Random incorrect A1-A6 Flashcards
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. Identifying the risks of material misstatement due to fraud.
B. Determining planning materiality and acceptable error.
C. Determining which controls to test.
D. Identifying acts of noncompliance
Choice “A” 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 “B” 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. 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.
Choice “D” is incorrect. Analytical procedures are not effective in identifying acts of
noncompliance with laws and regulations.
Which of the following is a computer-assisted audit technique that permits an auditor to insert the auditor’s version of a client’s program to process data and compare the output
with the client’s output?
A. Remote node router.
B. Test data module.
C. Frame relay protocol.
D. Parallel simulation
Choice “D” is correct. This is the definition of parallel simulation. The client’s input data is processed through both the auditor’s version of the client’s program and the client’s
program and the output is compared.
Choice “A” is incorrect. A remote node router is not a CAAT; it is a device used to
connect physical devices such as terminals and printers not connected to the main
network.
Choice “B” is incorrect. Test data is data that the auditor develops to test programmed
controls. For example, if the client has a programmed control that requires a
supervisory approval (a supervisor password) for transactions over $500, the auditor
would then create test data to determine if the system would accept a transaction over
$500 without a required supervisor password approval.
Choice “C” is incorrect. Frame relay protocol refers to the physical and logical link
layers of digital communication channels using packet switching methodology.
When a group engagement partner decides to make reference to a component auditor’s
audit under U.S. GAAS, the group engagement partner’s report should state “We did not audit the financial statements of X Company…” in which section of the audit report?
A. Auditor’s Responsibilities
B. An emphasis-of-matter paragraph
C. Opinion
D. Not in the auditor’s report, but in a separate report prepared by the component
auditor and appended to the auditor’s report
Choice “C” is correct. Such a statement is included in the Opinion section of the auditor’s report. The statement includes the following language: “Those statements
were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for X Company, is based solely on the report of the other auditors.”
Choice “A” is incorrect. The Auditor’s Responsibility section would remain unchanged
from the standard unmodified report when reference is made to a component auditor in
a report issued by a group engagement partner.
Choice “B” is incorrect. An emphasis-of-matter paragraph is not added to an auditor’s
report when reference is made to a component auditor.
Choice “D” is incorrect. No separate report would be issued when reference is made to
a component auditor
Which of the following is not a reason why most companies have established audit
committees?
A. The New York Stock Exchange requires listed companies to have audit
committees.
B. The use of an audit committee strengthens the public’s sense of the
independence of the external auditor.
C. Large accounting firms strongly support the function of an audit committee.
D. The SEC requires companies to establish audit committees
Choice “D” is correct. The SEC has strongly recommended that companies establish audit committees, but does not require this action.
Choice “A” is incorrect. The New York Stock Exchange requires listed companies to have audit committees.
Choice “B” is incorrect. The use of an audit committee does strengthen the public’s sense of the independence of the external auditor.
Choice “C” is incorrect. Large accounting firms strongly support the function of an audit committee.
Which of the following factors would an auditor most likely consider in evaluating the control environment for an audit client?
A. Organizational structure used for tax purposes.
B. Monthly bank reconciliations with supervisor sign-offs.
C. The ethical values demonstrated by management.
D. The number of employees in each department.
Choice “C” is correct. The control environment can be described as the overall tone of the organization. That tone begins with and is generated by management and those charged with governance. Therefore, when evaluating the control environment, the
auditor would focus on, among other things, the ethical values demonstrated by management.
Choice “A” is incorrect. The organizational structure of the whole organization would be
something an auditor would consider when evaluating the control environment.
However, the organizational structure for tax purposes may have differences from the
overall organizational structure and, therefore, would not be part of the auditor’s overall
evaluation of the organization’s control environment.
Choice “B” is incorrect. Monthly bank reconciliations with sign-offs is an example of a
control activity. Control activities are impacted by the control environment but are not
specifically part of the control environment, which sets the overall tone of the
organization.
Choice “D” is incorrect. The number of employees in each department may provide the
auditor some helpful insight to understand size and to perform some relevant analytical
procedures. However, the number of employees in each department does not affect the
overall tone of the organization, which is what the control environment provides
MCQ-02737
Which of the following statements is correct concerning an auditor’s required
communication with those charged with governance?
A. If matters are communicated in writing, the report is appropriate for general use.
B. If matters are communicated in writing, the report is required to be distributed to
both those charged with governance and management.
C. This communication is required to occur before the auditor’s report on the financial statements is issued.
D. This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.
Choice “D” is correct. An auditor is required to communicate certain matters to those charged with governance, including disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.
Choice “A” is incorrect. Written communications should include a limitation on the use of the communication.
Choice “B” is incorrect. The auditor is not required to distribute the report to management, especially since certain matters might be inappropriate for discussion with management.
Choice “C” is incorrect. The auditor is not required to make the communication before the auditor’s report on the financial statements is finalized, as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the
communication must be made before the auditor’s report is filled with the SEC.)
MCQ-02488
Which of the following internal controls most likely would be used to maintain accurate inventory records?
A. A just-in-time inventory ordering system keeps inventory levels to a desired minimum.
B. Periodic inventory counts are used to adjust the perpetual inventory records.
C. Requisitions, receiving reports, and purchase orders are independently matched before payment is approved.
D. Perpetual inventory records are periodically compared with the current cost of individual inventory items.
Choice “B” is correct. In order to maintain accurate perpetual inventory records, periodic inventory counts should be used to adjust perpetual records.
Choice “A” is incorrect. While a just-in-time inventory system will usually reduce the
amount of inventory on hand, it does not necessarily improve the accuracy of inventory
records.
Choice “C” is incorrect. The matching of requisitions, receiving reports, and purchase
orders is a control to ensure that purchases of inventory are properly authorized, but it
does not necessarily improve the accuracy of inventory records.
Choice “D” is incorrect. By comparing perpetual inventory records to current costs, the
company ensures that the inventory is appropriately valued at the lower of cost or
market, but the accuracy of the perpetual inventory is not assured.
MCQ-03800
Which of the following is an auditor’s responsibility if a previously reported internal control weakness is subsequently eliminated and management engages an independent auditor to attest to the improvement?
A. Test all internal controls identified within the report.
B. An auditor may not accept this type of engagement.
C. Only obtain evidence about the operating effectiveness of the identified control.
D. Express an opinion on whether the weakness has been eliminated.
Choice “D” is correct. If a material weakness is subsequently eliminated, management may wish to communicate this fact to the investing public, and may also wish to have an independent auditor attest to the improvements in internal control. The auditor’s
objective is to express an opinion on whether the previously reported weakness has been eliminated.
Choice “A” is incorrect. An auditor’s testing is limited to the controls specifically identified by management as eliminating the material weakness.
Choice “B” is incorrect. An engagement to report on whether a previously reported
internal control weakness continues to exist is a voluntary engagement, not required by
professional standards. The engagement may be performed at any time during the
year.
Choice “C” is incorrect. The auditor must obtain evidence about the design and
operating effectiveness of the identified control.
Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?
A. Purchase orders, receiving reports, and vendor’s invoices are independently matched in preparing vouchers.
B. Receiving reports require the signature of the individual who authorized the purchase.
C. Vendor’s invoices are compared with purchase orders by an employee who is independent of the receiving department.
D. The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports.
Choice “A” is correct. The most effective control in assuring that recorded purchases are free of material errors is the independent matching of the purchase order, receiving report, and vendor’s invoices in preparing the vouchers on which the disbursement
check is based.
Choice “B” is incorrect. Requiring that receiving reports be authorized by the individual who authorized the purchase does not ensure that the invoice and the related payment
will be properly recorded.
Choice “C” is incorrect. It is not enough to compare only vendor invoices and purchase orders, as this will still allow payment for goods that were not received.
Choice “D” is incorrect. The receiving department should not have access to the quantity ordered on the purchase order. This forces receiving department employees to actually perform an independent count.
MCQ-11048
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:
A. Increasing the number of items selected for the test of controls usually increases the tolerable rate of deviations.
B. Deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate.
C. Deviations from pertinent controls do not affect the risk of material misstatement in the accounting records.
D. When the degree of assurance desired in a sample is high, the auditor should allow for a high level of sampling risk.
Choice “B” is correct. In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that deviations from pertinent controls at a given rate ordinarily result in misstatements at a
lower rate. In other words, sometimes the control is not working but that does not mean there is a dollar misstatement. Therefore, the actual misstatement rate could be lower than the control deviation rate.
For example, if the auditor is testing approval of sales orders and notices that 50 percent of sales orders were not approved, this does not mean that sales revenue on the income statement is incorrect by 50 percent. As a result of this control deficiency,
the auditor will most likely change the nature, extent, and/or timing of substantive testing to ensure that more persuasive evidence is obtained. Once the auditor performs
the substantive testing, the auditor most likely will find that the misstatements are lower than 50 percent.
Choice “A” is incorrect. The number of items selected typically does not affect the
tolerable deviation rate. However, the tolerable deviation rate affects the sample size.
For example, the greater the tolerable deviation rate the auditor is willing to accept, the
smaller the selected sample size.
Choice “C” is incorrect. Deviations from internal controls do affect the risk of material
misstatement. For example, if the upper deviation rate exceeds the tolerable rate, the
auditor most likely would reduce the planned reliance on the control and may increase
the risk of material misstatement (as a result of a higher control risk).
Choice “D” is incorrect. If the degree of assurance desired in a sample is high, the
auditor should allow for a low (not high) level of sampling risk.
Which of the following audit procedures is best for identifying unrecorded trade accounts
payable?
A. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports.
B. Examining unusual relationships between monthly accounts payable balances and recorded cash payments.
C. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.
D. Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date.
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. Investigating payables already recorded would not help identify unrecorded trade payables.
Choice “B” 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 “D” 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.
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. Matters to which the attorney has given substantive attention in the form of legal representation.
B. The attorney’s opinion of the entity’s historical experience in recent similar litigation.
C. The probable outcome of asserted claims and pending or threatened litigation.
D. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
Choice “A” 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 “C” 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).
C. 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 factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?
A. Inability to borrow necessary capital without granting debt covenants.
B. Large amounts of liquid assets that are easily convertible into cash.
C. Management’s lack of interest in increasing the entity’s stock trend.
D. Inability to generate cash flows from operations while reporting substantial earnings growth.
Choice “D” is correct. An auditor’s concern about the risk of fraudulent financial reporting would be heightened if the entity were unable to generate cash flows from
operations, but still reported substantial earnings growth, since these two occurrences are somewhat inconsistent.
Choice “A” is incorrect. The need to grant debt covenants when borrowing capital is an ordinary occurrence that would not heighten the auditor’s concern.
Choice “B” is incorrect. Large amounts of liquid assets that are easily convertible into cash would heighten an auditor’s concern about misappropriation of assets, not about
fraudulent financial reporting.
Choice “C” is incorrect. Management’s excessive interest in increasing the stock price and earnings trend is a fraud risk factor; lack of such interest would not cause concern.
In searching for unrecorded liabilities, an auditor most likely would examine the:
A. Cutoff bank statement for deposits recorded in the books, but not by the bank.
B. Details of accounts receivable confirmations that are classified as “exceptions.”
C. Files of purchase requisitions for items ordered just before the year-end.
D. Receiving reports for items received before year-end, but not yet recorded
Choice “D” is correct. In searching for unrecorded liabilities, an auditor most likely would examine the receiving reports for items received before year-end, but not yet
recorded.
Choice “A” is incorrect. An examination of a cutoff bank statement for deposits
recorded in the books, but not by the bank, is performed to search for overstatement of
cash due to kiting. The search for unrecorded liabilities does not include procedures
related to deposits recorded in the books. The search for unrecorded liabilities includes
looking at cash disbursements after year-end.
Choice “B” is incorrect. Exceptions on accounts receivable confirmations most likely
relate to the accounts receivable and sales accounts rather than unrecorded liabilities.
Choice “C” is incorrect. Of the answer choices, examining the file of purchase requisitions for items ordered just before year-end is not the best procedure to perform
to search for unrecorded liabilities because it may not represent a liability as of year end. For example, an item may have been ordered but not yet shipped from the vendor as of year-end
What are two situations when a CPA can receive contingent fees?
- Reporesentation before the IRS (aka tax matters based on findings of government agencies)
- Contingent fees are also permitted for compilations of
financial statements expected to be used by third parties, but only if the member includes a statement that the member is not independent.
