "To which of the following matters would materiality limits not apply in obtaining written management representations? | |
| A. | |
| The availability of minutes of stockholders' and directors' meetings. | |
| B. | |
| The disclosure of compensating balance arrangements involving related parties. | |
| C. | |
| Reductions of obsolete inventory to net realizable value. | |
| D. | |
| Losses from purchase commitments at prices in excess of market value.","Choice ""A"" is correct. Management's representations may be limited to matters that are considered either individually or collectively material to the financial statements, provided management and the auditor have reached an understanding of the limits of materiality for this purpose. Such limitations would not apply to those representations that are not directly related to amounts included in the financial statements, such as management's acknowledgment of its responsibility for the financial statements, availability of financial records, and completeness and availability of minutes. | |
| Choice ""B"" is incorrect. The disclosure of compensating balances is directly related to amounts in the financial statements and thus is subject to materiality limits. | |
| Choice ""C"" is incorrect. The reduction of obsolete inventory to net realizable value is directly related to amounts in the financial statements and thus is subject to materiality limits. | |
| Choice ""D"" is incorrect. Losses from purchase commitments are directly related to amounts in the financial statements and thus are subject to materiality limits." | |
| "Which of the following audit procedures is best for identifying unrecorded trade accounts payable? | |
| A. | |
| Examining unusual relationships between monthly accounts payable balances and recorded cash payments. | |
| B. | |
| Reconciling vendors' statements to the file of receiving reports to identify items received just prior to the balance sheet date. | |
| C. | |
| Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. | |
| D. | |
| Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.","Choice ""C"" is correct. Unrecorded trade accounts payable are best identified by reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period. | |
| Choice ""A"" is incorrect. There is not usually a predictable relationship between accounts payable and cash payments, because management can pay cash or incur additional liabilities at its discretion. | |
| Choice ""B"" is incorrect. Reconciling vendors' statements to the file of receiving reports would not identify unrecorded payables, as the vendor statement would still agree with the receiving report even if the payable were not recorded. | |
| Choice ""D"" is incorrect. Investigating payables already recorded would not help identify unrecorded trade payables." | |
| "An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to: | |
| A. | |
| Determine that purchases were properly recorded. | |
| B. | |
| Test whether payments were for goods actually ordered. | |
| C. | |
| Verify that cash disbursements were for goods actually received. | |
| D. | |
| Identify unusually large purchases that should be investigated further.","Choice ""A"" is correct. In general, an audit procedure can be restated as the question to be answered. In this case, tracing a sample of purchase orders and related receiving reports to the purchases journal and the cash disbursements journal seeks to answer the question, ""Were all purchases properly recorded?"" (the completeness assertion). | |
| Choice ""B"" is incorrect. In order to verify that cash disbursements were for goods actually ordered, a sample of cash disbursements should be vouched back to purchase orders. | |
| Choice ""C"" is incorrect. In order to verify that cash disbursements were for goods actually received, a sample of cash disbursements should be vouched back to receiving reports. | |
| Choice ""D"" is incorrect. Tracing a sample of source documents to summary records would not identify unusually large transactions requiring additional attention." | |
| "In a well designed internal control, employees in the same department most likely would approve purchase orders, and also: | |
| A. | |
| Inspect goods upon receipt. | |
| B. | |
| Authorize requisitions of goods. | |
| C. | |
| Negotiate terms with vendors. | |
| D. | |
| Reconcile the open invoice file.","Choice ""C"" is correct. In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors. | |
| Choice ""A"" is incorrect. Employees in the receiving department inspect goods upon receipt while the purchasing agent approves purchase orders. | |
| Choice ""B"" is incorrect. The stores department (personnel in the raw materials inventory area) authorize requisition of goods while the purchasing agent approves purchase orders. | |
| Choice ""D"" is incorrect. Personnel in the accounts payable department reconcile the open invoice file while the purchasing agent approves purchase orders." | |
| "Under properly designed internal control, the same employee most likely would match vendors' invoices with receiving reports and also: | |
| A. | |
| Recompute the calculations on vendors' invoices. | |
| B. | |
| Reconcile the accounts payable ledger. | |
| C. | |
| Cancel vendors' invoices after payment. | |
| D. | |
| Post the detailed accounts payable records.","Choice ""A"" is correct. Matching vendor's invoices with receiving reports provides authorization for payment and is generally performed in the accounts payable department. Recalculation of vendor invoices is compatible with this authorization function. | |
| Choice ""B"" is incorrect. This review procedure (independent verification) should be performed by someone independent of the employee who approved the invoice for payment. | |
| Choice ""C"" is incorrect. Payment and cancellation of vendor invoices should be performed by someone (generally the treasurer) other than the individual authorizing payment. | |
| Choice ""D"" is incorrect. Posting the accounts payable records (recording) is incompatible with matching (authorization). Generally these functions would be performed by two different employees." | |
| "In performing a count of negotiable securities, an auditor records the details of the count on a security count worksheet. What other information is usually included on this worksheet? | |
| A. | |
| An acknowledgment by a client representative that the securities were returned intact. | |
| B. | |
| An evaluation of the client's internal control concerning physical access to the securities. | |
| C. | |
| An analysis of realized gains and losses from the sale of securities during the year. | |
| D. | |
| A description of the client's procedures that prevent the negotiation of securities by just one person.","Choice ""A"" is correct. After performing a count of negotiable securities, the auditor would generally obtain an acknowledgment from the client that the securities were returned intact. This helps maintain accountability for the securities, and reduces the likelihood of employee misappropriation (e.g., if a client employee were to steal a security and blame the auditor). | |
| Choice ""B"" is incorrect. The auditor generally would not include an evaluation of the client's internal control on a security count worksheet, although this information would be included elsewhere in the audit documentation. | |
| Choice ""C"" is incorrect. The auditor generally would not include an analysis of realized gains and losses on a security count worksheet, although this information would be included elsewhere in the audit documentation. | |
| Choice ""D"" is incorrect. The auditor generally would not include a description of the client's control procedures on a security count worksheet, although this information might be included elsewhere in the audit documentation." | |
| "An auditor scans a client's investment records for the period just before and just after the year-end to determine that any transfers between categories of investments have been properly recorded. The primary purpose of this procedure is to obtain evidence about management's financial statement assertions of: | |
| A. | |
| Existence, and understandability of presentation and classification. | |
| B. | |
| Understandability of presentation and classification, and valuation and accuracy. | |
| C. | |
| Valuation and accuracy, and rights and obligations. | |
| D. | |
| Rights and obligations, and existence.","Choice ""B"" is correct. Investments may be classified as trading, available-for-sale, or held-to-maturity. The classification of each investment into one of these three categories determines how it will be shown on the balance sheet (understandability of presentation and classification) and whether it will be valued at market or at amortized cost (valuation and accuracy). | |
| Choices ""D"", ""C"", and ""A"" are incorrect. Reviewing transfers of investments between categories will not provide evidence regarding rights and obligations or existence. Rights and obligations and existence would be concerned with whether the securities actually exist and are owned by the client." | |
| "Which of the following procedures would the auditor most likely perform to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet? | |
| A. | |
| Comparing the contract amount with the fair value of the contract and calculating the unrealized gain or loss. | |
| B. | |
| Testing the data used to arrive at the fair value of the interest rate swap contract. | |
| C. | |
| Sending a positive confirmation to the interest rate swap contract custodian. | |
| D. | |
| Inspecting the minutes of the board of directors' meetings for approval of the interest rate swap contract.","Choice “B” is correct. The auditor most likely would test the data used to arrive at the fair value of the interest rate swap contract to determine that an interest rate swap contract is properly stated at fair value on the client's balance sheet. | |
| Choice “A” is incorrect. Comparing the contract amount with the fair value of the contract and calculating the unrealized gain or loss provides evidence for the amount of unrealized gain or loss that should be recorded in other comprehensive income or the income statement, but it would not help determine that the interest rate swap is properly stated at fair value on the balance sheet. | |
| Choice “C” is incorrect. Confirmations are typically not sent to the interest rate swap custodian. In addition, there may be just two parties to the transaction with no designated custodian. | |
| Choice “D” is incorrect. Inspecting the minutes of the board of directors' meetings for approval of the interest rate swap contract would not provide evidence that the contract is stated at fair value on the balance sheet. This would provide evidence related to the control that the swap was appropriately approved." | |
| "The negative request form of accounts receivable confirmation is useful particularly when the: | |
| Assessed level | |
| of control | |
| risk relating to | |
| receivables is | |
| Number of | |
| small | |
| balances is | |
| Consideration | |
| by the | |
| recipient is | |
| A. | |
| High | |
| Many | |
| Likely | |
| B. | |
| High | |
| Few | |
| Likely | |
| C. | |
| Low | |
| Few | |
| Unlikely | |
| D. | |
| Low | |
| Many | |
| Likely","Choice ""D"" is correct. The negative request form of accounts receivable confirmation is useful particularly when: | |
| The assessed level of control risk relating to receivables is low (if control risk is high, then positive confirmation requests would probably be sent), | |
| There are many small balances (which would make it difficult to keep the number of positive confirmations to a reasonably low level), and | |
| Consideration of the confirmation by the recipient is likely (since the auditor is relying on the customers' consideration as the sole basis of support for the confirmation). | |
| Choices ""C"", ""B"", and ""A"" are incorrect, based on the above explanation." | |
| "An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by: | |
| A. | |
| A substantial fluctuation in the price of the investee's common stock on a national stock exchange. | |
| B. | |
| An error in recording the unrealized gain from an increase in the fair value of available-for sale securities in the income account for trading securities. | |
| C. | |
| The investee's decision to reduce cash dividends declared per share of its common stock. | |
| D. | |
| An error in recording amortization of the excess of the investor's cost over the investment's underlying book value.","Choice ""D"" is correct. Under equity method accounting, the amortization of the excess of the investor's cost over the investment's underlying book value reduces the investor's income from the equity method investment. If amortization is calculated incorrectly (i.e., the amortization is too high), this could lower the return on the investment. | |
| Choice ""A"" is incorrect. Equity method investments are not reported at fair value. Therefore, a substantial fluctuation in the price of the investee's common stock would have no impact on the investor's return on the equity method investment. | |
| NOTE to students: The answer to this question (and your ability to perform a successful audit) depends on your knowledge of financial accounting concepts. If you are unfamiliar with equity method accounting, please consult the Financial 3 lecture in the Becker Financial materials. | |
| Choice ""B"" is incorrect. Equity method investments are accounted for separate from investments classified as trading or available-for-sale. Therefore, an error in the accounting for trading and available-for-sale securities should have no impact on the calculated return on an equity method investment. | |
| Choice ""C"" is incorrect. Under equity method accounting, dividends are recorded as a reduction of the investor's investment in the balance sheet, not as income on the income statement. Therefore, the lower dividend should not reduce the calculated return on the equity method investment." | |
| "Each of the following items should be included in a presentation of pro forma financial statements, except: | |
| A. | |
| An indication that the pro forma information is not necessarily indicative of results. | |
| B. | |
| The significant assumptions used in developing the pro forma information. | |
| C. | |
| All direct and indirect effects attributed to the related transaction. | |
| D. | |
| The source of the historical information on which the pro forma information is based.","Choice ""C"" is correct. A presentation of pro forma financial statements should include all significant direct effects related to the transaction. The presentation does not need to include indirect effects related to the transaction. | |
| Choice ""A"" is incorrect. A presentation of pro forma financial statements should include an indication that the pro forma information is not necessarily indicative of results. | |
| Choice ""B"" is incorrect. A presentation of pro forma financial statements should include the significant assumptions used in developing the pro forma information. | |
| Choice ""D"" is incorrect. A presentation of pro forma financial statements should include the source of the historical information on which the pro forma information is based." | |
| "On receiving a client's bank cutoff statement, an auditor most likely would trace: | |
| A. | |
| Deposits recorded in the cash receipts journal after year-end to the cutoff statement. | |
| B. | |
| Prior-year checks listed in the cutoff statement to the year-end outstanding checklist. | |
| C. | |
| Checks dated after year-end listed in the cutoff statement to the year-end outstanding checklist. | |
| D. | |
| Deposits in transit listed in the cutoff statement to the year-end bank reconciliation.","Choice ""B"" is correct. The auditor should obtain bank cutoff statements that include transactions for 10 to 15 days after year-end. The outstanding checks and deposits in transit at year-end on the bank reconciliation should agree with the information in the bank cutoff statement. | |
| Choice ""A"" is incorrect. Deposits recorded in the cash receipts journal after year-end do not affect the cash balance at year-end, and therefore the auditor would not perform audit procedures with respect to those deposits. | |
| Choice ""C"" is incorrect. Checks dated after year-end would not be included in the year-end outstanding checklist. | |
| Choice ""D"" is incorrect. Companies may have a tendency to overstate their cash balance. A company that is trying to improve its balance sheet will have a tendency to accelerate recording of deposits, so a deposit that wasn't really made until January might be erroneously listed as a deposit in transit at year-end. Tracing deposits from the cutoff statement to the year-end bank reconciliation won't identify this error, since there is no mention in this option of identifying the actual dates the deposits were made." | |
| "An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about: | |
| A. | |
| Occurrence. | |
| B. | |
| Understandability of presentation and classification. | |
| C. | |
| Valuation and accuracy. | |
| D. | |
| Completeness.","Choice ""B"" is correct. An auditor's purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning management's assertions about understandability of presentation and classification (i.e., classification of the note as current or noncurrent). | |
| Choice ""A"" is incorrect. Occurrence relates to whether recorded transactions have actually occurred during the given period. Since the renewal took place subsequent to year-end, the auditor would not be concerned about how the transaction was actually recorded until the next reporting period. | |
| Choice ""C"" is incorrect. Valuation and accuracy pertains to the fair disclosure of financial and other information at appropriate amounts. The renewal of a note payable shortly after year-end generally would not affect its valuation or its accuracy. | |
| Choice ""D"" is incorrect. Completeness relates to whether all transactions occurring in the period have been recorded. Since the renewal took place subsequent to year-end, it is not relevant to the completeness assertion for the year under audit." | |
| "When auditing a client’s property, plant, and equipment transactions, which of the following test of details can be used to support the existence and occurrence assertion? | |
| A. | |
| Examine a sample of material charges to repairs and maintenance expense to determine if any items should have been capitalized. | |
| B. | |
| Vouch a sample of purchases to the vendor invoice and receiving report. | |
| C. | |
| Recalculate any revaluation losses or surplus transactions made to property, plant, and equipment during the year. | |
| D. | |
| Review fixed asset purchases and dispositions right before and after year-end to determine if recorded in the correct period.","Choice ""B"" is correct. By vouching a sample of purchases to the vendor invoice and receiving report, the auditor is testing the existence and occurrence assertion. | |
| Choice ""A"" is incorrect. This procedure is used to test the understandability of presentation and classification assertion as well as the completion assertion. | |
| Choice ""C"" is incorrect. This procedure is used by the auditor to test the valuation, allocation, and accuracy assertion. | |
| Choice ""D"" is incorrect. This procedure is used to test the cutoff assertion for property, plant, and equipment transactions." | |
| "Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity. | |
| A. | |
| The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. | |
| B. | |
| Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again. | |
| C. | |
| Any matters communicated to those charged with governance also are required to be communicated to the entity's management. | |
| D. | |
| Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved.","Choice ""A"" is correct. If those charged with governance are not involved with managing the entity, the auditor should communicate material, corrected misstatements brought to management's attention as a result of the audit. | |
| Choice ""B"" is incorrect. Previously communicated significant deficiencies that have not been corrected should be communicated again, in writing, during the current audit. | |
| Choice ""C"" is incorrect. Certain matters communicated to those charged with governance, such as those related to the competence and integrity of management, might not be appropriate for discussion with management. | |
| Choice ""D"" is incorrect. The auditor should communicate disagreements with management, whether or not resolved." | |
| "A control deficiency would be considered a material weakness when the likelihood that potential financial statement misstatements will not be prevented, or detected/corrected, and the magnitude of such misstatements are at a minimum: | |
| Likelihood | |
| Magnitude | |
| A. | |
| Probable | |
| More than inconsequential | |
| B. | |
| Reasonable | |
| Material | |
| C. | |
| Probable | |
| Material | |
| D. | |
| Reasonable | |
| More than inconsequential","Choice ""B"" is correct. A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected/corrected. | |
| Choices ""C"", ""D"", and ""A"" are incorrect, based on the explanation above." | |
| "An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the: | |
| A. | |
| Monthly bank reconciliation. | |
| B. | |
| Prelist of individual checks. | |
| C. | |
| Daily deposit slip. | |
| D. | |
| Remittance advices.","Choice ""C"" is correct. An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the daily deposit slip. (That is his or her job). | |
| Choice ""A"" is incorrect. The monthly bank reconciliation is prepared by an internal auditor or someone else that is independent of the cash receipts and cash disbursements functions. | |
| Choice ""B"" is incorrect. The prelist of individual checks is prepared by a clerk in the mailroom upon opening the mail. | |
| Choice ""D"" is incorrect. The remittance advice is prepared by the customer and is mailed along with the check (remittance)." | |
| "Which of the following represents an insufficient control over cash receipts for a large company? | |
| A. | |
| The accounts receivable department matches the details from the bank deposit ticket with the details from the remittance advices. | |
| B. | |
| A triplicate detail listing of cash receipts is sent to the cashier (along with the cash receipts), accounting department, and accounts receivable department. | |
| C. | |
| A lockbox is used for customer payments. | |
| D. | |
| Checks received are endorsed by the cashier and deposited by the mail custodian on a daily basis.","Choice ""D"" is correct. The cashier is responsible for preparation and making of the bank deposit on a daily basis. Because cash collections must be restrictively endorsed and deposited by the cashier, allowing the mail custodian to make the deposits, which have already been endorsed, is an internal control weakness over cash receipts. | |
| Choice ""A"" is incorrect. This is a good control over cash receipts because it helps find discrepancies. | |
| Choice ""B"" is incorrect. Having the cash receipts sent to the cashier along with copies of the cash receipts detail to the cashier, accounting department (for input into general ledger), and accounts receivable department (for input into accounts receivable subsidiary ledgers) is an adequate control over cash receipts. | |
| Choice ""C"" is incorrect. Using a lockbox is a good control over cash receipts." | |
| "While auditing a client’s purchase transactions, an auditor selects a sample of vouchers and then compares the dates on the vouchers to the dates the corresponding transactions were actually recorded in the client’s purchase journal. The audit procedure is most likely designed to test the: | |
| A. | |
| Existence and occurrence assertion. | |
| B. | |
| Cut-off assertion. | |
| C. | |
| Completeness assertion. | |
| D. | |
| Valuation, allocation, and accuracy assertion.","Choice ""B"" is correct. The scenario above indicates that the auditor is most likely testing the cut-off assertion. This is evidenced by the auditor’s comparison (focus) of dates on the sample of vouchers to the dates of the transactions recorded in the purchase journal. | |
| Choice ""A"" is incorrect. To test the existence and occurrence assertion, the auditor would review a sample of vouchers for authorization and to determine if the transactions exist on the receiving report. | |
| Choice ""C"" is incorrect. Although testing the completeness assertion could also involve tracing a sample of transactions to the purchase journal, the auditor’s focus on comparing the dates for transactions on the vouchers and purchase journal indicate the auditor is most likely testing the cut-off assertion. | |
| Choice ""D"" is incorrect. In order to test the valuation, allocation, and accuracy assertion, the auditor would perform a re-computation on a sample of vendor invoices to determine mathematical accuracy." | |
| "Which of the following would an auditor least likely consider with respect to fair values? | |
| A. | |
| Whether the valuation methods used are appropriate in relation to the industry in which the entity operates. | |
| B. | |
| The role of information technology in determining fair value measurements and disclosures. | |
| C. | |
| The effect on fair value measurement and disclosures of information available subsequent to the audit. | |
| D. | |
| Segregation of duties between those committing the entity to certain transactions and those responsible for undertaking the valuations related to those transactions.","Choice ""C"" is correct. The auditor would consider subsequent events and transactions occurring before the completion of the audit, not after. The auditor is not responsible for predicting the future, and would not be expected to evaluate the effect of conditions arising subsequent to the audit, that, if known at the time of the audit, might have affected fair value measurements and disclosures. | |
| Choice ""A"" is incorrect. The auditor should evaluate whether the valuation model is appropriate given the entity's circumstances. As part of this evaluation, the auditor should consider whether the valuation method is appropriate in relation to the business, industry, and environment in which the entity operates. | |
| Choice ""B"" is incorrect. The auditor is responsible for understanding the entity's process for determining fair value measurements and disclosures. Considering the role of information technology in determining fair value measurements and disclosures is part of understanding this process. | |
| Choice ""D"" is incorrect. The auditor is responsible for understanding relevant controls. Segregation of duties between those committing the entity to certain transactions and those responsible for undertaking the valuations related to those transactions is a relevant control." | |
| "In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning: | |
| A. | |
| Overpayment of employees for hours not worked. | |
| B. | |
| Control and distribution of unclaimed checks. | |
| C. | |
| Withholding of taxes and Social Security contributions. | |
| D. | |
| Missing employee identification numbers.","Choice ""B"" is correct. In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning control and distribution of unclaimed checks, since these sorts of controls are typically not automated. Controls surrounding unclaimed checks typically rely on proper segregation of duties, which is best evaluated through the auditor's direct observation. | |
| Choice ""A"" is incorrect. In auditing an entity's computerized payroll transactions, an auditor might use test data to test controls concerning overpayment of employees for hours not worked. For example, the auditor might input fictitious additional hours to determine whether any controls identify the problem. | |
| Choice ""C"" is incorrect. In auditing an entity's computerized payroll transactions, an auditor might use test data to test controls concerning withholding of taxes and Social Security contributions. For example, the auditor might input fictitious amounts, or attempt to change the current amounts, to determine whether any controls identify the problem. | |
| Choice ""D"" is incorrect. In auditing an entity's computerized payroll transactions, an auditor might use test data to test controls concerning missing employee identification numbers. For example, the auditor might try to input employee payroll data without an appropriate identification number, to determine whether any controls identify the problem." | |
| "Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead? | |
| A. | |
| Use of time tickets to record actual labor worked on production orders. | |
| B. | |
| Reconciliation of work-in-process inventory with periodic cost budgets. | |
| C. | |
| Comparison of daily journal entries with approved production orders. | |
| D. | |
| Periodic independent counts of work-in-process for comparison to recorded amounts.","Choice ""A"" is correct. The use of time tickets to record actual labor worked on production orders is the best way to prevent direct labor from being charged to manufacturing overhead. | |
| Choice ""B"" is incorrect. The work-in-process inventory contains not only labor, but also materials and overhead. | |
| Choice ""C"" is incorrect. Daily journal entries are made to record the use of labor and materials. Reconciliation of the amount of daily labor to approved production orders would not prevent direct labor from being charged to manufacturing overhead. | |
| Choice ""D"" is incorrect. The work-in-process inventory contains not only labor, but also materials and overhead." | |
| "In an integrated audit of a nonissuer, which of the following is not required of management: | |
| A. | |
| Acceptance of responsibility for the effectiveness of internal control. | |
| B. | |
| Evaluation of the effectiveness of the entity’s internal control. | |
| C. | |
| Identifying and documenting control objectives and the controls that meet those objectives. | |
| D. | |
| Providing a written assessment about the effectiveness of the entity’s control that is dated as of the date of issuance of the assessment.","Choice “D” is correct. In an integrated audit of a nonissuer, management should provide a written assessment about the effectiveness of the entity’s control in a report that accompanies the auditor’s report. The as-of date in management’s assessment should coincide with the date of the financial statements. | |
| Choice “A” is incorrect. Management must accept responsibility for the effectiveness of internal control. | |
| Choice “B” is incorrect. Management is required to perform an evaluation of the effectiveness of the entity’s internal control. | |
| Choice “C” is incorrect. Management is required to identify and document control objectives and the controls that meet those objectives." | |
| "A report on a nonissuer's internal control based on an audit of internal control should include a statement indicating that: | |
| I. | |
| Because there are inherent limitations in internal control, misstatements may occur and not be detected. | |
| II. | |
| Projections of the evaluation of internal control to future periods are subject to the risk that the internal control may become inadequate. | |
| III. | |
| The report is intended solely for the information and use of the audit committee, management, and other specified parties. | |
| A. | |
| II and III, only. | |
| B. | |
| I and II only. | |
| C. | |
| I, II, and III. | |
| D. | |
| I and III only.","Choice ""B"" is correct. Each of the first two statements would be included in the inherent limitations paragraph of the report. The third statement, indicating restricted use, would not be included as there is no restriction on the use of this report. (A report on internal control matters noted during an audit would, however, include a restricted use paragraph.) | |
| Choices ""D"", ""C"", and ""A"" are incorrect, based on the above explanation." | |
| "A subsequent event occurred after the date of the auditor’s report on an integrated audit. What is the auditor’s responsibility regarding this subsequent event? | |
| A. | |
| Revoke the audit report and issue an adverse opinion. | |
| B. | |
| Inquire of management and keep the documentation for the following year’s audit. | |
| C. | |
| There is no responsibility to stay informed of events that occur after the date of the auditor’s report. | |
| D. | |
| Obtain information about the conditions that arose after the date of the auditor’s report to include in a letter written to management and to those charged with governance.","Choice “C” is correct. The auditor has no responsibility to stay informed with respect to events that occur after the date of the auditor’s report when performing an integrated audit. But if the auditor becomes aware of conditions that existed at the report date, appropriate action should be taken. | |
| Choices “D”, “A”, and “B” are incorrect, based on the above explanation." | |
| "Which of the following standards should a CPA firm apply in a review of Management Discussion and Analysis? | |
| A. | |
| Statements on Standards for Consulting Services. | |
| B. | |
| Statements on Auditing Standards. | |
| C. | |
| Statements on Standards for Accounting and Review Services. | |
| D. | |
| Statements on Standards for Attestation Engagements.","Choice ""D"" is correct. A CPA should refer to Statements on Standards for Attestation Engagements (SSAE) for a review of Management and Discussion Analysis. | |
| Choice ""A"" is incorrect. A CPA should refer to Statements on Standards for Consulting Services when performing consulting services. | |
| Choice ""B"" is incorrect. A CPA should refer to Statements on Auditing Standards when performing an audit for a nonissuer. | |
| Choice ""C"" is incorrect. A CPA should refer to Statements on Standards for Accounting and Review Services when performing a preparation, compilation, or review of historical financial statements for nonissuers. SSARS also applies to preparation and compilations of pro forma and prospective financial information." | |
| "Robbins Company uses an outside service organization called Payroll Plus to process its payroll. Matthews, CPA is the auditor of Payroll Plus, and Stevens, CPA is Robbins' auditor. Stevens' assessment of the risk of material misstatement may be based on the effective operation of controls surrounding payroll if: | |
| A. | |
| Matthews provides a report on controls placed in operation and tests of operating effectiveness. | |
| B. | |
| Matthews’ audit report indicates that none of the significant deficiencies in internal control identified at Payroll Plus constitute material weaknesses in internal control. | |
| C. | |
| Matthews provides a report on controls placed in operation. | |
| D. | |
| Matthews issues a standard, unmodified opinion on the financial statements of the service organization.","Choice ""A"" is correct. Stevens may assume controls are operating effectively if Matthews provides a report on controls placed in operation and tests of operating effectiveness, and if this report supports a reduction in the assessed level of control risk. A SOC 1® Type 2 report provides the user auditor with assurance about the design, implementation, and operating effectiveness of the service organization's internal controls. | |
| Choice ""B"" is incorrect. The fact that none of the significant deficiencies in internal control are serious enough to be material weaknesses is not sufficient to support a reduction in the assessed level of control risk. | |
| Choice ""C"" is incorrect. A report on controls placed in operation does not provide evidence about operating effectiveness and therefore cannot be used to support a reduction in the assessed level of control risk. A SOC 1® Type 1 report does not include the testing of the operating effectiveness of controls at a service organization and therefore cannot be used as a basis for assessing control risk below maximum. | |
| Choice ""D"" is incorrect. An audit report on the financial statements of Payroll Plus does not indicate whether controls are operating effectively. It only indicates that the financial statements are fairly stated, and this could be the case regardless of how controls are functioning." | |
| "Management's written representation to the auditor in connection with a governmental audit would most likely include: | |
| A. | |
| Negative assurance that the government has complied with compliance requirements. | |
| B. | |
| Representation that all known noncompliance had been reported or negative assurance that other noncompliance likely does not exist. | |
| C. | |
| A statement that management has disclosed any communications from grantors concerning possible noncompliance. | |
| D. | |
| A statement that management had identified and disclosed all material government programs to the auditor.","Choice ""C"" is correct. The management letter will include a statement that management has disclosed any communications from grantors concerning possible noncompliance. | |
| Choice ""A"" is incorrect. The representation letter should include a statement that management believes that the entity has complied with compliance requirements. Management representations do not provide negative assurance. | |
| Choice ""B"" is incorrect. Management will assert that they have disclosed all known noncompliance or positively state that there was no such noncompliance. Management representations do not provide negative assurance. | |
| Choice ""D"" is incorrect. The representation letter should include a statement that management has disclosed all governmental programs to the auditor. Management's representation is not limited to only material government programs." | |
| "When an auditor reports on a nonissuer's compliance with aspects of contractual agreements in a report separate from the audit report on the financial statements, the report should include a statement that: | |
| A. | |
| Instances of noncompliance have been disclosed to those charged with governance. | |
| B. | |
| The audit was directed primarily toward obtaining knowledge regarding compliance. | |
| C. | |
| The report is being provided in connection with the audit of the financial statements. | |
| D. | |
| Includes interpretations made by the auditors relating to the contractual agreements.","Choice ""C"" is correct. If an auditor issues a report on a client's compliance with contractual agreements in a separate report on the financial statements, the report should only provide negative assurance and must indicate that the auditor has expressed an unmodified or qualified opinion in the financial statements. | |
| Choice ""A"" is incorrect. If an auditor identifies instances of noncompliance, the report on compliance would describe the noncompliance. It would not need to indicate that those instances of noncompliance have been disclosed to those charged with governance. | |
| Choice ""B"" is incorrect. If an auditor issues a report on a client's compliance with contractual agreements, the report should only provide negative assurance. Negative assurance means that nothing came to the auditor's attention that caused the auditor to believe that the entity failed to comply. | |
| Choice ""D"" is incorrect. The report would not include a statement that includes interpretations made by the auditors relating to the contractual agreements. The report would provide negative assurance and indicate the report issued on the financial statements." | |
| "An accountant's compilation report on a financial projection that does not contain a range should include a statement that: | |
| A. | |
| The accountant's responsibility to update the report for future events and circumstances is limited to one year. | |
| B. | |
| The projection is limited to presenting, in the form of financial statements, information that is the accountant's representation. | |
| C. | |
| The compilation includes an evaluation of the support for the assumptions underlying the projection. | |
| D. | |
| There will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected.","Choice ""D"" is correct. An accountant's compilation report on a financial projection should include a statement that there will usually be differences between the projected and actual results because events and circumstances frequently do not occur as expected. | |
| Choice ""A"" is incorrect. An accountant's compilation report on a financial projection should include a statement that the accountant has no responsibility to update the report for future events and circumstances occurring after the date of the report. | |
| Choice ""B"" is incorrect. Management, not the accountant, is responsible for the projected financial statements. | |
| Choice ""C"" is incorrect. An accountant's examination report, not compilation report, on a financial projection should include a statement that the examination includes an evaluation of the support for the assumptions underlying the projection." | |
| "With respect to the expression of an opinion regarding whether a client maintained effective internal control over financial reporting: | |
| A. | |
| The auditor of a nonissuer must express an opinion whenever significant deficiencies or material weaknesses are noted. | |
| B. | |
| The auditor of a nonissuer may express an opinion as a result of a financial statement audit. | |
| C. | |
| The auditor of a nonissuer may express an opinion as a result of an audit engagement. | |
| D. | |
| The auditor of a nonissuer must express an opinion in every financial statement audit.","Choice ""C"" is correct. The auditor of a nonissuer may be engaged to express an opinion on the design and/or operating effectiveness of the entity's internal control. This is considered an audit engagement. Note that an audit of internal control should be integrated with an audit of the financial statements. | |
| Choice ""A"" is incorrect. While an auditor of a nonissuer is required to communicate significant deficiencies or material weaknesses to management and those charged with governance, this type of report does not provide an opinion on the operating effectiveness of the entity's internal control. | |
| Choice ""B"" is incorrect. The auditor of a nonissuer may not express an opinion as a result of a financial statement audit, but may report on significant deficiencies or material weaknesses noted during the audit. The report on control deficiencies noted should specifically state that the auditor is not expressing an opinion on the effectiveness of internal control. | |
| Choice ""D"" is incorrect. A financial statement audit includes consideration of internal control as a basis for designing audit procedures, not as a basis for expressing an opinion. An auditor of a nonissuer may report on significant deficiencies or material weaknesses noted during the audit, but is prohibited from expressing an opinion based solely on the audit." | |
| "When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, an auditor would be least likely to consider which of the following factors? | |
| A. | |
| The evaluation of the operating effectiveness of the controls. | |
| B. | |
| The type of available evidential matter pertaining to the effectiveness of the entity’s internal control. | |
| C. | |
| Preliminary judgments about the effectiveness of internal control. | |
| D. | |
| The extent of recent changes in the entity and its operations.","Choice “A” is correct. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would be least likely to consider the evaluation of the operating effectiveness of the controls. The evaluation of the operating effectiveness of controls occurs after the planning stage. | |
| Choice “B” is incorrect. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider the type of available evidential matter pertaining to the effectiveness of the entity’s internal control. | |
| Choice “C” is incorrect. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider preliminary judgments about the effectiveness of internal control. | |
| Choice “D” is incorrect. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider the extent of recent changes in the entity and its operations." | |
| "When an auditor reports on a nonissuer's compliance with aspects of contractual agreements in a report separate from the audit report on the financial statements, the report should include a statement that: | |
| A. | |
| Instances of noncompliance have been disclosed to those charged with governance. | |
| B. | |
| Includes interpretations made by the auditors relating to the contractual agreements. | |
| C. | |
| The report is being provided in connection with the audit of the financial statements. | |
| D. | |
| The audit was directed primarily toward obtaining knowledge regarding compliance.","Choice ""C"" is correct. If an auditor issues a report on a client's compliance with contractual agreements in a separate report on the financial statements, the report should only provide negative assurance and must indicate that the auditor has expressed an unmodified or qualified opinion in the financial statements. | |
| Choice ""A"" is incorrect. If an auditor identifies instances of noncompliance, the report on compliance would describe the noncompliance. It would not need to indicate that those instances of noncompliance have been disclosed to those charged with governance. | |
| Choice ""B"" is incorrect. The report would not include a statement that includes interpretations made by the auditors relating to the contractual agreements. The report would provide negative assurance and indicate the report issued on the financial statements. | |
| Choice ""D"" is incorrect. If an auditor issues a report on a client's compliance with contractual agreements, the report should only provide negative assurance. Negative assurance means that nothing came to the auditor's attention that caused the auditor to believe that the entity failed to comply." | |
| "An auditor conducting a compliance audit will design and perform additional audit procedures in response to the assessed risk of material noncompliance. These procedures will include tests of controls if: | |
| A. | |
| Tests of controls are required by the governmental audit requirement. | |
| B. | |
| The auditor has been engaged to perform an organization-wide audit. | |
| C. | |
| The auditor has determined a deficiency in the design of internal control over compliance. | |
| D. | |
| The auditor's expectation of the operating effectiveness of controls over compliance is otherwise unknown.","Choice ""A"" is correct. Tests of the operating effectiveness of controls may be required if any one of the following exist: | |
| The risk assessment includes an explanation of the operating effectiveness of controls over compliance, | |
| Substantive procedures do not provide enough evidence to support a conclusion, or | |
| Tests of controls are required by the applicable governmental audit requirements. | |
| Choice ""B"" is incorrect. The engagement to perform an entity-wide audit does not have direct bearing on whether tests of controls are performed. | |
| Choice ""C"" is incorrect. The design of internal controls over compliance are not as significant as their operation for determination of the need for tests of controls. | |
| Choice ""D"" is incorrect. Tests of controls are appropriate when the auditor has developed an expectation regarding the operation of controls; not when the operating effectiveness is unknown." | |
| "When performing an audit of a government entity under generally accepted government auditing standards, an auditor: | |
| A. | |
| May use the information obtained in any way the auditor deems appropriate. | |
| B. | |
| Makes decisions to ensure that statements are not materially misstated. | |
| C. | |
| May use a specialist with required professional skills, if needed, at the auditor's discretion. | |
| D. | |
| Is primarily responsible to the director of the Government Accountability Office.","Choice ""C"" is correct. An auditor of a government entity may use a specialist on the engagement. The use of specialists is permitted under GAAS. GAAS and GAGAS are the sources of standards for governmental audits. | |
| Choice ""A"" is incorrect. Audits of government entities are performed under GAAS and GAGAS. Under these standards, the auditor may not use information obtained in any way. The auditor's responsibility is to assess information obtained. | |
| Choice ""B"" is incorrect. Audits of government entities are performed under GAAS and GAGAS. Under these standards, the financial statements are the responsibility of management. Therefore, the auditor may not make decisions to ensure that the statements are not materially misstated. | |
| Choice ""D"" is incorrect. Audits of government entities are performed under GAAS and GAGAS. Therefore, the auditor of a government entity is primarily responsible to those charged with governance. The Government Accountability Office (GAO) plays a significant role in establishing government auditing standards." | |
| "When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, an auditor would be least likely to consider which of the following factors? | |
| A. | |
| The evaluation of the operating effectiveness of the controls. | |
| B. | |
| Preliminary judgments about the effectiveness of internal control. | |
| C. | |
| The extent of recent changes in the entity and its operations. | |
| D. | |
| The type of available evidential matter pertaining to the effectiveness of the entity’s internal control.","Choice “A” is correct. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would be least likely to consider the evaluation of the operating effectiveness of the controls. The evaluation of the operating effectiveness of controls occurs after the planning stage. | |
| Choice “B” is incorrect. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider preliminary judgments about the effectiveness of internal control. | |
| Choice “C” is incorrect. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider the extent of recent changes in the entity and its operations. | |
| Choice “D” is incorrect. When planning an audit of the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider the type of available evidential matter pertaining to the effectiveness of the entity’s internal control." | |
| "When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's: | |
| A. | |
| Opinion on the entity's attainment of the goals and objectives specified by applicable laws and regulations. | |
| B. | |
| Field work and procedures that substantiated the auditor's specific findings and conclusions. | |
| C. | |
| Understanding of internal control and assessment of control risk. | |
| D. | |
| Identification of the causes of performance problems and recommendations for actions to improve operations.","Choice ""C"" is correct. Government Auditing Standards require that the auditor issue a written report on internal control in all audits. As part of this reporting requirement, the auditor must describe the scope of the auditor's work in obtaining an understanding of internal control and his or her assessment of control risk. | |
| Choice ""A"" is incorrect. The objective of the audit of the financial statements is to provide an opinion on the financial statements, not on the entity's attainment of goals and objectives. | |
| Choice ""B"" is incorrect. A report on fieldwork and procedures that substantiated the auditor's specific findings and conclusions would not be prepared as part of a GAGAS audit. | |
| Choice ""D"" is incorrect. In the report, the auditor would identify deficiencies, significant deficiencies, and material weaknesses in internal control over compliance (not performance problems) found in the examination of the entity's internal control." | |
| "Which of the following engagements require the practitioner to be independent in order to issue a report, even though the report contains no assurance? | |
| A. | |
| Compilation | |
| B. | |
| Preparation | |
| C. | |
| Review | |
| D. | |
| Agreed-upon procedure","Choice “D” is correct. Agreed-upon procedure engagements require the practitioner to be independent in order to issue a report, even though the report contains no assurance. | |
| Choice “A” is incorrect. An accountant does not need to be independent to issue a compilation report. An accountant who lacks independence may issue a compilation report as long as the accountant discloses a lack of independence in the report. | |
| Choice “B” is incorrect. A preparation engagement does not require the practitioner to be independent nor does the practitioner have to assess independence. | |
| Choice “C” is incorrect. A review requires the practitioner to be independent; however, the report contains limited assurance." | |
| "When a CPA examines a client's projected financial statements, the CPA's report should: | |
| A. | |
| State that the CPA performed procedures to evaluate management's assumptions. | |
| B. | |
| Include the CPA's opinion on the client's ability to continue as a going concern. | |
| C. | |
| Explain the principal differences between historical and projected financial statements. | |
| D. | |
| Refer to the CPA's auditor's report on the historical financial statements.","Choice ""A"" is correct. When a CPA examines projected financial statements, the standard report should include a statement that the examination ""…included such procedures as we considered necessary to evaluate both the assumptions used by management and the preparation and presentation of the projection."" | |
| Choice ""B"" is incorrect. The accountant's report would not express an opinion on the client's ability to continue as a going concern. | |
| Choice ""C"" is incorrect. The accountant's report on the examination of projected financial statements would not explain the principal differences between historical and projected financial statements. | |
| Choice ""D"" is incorrect. The accountant's report on the examination of projected financial statements would not make any reference to the CPA's auditor's report on the historical financial statements." | |
| "Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to provide a SOC 1® Type 1 report. CSC's internal controls are relevant to the schools' internal control, so Drake's report will be useful in providing the schools' independent auditors with information necessary to plan their audits. Drake's report should contain: | |
| A. | |
| Drake's description of the service organization's system, with an acknowledgement by management of the accuracy of Drake's description. | |
| B. | |
| Management's description of the service organization's system. | |
| C. | |
| Drake's opinion on the operating effectiveness of the service center's internal controls. | |
| D. | |
| A paragraph indicating the basis for the user auditor to reduce the assessment of control risk below maximum for areas of the entity's accounting that are affected by the service organization.","Choice ""B"" is correct. A SOC 1® Type 1 report should include management's description of the service organization's system. | |
| Choice ""A"" is incorrect. Drake does not provide a description of the service organization's system; this is provided by management. | |
| Choice ""C"" is incorrect. The service auditor's Type 1 report is not intended to provide evidence of operating effectiveness. That requires a SOC 1® Type 2 report. | |
| Choice ""D"" is incorrect. No paragraph indicating the basis for the assessment of control risk is included in Drake's report." | |
| "Which of the following is not a difference between a financial statement audit and an audit of internal control for nonissuers? | |
| A. | |
| In a financial statement audit, communication of significant deficiencies should include restricted use language. In an audit of internal control, no restriction on the use of the report is required. | |
| B. | |
| An auditor’s consideration of internal control in a financial statement audit is more limited than that of an auditor engaged to examine the effectiveness of internal control. | |
| C. | |
| An opinion on financial statements is over a period of time, and an opinion of internal control is at a point in time. | |
| D. | |
| In a financial statement audit, communication of significant deficiencies must be made by the report release date, whereas in an audit of internal control, the communication must be made within 60 days of the report release date.","Choice “D” is correct. In a financial statement audit, communication of significant deficiencies must be made within 60 days of the report release date, whereas in an audit of internal control, the communication must be made by the report release date. | |
| Choice “A” is incorrect. This is a difference between a financial statement audit and an audit of internal control. In a financial statement audit, communication of significant deficiencies should include restricted use language, whereas in an audit of internal control, no restriction on the use of the report is required. | |
| Choice “B” is incorrect. This is a difference between a financial statement audit and an audit of internal control. An auditor’s consideration of internal control in a financial statement audit is more limited than that of an auditor engaged to examine the effectiveness of internal control. | |
| Choice “C” is incorrect. This is a difference between a financial statement audit and an audit of internal control. An opinion on financial statements is over a period of time, and an opinion of internal control is at a point in time" | |
| "In an integrated audit of a nonissuer, which of the following is the responsibility of an auditor with regard to testing controls at a company with multiple business units? | |
| A. | |
| Testing controls over only certain specific risks at all business units of the company. | |
| B. | |
| Testing controls over all risks at all business units of the company. | |
| C. | |
| Testing controls over all risks at business units that are material to the company's consolidated financial statements. | |
| D. | |
| Testing controls over specific risks at business units that are material to the company's consolidated financial statements.","Choice ""D"" is correct. An auditor that is testing controls at a company with multiple business units should test controls over specific risks at business units that are material to the company's consolidated financial statements. | |
| Choice ""A"" is incorrect. An auditor that is testing controls at a company with multiple business units does not need to test controls at all business units. The auditor should test controls over specific risks at business units that are material to the company's consolidated financial statements. | |
| (Note: Be careful when selecting answers that contain absolute terms such as all, always, only, etc.) | |
| Choice ""B"" is incorrect. An auditor that is testing controls at a company with multiple business units does not need to test all risks at all business units. | |
| Choice ""C"" is incorrect. The auditor should test certain specific risks, not all risks, at business units that are considered material to the company's consolidated financial statements." | |
| "Management’s report on internal control included a statement that the cost of correcting a weakness noted by the auditors would exceed the benefits derived from implementing the correction. What is the appropriate response by the auditor? | |
| A. | |
| The auditor should disclaim an opinion on the cost-benefit statement. | |
| B. | |
| No response is required. | |
| C. | |
| The auditor should verify the accuracy of the cost-benefit statement. | |
| D. | |
| The auditor should express an opinion on the cost-benefit statement.","Choice “A” is correct. If management’s report contains a cost-benefit statement, the auditor should read the additional information to ensure there are no material inconsistencies with management's report and disclaim an opinion on the statement. | |
| Choice “B” is incorrect. A response is required by the auditor. If management’s report contains a cost-benefit statement, the auditor should disclaim an opinion on the statement. | |
| Choice “C” is incorrect. The auditor is not required to verify the accuracy of the cost-benefit statement; the auditor should disclaim an opinion on the statement. | |
| Choice “D” is incorrect. The auditor should not express an opinion on the cost-benefit statement; the auditor should disclaim an opinion on the statement." | |
| "Which of the following is not a role of the risk assessment in an integrated audit of a nonissuer? | |
| A. | |
| Selecting controls to test. | |
| B. | |
| Concluding on the effectiveness of a given control. | |
| C. | |
| Determining significant accounts and relevant assertions. | |
| D. | |
| Determining evidence necessary to conclude on the effectiveness of a given control.","Choice “B” is correct. The auditor’s conclusion on the operating effectiveness of a given control is not a role of the risk assessment process. The auditor’s conclusion on the operating effectiveness of internal control occurs after the risk assessment process. | |
| Choice “A” is incorrect. Selecting controls to test is part of the risk assessment process in an integrated audit of a nonissuer. | |
| Choice “C” is incorrect. Determining significant accounts and relevant assertions is part of the risk assessment process in an integrated audit of a nonissuer. | |
| Choice “D” is incorrect. Determining evidence necessary to conclude on the effectiveness of a given control is part of the risk assessment process in an integrated audit of a nonissuer." | |
| "Which of the following cognizant agencies is most likely to be assigned to an auditee? | |
| A. | |
| The federal agency that is located within the auditee's region. | |
| B. | |
| The federal agency that provides the most funding to the auditee. | |
| C. | |
| An independent federal agency that does not provide funding to the auditee. | |
| D. | |
| A preselected federal agency whose sole purpose is to monitor single audits.","Choice ""B"" is correct. A cognizant agency for the audit is typically the federal awarding agency that provides the most amount of direct funding to a nonfederal entity. | |
| Choice ""A"" is incorrect. The assigned cognizant agency may or may not be located within the auditee's region. | |
| Choice ""C"" is incorrect. An independent federal agency that provides no funding is unlikely to be selected to be the cognizant agency for the auditee. The cognizant agency is typically the agency that provides the most funding to the auditee. | |
| Choice ""D"" is incorrect. The assigned cognizant agency is based on the agency that provides the most amount of direct funding. The assigned cognizant agency is not likely one whose sole purpose is to monitor single audits." | |
| "A CPA is engaged to audit the financial statements of a local government that receives federal awards. The CPA will be required to perform a single audit for which of the following reasons? | |
| A. | |
| To determine whether the entity complied with laws, regulations, and the provisions of contracts or grant agreements pertaining to federal awards that have a direct and material effect on each major program | |
| B. | |
| To provide reasonable assurance that the financial statements are free of material misstatements resulting from violations of laws and regulations that have a direct and material effect on the determination of financial statement amounts | |
| C. | |
| To provide reasonable assurance of detecting material misstatements resulting from noncompliance with provisions of contracts or grant agreements that have a direct and material effect on the determination of financial statement amounts | |
| D. | |
| To provide reasonable assurance that the financial statements are free of material misstatements, whether caused by error or fraud","Choice ""A"" is correct. One of the objectives of single audits is to audit the compliance of federal awards expended during the year as a basis for issuing additional reports on compliance related to major programs. | |
| Choice ""B"" is incorrect. Providing reasonable assurance over material misstatements, regardless of the reason for the misstatement, is not part of a single audit. A single audit includes a compliance audit of federal awards, but it is a basis for issuing additional reports related to major programs and on internal control over compliance. | |
| Choice ""C"" is incorrect. Providing reasonable assurance over detecting material misstatements, regardless of noncompliance, is not part of a single audit. A single audit includes a compliance audit of federal awards, but it is a basis for issuing additional reports related to major programs and on internal control over compliance. | |
| Choice ""D"" is incorrect. Providing reasonable assurance over financial statements is the objective of a financial statement audit. A single audit includes an audit of the entity's financial statements but also includes reporting on a separate schedule pertaining to the federal awards." | |
| "Under Government Auditing Standards (GAGAS), when reporting on compliance with laws and regulations in a financial statement audit, the auditor's report should include: | |
| A. | |
| The materiality criteria used by the auditor in considering whether instances of non-compliance were significant. | |
| B. | |
| An opinion on whether the entity's goals and objectives were affected by its compliance with laws and regulations. | |
| C. | |
| Assurance that all controls over fraud and illegal acts were tested. | |
| D. | |
| Relevant information regarding material illegal acts and fraud or irregularities found in the course of the audit.","Choice ""D"" is correct. The auditor's report either asserts that there are no findings or references a separate schedule of findings, which includes disclosure of material instances of fraud and illegal acts. | |
| Choice ""A"" is incorrect. While the auditor's report on noncompliance and on internal control includes a definition of ""material weakness"", there is no discussion of the specific materiality criteria applied to determine the significance of instances of non-compliance. | |
| Choice ""B"" is incorrect. There is no opinion expressed on the achievement of goals and objectives and their relationship to compliance. | |
| Choice ""C"" is incorrect. The report discloses that internal control over financial reporting was considered as part of designing the audit, but it does not state that all controls over fraud and illegal acts were tested." | |
| "Each of the following items should be included in a presentation of pro forma financial statements, except: | |
| A. | |
| The source of the historical information on which the pro forma information is based. | |
| B. | |
| The significant assumptions used in developing the pro forma information. | |
| C. | |
| An indication that the pro forma information is not necessarily indicative of results. | |
| D. | |
| All direct and indirect effects attributed to the related transaction.","Choice ""D"" is correct. A presentation of pro forma financial statements should include all significant direct effects related to the transaction. The presentation does not need to include indirect effects related to the transaction. | |
| Choice ""A"" is incorrect. A presentation of pro forma financial statements should include the source of the historical information on which the pro forma information is based. | |
| Choice ""B"" is incorrect. A presentation of pro forma financial statements should include the significant assumptions used in developing the pro forma information. | |
| Choice ""C"" is incorrect. A presentation of pro forma financial statements should include an indication that the pro forma information is not necessarily indicative of results." | |
| "A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to finalize the engagement? | |
| A. | |
| The prospective financial statements include a summary of significant accounting policies. | |
| B. | |
| The practitioner takes responsibility for the sufficiency of the agreed-upon procedures. | |
| C. | |
| The engaging party acknowledges that the procedures performed were appropriate to meet the intended purpose of the engagement. | |
| D. | |
| The practitioner reviews the findings and reaches an opinion based on the procedures performed.","Choice ""C"" is correct. Prior to the issuance of the practitioner's report, the engaging party (normally the client) must acknowledge and agree that the procedures performed were appropriate to meet the intended purpose of the engagement. | |
| Choice ""A"" is incorrect. The prospective financial statements should include a summary of significant assumptions, not a summary of significant accounting policies. | |
| Choice ""B"" is incorrect. The engaging party (client) (not the practitioner) should take responsibility for the sufficiency of the agreed-upon procedures. | |
| Choice ""D"" is incorrect. The practitioner does not issue an opinion, but rather includes a description of the procedures performed and related findings, including any materiality threshold established. " | |
| "Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to: | |
| A. | |
| Provide negative assurance that the auditor discovered no evidence of intentional override of internal controls. | |
| B. | |
| Describe the scope of the auditor's principal substantive tests. | |
| C. | |
| Provide positive assurance that control activities regarding segregation of duties are consistent with the entity's control objectives. | |
| D. | |
| Present the results of the auditor's tests of controls.","Choice ""D"" is correct. The report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting, and present the results of those tests. | |
| Choice ""A"" is incorrect. The auditor is not required to provide negative assurance regarding the override of internal control, although the audit report will provide negative assurances regarding internal control over financial reporting and its operations that may involve a material weakness. | |
| Choice ""B"" is incorrect. There is no requirement that the auditor describe the scope of substantive tests. However, under Government Auditing Standards, the report on the audit of financial statements should describe the scope of the auditor's testing of compliance with laws and regulations and internal control over financial reporting. | |
| Choice ""C"" is incorrect. The auditor's report on internal controls indicates whether or not material weaknesses were found, but it does not provide assurance that specific internal control activities are consistent with the entity's objectives." | |
| "Obtaining a SOC 1® Type 2 report would assist the user auditor in all of the following ways except: | |
| A. | |
| Allowing the reduction in the assessed control risk below maximum for controls related to areas of accounting impacted by the service organization. | |
| B. | |
| Allowing the user auditor to pass on any substantive testing over balances related to the areas of accounting impacted by the service organization. | |
| C. | |
| Aiding the user auditor in obtaining a better understanding of the controls related to areas of accounting impacted by the service organization. | |
| D. | |
| Providing the user auditor with assurance of the operating effectiveness of controls related to areas of accounting impacted by the service organization.","Choice ""B"" is correct. A SOC 1® Type 2 report does not alone allow an auditor to pass on substantive testing of balances related to the areas of accounting impacted by the service organization. A SOC 1® report is one piece of evidence that must be considered in conjunction with other information (such as materiality, nature of transactions, risk assessment, etc.) when planning audit procedures. | |
| Choice ""A"" is incorrect. Obtaining a SOC 1® Type 2 report may allow an auditor to assess control risk below maximum for areas of accounting impacted by a service organization, as such a report includes the testing of the design, implementation, and operating effectiveness of the service organization's controls. | |
| Choice ""C"" is incorrect. Obtaining a SOC 1® Type 2 report would aid the user auditor in better understanding controls impacted by a service organization because it includes information such as a system description, management assertions, and design, implementation, and operating effectiveness assurance. | |
| Choice ""D"" is incorrect. A SOC 1® Type 2 report includes testing of the design, implementation, and operating effectiveness of controls." | |
| "When auditing an entity's financial statements in accordance with Government Auditing Standards (the Yellow Book), an auditor is required to report on: | |
| I. | |
| Noteworthy accomplishments of the program. | |
| II. | |
| The scope of the auditor's testing of internal controls. | |
| A. | |
| Both I and II. | |
| B. | |
| II only. | |
| C. | |
| I only. | |
| D. | |
| Neither I nor II.","Choice ""B"" is correct. When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor is required to report on the scope of the auditor's testing of internal control, but not on noteworthy accomplishments of the program. | |
| Choices ""C"", ""A"", and ""D"" are incorrect, based on the above explanation." | |
| "Gearty & Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll Township in accordance with 2 CFR 200 single audit. In connection with that engagement, Gearty & Duffy will determine major programs: | |
| A. | |
| By testing enough grants to achieve a single specific coverage percentage. | |
| B. | |
| By applying only a specific dollar threshold, where all programs exceeding the threshold would be considered major. | |
| C. | |
| Using a list of programs included in the work plan of the Office of the Inspector General. | |
| D. | |
| By applying a risk-based approach.","Choice ""D"" is correct. 2 CFR 200 single audit allows auditors to use a risk-based approach to determine major grants. | |
| Choice ""A"" is incorrect. Risk-based auditing allows auditors to test as little as 20 percent of total federal programs or as much as 40 percent of total federal programs, depending on circumstances and on the auditor's judgment. | |
| Choice ""B"" is incorrect. Programs in excess of $750,000 are generally considered to be major grants; however, the dollar threshold is not the exclusive determinant of major programs. | |
| Choice ""C"" is incorrect. The judgment of the Office of the Inspector General would not exclusively influence the selection of major programs." | |
| "Which of the following components is appropriate in a practitioner's report on the results of applying agreed-upon procedures? | |
| A. | |
| A title that includes the phrase ""independent audit."" | |
| B. | |
| A description of the procedures performed, related findings, and a description of any specified materiality threshold established for reporting exceptions. | |
| C. | |
| A statement that management is responsible for expressing an opinion. | |
| D. | |
| A statement that the practitioner acknowledged that the procedures performed are appropriate for their specific purpose. ","Choice ""B"" is correct. It is appropriate to include a description of the procedures performed, related findings, and materiality thresholds in the practitioner's report in an agreed-upon procedures engagement. | |
| Choice ""A"" is incorrect. A report on the results of applying agreed-upon procedures includes the term ""independent"" in the title, but does not include the term ""audit"" in the title. | |
| Choice ""C"" is incorrect. An opinion is not expressed in a report on applying agreed-upon procedures. The practitioner provides a description of procedures and findings. Additionally, it is never appropriate for management to express an opinion. | |
| Choice ""D"" is incorrect. The engaging party, and not the practitioner, is responsible for acknowledging the adequacy of the procedures performed and such statement is included in the practitioner's report. " | |
| "Government Auditing Standards published by the United States Government Accountability Office define standards associated with the following types of engagements: | |
| A. | |
| Financial audits, single audits, and program specific audits. | |
| B. | |
| Financial audits, attest engagements, and performance audits. | |
| C. | |
| Audits, reviews, and compilations. | |
| D. | |
| Financial audits, attest engagements, and program-specific audits.","Choice ""B"" is correct. Government Audit Standards define three types of engagements: financial audits, attest engagements, and performance audits. | |
| Choice ""A"" is incorrect. Single audits and program specific audits are defined by 2 CFR 200 and the Single Audit Act. Government Auditing Standards define standards for financial audits, attest engagements, and performance audits. GAGAS are used in conjunction with single audits. | |
| Choice ""C"" is incorrect. Audits, reviews, and compilations are defined by generally accepted auditing standards, not generally accepted government auditing standards. | |
| Choice ""D"" is incorrect. Program-specific audits are defined by 2 CFR 200 and the Single Audit Act. Government Auditing Standards define standards for financial audits, attest engagements, and performance audits." | |
| "In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations. This report should: | |
| A. | |
| Provide negative assurance of the entity's legal compliance. | |
| B. | |
| Provide an opinion on overall compliance with laws and regulations. | |
| C. | |
| State that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the entity's programs. | |
| D. | |
| Describe the laws and regulations that the entity must comply with.","Choice ""C"" is correct. Basic elements of a report on compliance include a statement that the audit should be planned to obtain reasonable assurance about whether noncompliance could have a material effect on the programs audited. | |
| Choice ""A"" is incorrect. The report should specifically state that a compliance audit does not provide a legal determination of the entity's compliance. | |
| Choice ""B"" is incorrect. The objective of the audit of the financial statements is not to provide an opinion on overall compliance with laws and regulations. | |
| Choice ""D"" is incorrect. It is not necessary to describe the laws and regulations with which the entity must comply." | |
| "A report on internal control over compliance will include which of the following assertions? | |
| A. | |
| Disclaimer of opinion in the event that significant weaknesses are identified. | |
| B. | |
| An opinion as to whether internal controls were adequate to provide reasonable assurance that the organization would comply, in all material respects, with laws rules and regulations. | |
| C. | |
| Identification of material weakness in the event an adverse opinion is expressed. | |
| D. | |
| A disclaimer of opinion on internal control over compliance.","Choice ""D"" is correct. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. | |
| Choice ""A"" is incorrect. The report disclaims an opinion on the effectiveness of internal control over compliance regardless of the status of reported weaknesses. Significant weaknesses are disclosed or referenced in a separate report. | |
| Choice ""B"" is incorrect. The audit opinion states that the audit was conducted in order to express an opinion on compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. | |
| Choice ""C"" is incorrect. Material weaknesses are identified as part of the report on internal control over compliance. No opinion on internal control over compliance (unqualified or adverse) is expressed." | |
| "A practitioner has been engaged to apply agreed-upon procedures in accordance with Statements on Standards for Attestation Engagements (SSAE) to prospective financial statements. Which of the following conditions must be met for the practitioner to finalize the engagement? | |
| A. | |
| The prospective financial statements include a summary of significant accounting policies. | |
| B. | |
| The practitioner takes responsibility for the sufficiency of the agreed-upon procedures. | |
| C. | |
| The practitioner reviews the findings and reaches an opinion based on the procedures performed. | |
| D. | |
| The engaging party acknowledges that the procedures performed were appropriate to meet the intended purpose of the engagement. ","Choice ""D"" is correct. Prior to the issuance of the practitioner's report, the engaging party (normally the client) must acknowledge and agree that the procedures performed were appropriate to meet the intended purpose of the engagement. | |
| Choice ""A"" is incorrect. The prospective financial statements should include a summary of significant assumptions, not a summary of significant accounting policies. | |
| Choice ""B"" is incorrect. The engaging party (client) (not the practitioner) should take responsibility for the sufficiency of the agreed-upon procedures. | |
| Choice ""C"" is incorrect. The practitioner does not issue an opinion, but rather includes a description of the procedures performed and related findings, including any materiality threshold established. " | |
| "An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following? | |
| A. | |
| Issue the same opinion in each report. | |
| B. | |
| Report to the governing authority that separate reports will be issued. | |
| C. | |
| State in the audit report that separate reports will be issued. | |
| D. | |
| Obtain permission from the audit committee to issue separate reports.","Choice ""C"" is correct. If an auditor decides to issue separate reports rather than a combined report on internal control over financial reporting and compliance with laws and regulations, then the auditor should state in the audit report that separate reports will be issued. This would appear as a paragraph entitled ""Other Reporting Required by Government Auditing Standards"" in the auditor's report. | |
| Choice ""A"" is incorrect. The reports on internal control over financial reporting and compliance with laws and regulations may, but are not required by GAGAS to, contain an opinion. If they do contain an opinion, that opinion may be different from the financial statement opinion. | |
| Choice ""B"" is incorrect. An auditor does not need to notify the governing authority when the auditor decides to issue separate reports rather than a combined report on internal control over financial reporting and compliance with laws and regulations | |
| Choice ""D"" is incorrect. The auditor does not need permission from the audit committee to issue separate reports on internal control over financial reporting and compliance with laws and regulations." | |
| "Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express: | |
| A. | |
| Reasonable assurance on the compliance tests. | |
| B. | |
| A qualified or adverse opinion. | |
| C. | |
| No assurance on the compliance tests. | |
| D. | |
| An adverse or disclaimer of opinion.","Choice ""B"" is correct. If material instances of noncompliance are identified, the auditor should express either a qualified or adverse opinion on compliance. | |
| Choice ""A"" is incorrect. Reasonable assurance is provided on the entity's compliance with requirements of the major program (not on compliance tests.) | |
| Choice ""C"" is incorrect. Assurance (in the form of an opinion) is provided on the compliance requirements for major programs. | |
| Choice ""D"" is incorrect. If material instances of noncompliance are identified, a disclaimer of opinion is not appropriate." | |
| "An accountant has been engaged to review a nonissuer's financial statements that contain several material misstatements and management is unwilling to revise the financial statements. Under these circumstances, the accountant should: | |
| A. | |
| Determine the effects of the departures from GAAP and issue a special report on the financial statements. | |
| B. | |
| Express a disclaimer of opinion on the financial statements and advise the board of directors that the financial statements should not be relied on. | |
| C. | |
| Inform management that a review of the financial statements cannot be completed and request a change from a review to a compilation engagement. | |
| D. | |
| Issue a ""Qualified"" or ""Adverse"" conclusion depending on the facts and circumstances of the misstatements.","Choice ""D"" is correct. If material misstatements are found and management is unwilling to revise the financial statements, the accountant should issue a modified conclusion in the Accountant's Review Report. | |
| Choice ""A"" is incorrect. A special report refers to an audit report on financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles, specified elements, accounts, or items of a financial statement, compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements, financial presentations to comply with contractual agreements or regulatory provisions, or financial information presented in prescribed forms or schedules that require a prescribed form of auditor's reports. Special reports are not issued in review engagements. | |
| Choice ""B"" is incorrect. A disclaimer of opinion is a report that can be issued when conducting an audit and is not appropriate for reports issued in accordance with SSARs. | |
| Choice ""C"" is incorrect. Management's unwillingness to revise the financial statements is not a reasonable basis for requesting a change in the engagement. Note also that the entity should request the change in the engagement, not the accountant." | |
| "Which correctly describes the relationship between the PCAOB and the SEC? | |
| A. | |
| The PCAOB is a subsidiary of the SEC, tasked with registering public accounting firms, establishing rules relating to the preparation of audit reports, and conducting inspections, investigations, and disciplinary proceedings. | |
| B. | |
| The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers. | |
| C. | |
| The SEC is subject to the oversight of the PCAOB with respect to the registration of public accounting firms that prepare audit reports for issuers. | |
| D. | |
| The SEC is subject to the oversight of the PCAOB with respect to conducting inspections, investigations, and disciplinary proceedings.","Choice ""B"" is correct. The PCAOB is subject to oversight by the SEC, and only accounting firms registered with the PCAOB may prepare audit reports for SEC issuers. | |
| Choice ""A"" is incorrect. The PCAOB is not a subsidiary of the SEC. It is, however, tasked with registering public accounting firms, establishing rules relating to the preparation of audit reports, and conducting inspections, investigations, and disciplinary proceedings. | |
| Choices ""C"" and ""D"" are incorrect. The SEC is not subject to the oversight of the PCAOB." | |
| "Plinth Industries, an issuer, employs several former employees of its auditor, Lawrence & Whitney, CPAs. Adams, CEO, began his career with L&W, but left ten years ago; Brooks, CFO, was with L&W until 18 months ago, and James, internal auditor, left L&W six months prior to the start of the current year's audit. Which of the following properly describes the effect of these potential conflicts of interest? | |
| A. | |
| L&W may not audit Plinth due to the employment of James within the one-year period preceding the audit. | |
| B. | |
| L&W may not audit Plinth because the CEO and CFO are both former L&W employees. | |
| C. | |
| L&W may not audit Plinth due to the employment of Brooks within the two-year period preceding the audit. | |
| D. | |
| L&W may audit Plinth.","Choice ""D"" is correct. L&W may audit Plinth since none of the situations described presents a conflict of interest as described in SOX Title II. | |
| Choice ""A"" is incorrect. The conflict of interest provisions of SOX Title II apply only to the issuer's CEO, CFO, Controller, or Chief Accounting Officer (or to any person serving in an equivalent position), not to an internal auditor. | |
| Choices ""B"" and ""C"" are incorrect. Neither Adams nor Brooks was employed by L&W within the one-year period preceding the audit, so neither position poses a conflict of interest as described in SOX Title II." | |
| "Pursuant to the Sarbanes-Oxley Act of 2002, an accountant who destroys documents to impede an investigation by a U.S. agency can be: | |
| A. | |
| Fined and/or imprisoned not more than 10 years. | |
| B. | |
| Fined and/or imprisoned not more than 20 years. | |
| C. | |
| Temporarily or permanently limited on the activities, functions, or operations conducted on behalf of a registered public accounting firm. | |
| D. | |
| Suspended or barred from being associated with a registered public accounting firm, or be required to end such association.","Choice ""B"" is correct. Under Title VIII (Corporate and Criminal Fraud Accountability) of the Sarbanes-Oxley Act of 2002, the penalty for intentionally destroying documents to impede, obstruct, or influence an investigation will be a fine, imprisonment for not more than 20 years, or both. | |
| Choice ""A"" is incorrect. The maximum term of imprisonment is 20 years, not 10 years. | |
| Choice ""C"" is incorrect. The penalty relates to fines and imprisonment, not suspension or disbarment from a public accounting firm or the activities of the firm. | |
| Choice ""D"" is incorrect. The penalty relates to fines and imprisonment, not suspension or disbarment from a public accounting firm or the activities of the firm." | |
| "Which of the following statements with respect to the Public Company Accounting Oversight Board rules on independence is correct? | |
| A. | |
| Public confidence would usually not be impaired by the existence of circumstances that reasonable people might believe are likely to influence independence. | |
| B. | |
| Auditors should be independent in fact but are not obligated to avoid situations that could lead outsiders to doubt their independence. | |
| C. | |
| Auditors must be without bias with respect to a client in order to maintain the impartiality necessary for the dependability of audit findings. | |
| D. | |
| Independence implies the attitude of a prosecutor that recognizes an obligation for fairness to management and other stakeholders.","Choice ""C"" is correct. An auditor is not independent if they are not, or a reasonable, knowledgeable investor would conclude that they are not, capable of exercising objective and impartial judgment. In order to exercise such judgment, the auditor must be without bias with regard to the client. | |
| Choice ""A"" is incorrect. If circumstances exist that reasonable people might believe could likely influence independence, the accountant would not be considered independent because the auditor must be capable of exercising objective and impartial judgment. | |
| Choice ""B"" is incorrect. Auditors must be independent with respect to an audit client so that a reasonable, knowledgeable investor would not conclude that the accountant is not capable of exercising objective and impartial judgment. | |
| Choice ""D"" is incorrect. Independence is considered from the point of view of a reasonable and knowledgeable investor." | |
| "An accountant is most likely required to follow Statements on Standards for Accounting and Review Services (SSARS) when the accountant has: | |
| A. | |
| Used the information in a general ledger to prepare financial statements outside of an accounting software system. | |
| B. | |
| Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements. | |
| C. | |
| Provided a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements. | |
| D. | |
| Typed client-prepared financial statements, without modification, as an accommodation to the client.","Choice ""A"" is correct. SSARS apply when an accountant prepares, compiles, or reviews financial statements. Using information in the general ledger to prepare financial statements outside an accounting software system is considered a preparation engagement. | |
| Choice ""B"" is incorrect. Proposing correcting journal entries does not constitute preparation of financial statements. Even entering general ledger transactions or processing payments (general bookkeeping) in an accounting system does not constitute a preparation engagement because it is considered merely ""assisting "" in preparing the financial statements (bookkeeping service.) | |
| Choice ""C"" is incorrect. Providing a client with a financial statement format does not constitute preparation of financial statements and, therefore, this does not fall within the guidelines of SSARS. | |
| Choice ""D"" is incorrect. Typing or reproducing client-prepared financial statements, without modification, as an accommodation to a client does not constitute preparation of financial statements because the accountant has not prepared those statements." | |
| "For an engagement to prepare financial statements, which of the following items should be identified in the engagement letter as management's responsibility? | |
| A. | |
| The accuracy of significant judgments to be used in the preparation of the financial statements. | |
| B. | |
| The inclusion of the financial reporting framework description on the face of the financial statements. | |
| C. | |
| The determination of the level of assurance over the financial statements. | |
| D. | |
| The preparation of financial statement disclosures.","Choice ""A"" is correct. One of management's responsibilities in a preparation engagement is for the accuracy and completeness of the accounting records, which includes the accuracy of significant judgments provided to the accountant who has been engaged to prepare the financial statements. | |
| Choice ""B"" is incorrect. The accountant, not management, is responsible for including a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements when preparing financial statements in accordance with a special purpose framework. | |
| Choice ""C"" is incorrect. No assurance of the financial statements is given in a preparation engagement. | |
| Choice ""D"" is incorrect. The accountant, not management, is responsible for the preparation of the financial statement disclosures in a preparation engagement." | |
| "When an accountant compiles a client's financial statements accompanied by supplemental information, which of the following is a required element of the accountant's separate report on the supplemental information? | |
| A. | |
| A list of the procedures performed by the accountant during the compilation. | |
| B. | |
| A statement that the information has been compiled from information that is the representation of management without audit or review. | |
| C. | |
| A statement that the accountant did not become aware of any material modifications that should be made to the information. | |
| D. | |
| A confirmation of the independence of the accountant with respect to the information presented.","Choice ""B"" is correct. When an accountant compiles a client's financial statements accompanied by supplemental information, the accountant's separate report on the supplemental information should include a statement that the information has been compiled from information that is the representation of management without audit or review. | |
| Choice ""A"" is incorrect. When the compiled financial statements are accompanied by supplemental information, a list of procedures performed is not required in an accountant's separate report on supplemental information. A list of procedures performed is included in an agreed-upon procedures report. | |
| Choice ""C"" is incorrect. When an accountant reviews a client's financial statements accompanied by supplemental information, the accountant's separate report on the supplemental information should include a statement that the accountant did not become aware of any material modifications that should be made to the information. | |
| Choice ""D"" is incorrect. When the compiled financial statements are accompanied by supplemental information, the accountant is not required to confirm independence in the accountant's separate report on supplemental information." | |
| "The standard report issued by a CPA after reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS) should state that the CPA: | |
| A. | |
| Assessed the accounting principles used and significant estimates made by management. | |
| B. | |
| Is not aware of any material modifications that should be made to the financial statements. | |
| C. | |
| Believes that there will usually be differences between the projected and actual results. | |
| D. | |
| Has no responsibility to update the CPA's report for events and circumstances occurring after the report's date.","Choice ""B"" is correct. The standard review report issued in accordance with SSARS should state that the CPA is not aware of any material modifications that should be made to the financial statements. | |
| Choice ""A"" is incorrect. An issuer standard audit report includes a statement that the CPA assessed the accounting principles used and significant estimates made by management. | |
| Choice ""C"" is incorrect. This statement does not appear in a review report under SSARS. This statement appears in reports on projected financial statements under Statements on Standards for Attestation Engagements (SSAE) guidance. | |
| Choice ""D"" is incorrect. This statement does not appear in a review report under SSARS. This statement appears in reports on prospective financial statements under Statements on Standards for Attestation Engagements (SSAE) guidance." | |
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