AUD 6 Flashcards
In violation of company policy, Lowell Company erroneously capitalized the cost of painting its warehouse. The auditor examining Lowell’s financial statements would most likely detect this when
Discussing capitalization policies with Lowell’s controller.
Examining maintenance expense accounts.
Observing, during the physical inventory observation, that the warehouse had been painted.
Examining the construction work orders supporting items capitalized during the year.
Examining the construction work orders supporting items capitalized during the year.
This answer is correct because the cost which was erroneously capitalized will be included in the population of construction work orders which were capitalized during the year.
Which of the following conditions would not normally cause the auditor to question whether material errors or fraud exist?
The client’s information system generates exception reports which periodically include bookkeeping errors.
Differences exist between control accounts and supporting subsidiary records.
Transactions are not supported by proper documentation.
Differences are disclosed by confirmations.
The client’s information system generates exception reports which periodically include bookkeeping errors.
This answer is correct since the client may be expected to correct errors included on a computer-generated exception report.
A CPA’s report performing an examination of an entity’s internal control identified several material weaknesses and will be published in the entity’s annual report to shareholders. Management intends to include a statement asserting that the cost of correcting the weaknesses would exceed the benefits of reducing the risk of errors and fraud. The CPA should
Insist that management’s statement not appear in the same document as the CPA’s report.
Investigate whether the cost of correcting the weaknesses would, in fact, exceed the benefits.
Insist that management correct the weaknesses if cost is the only consideration.
Not express any opinion as to management’s statement.
Not express any opinion as to management’s statement.
This answer is correct because the accountant should not express any opinion as to management’s statement. Additionally, the accountant is not precluded from disclaiming an opinion on any such statement.
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%.
The allowance for sampling risk was
5 1/2%
4 1/2%
3 1/2%
1%
4 1/2%
The requirement is to determine the allowance for sampling risk of the presented sample. When considering the allowance for sampling risk, one may consider both the planned allowance for sampling risk or the adjusted allowance based on the sample results. Answer (b) is correct because both the planned and adjusted allowance for sampling risk are 4 1/2% (7% – 2.5% for planning purposes, and 8% – 3.5% [7/200] as adjusted).
As guidance for measuring the quality of the performance of an auditor, the auditor should refer to
Statements of the Financial Accounting Standards Board.
Generally accepted auditing standards.
Interpretations of the Statements on Auditing Standards.
Statements on Quality Control Standards.
Generally accepted auditing standards.
This answer is correct because auditors are responsible for compliance with generally accepted auditing standards and comparison of their performance against these standards is appropriate.
An auditor was unable to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary.
Between which of the following opinions should the entity’s auditor choose?
Adverse and unmodified, with an emphasis-of-matter paragraph added.
Disclaimer and unmodified with an emphasis-of-matter paragraph added.
Qualified and adverse.
Qualified and disclaimer.
Qualified and disclaimer.
The auditor’s inability to obtain audited financial statements or other evidence supporting an entity’s investment in a foreign subsidiary represents a scope limitation. Either a qualified opinion or a disclaimer would be issued.
Can Internal auditors assist in obtaining an understanding of controls, performing tests of controls, and/or performing substantive procedures?
Yes to all 3
At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers?
Annually.
Every two years.
Every three years.
As requested by the firm.
Every three years.
In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management’s misappropriation of assets directly to a federal inspector general when the fraudulent activities are
Concealed by management by circumventing specific internal controls designed to safeguard those assets.
Reported to the entity’s governing body and the governing body fails to make a required report to the federal inspector general.
Accompanied by fraudulent financial reporting that results in material misstatements of asset balances.
Perpetrated by several levels of management in a scheme that is likely to continue in future years.
Reported to the entity’s governing body and the governing body fails to make a required report to the federal inspector general.
Before accepting an engagement to audit a new client, a CPA is required to obtain
An understanding of the prospective client’s industry and business.
The prospective client’s signature to the engagement letter.
A preliminary understanding of the prospective client’s control environment.
The prospective client’s consent to make inquiries of the predecessor auditor, if any.
The prospective client’s consent to make inquiries of the predecessor auditor, if any.
AU-C 210 (AU 315) requires that an auditor attempt to obtain client permission to contact the predecessor prior to accepting a new engagement.
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the
Extent of tests of controls.
Level of detection risk.
Extent of tests of details.
Level of inherent risk.
Extent of tests of details.
Increases in the assessed level of the risk of material misstatement lead to decreases in the acceptable level of detection risk. Accordingly, the auditor will need to increase the extent of substantive tests such as tests of details.
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?
An acknowledgment by a client representative that the securities were returned intact.
An analysis of realized gains and losses from the sale of securities during the year.
An evaluation of the client’s internal control concerning physical access to the securities.
A description of the client’s procedures that prevent the negotiation of securities by just one person.
An acknowledgment by a client representative that the securities were returned intact.
This answer is correct because an auditor will obtain acknowledgement by a client representative that the securities were returned so as to eliminate subsequent questions in the event that such securities disappear.
For which of the following audit tests would an auditor most likely use attribute sampling?
Inspecting purchase orders for proper approval by supervisors.
Making an independent estimate of recorded payroll expense.
Determining that all payables are recorded at year-end.
Selecting accounts receivable for confirmation of account balances.
Inspecting purchase orders for proper approval by supervisors.
This is correct because attribute sampling deals with whether an attribute either exists or does not exist in a particular circumstance, here the approval of an individual purchase order.
If, after discussions with management, an accountant who has prepared financial statements knows that the financial statements include a material departure from GAAP that management will not allow correction of, the accountant should
Disclose the material misstatement on the face of the financial statements or in a note to the financial statements.
Require that management change the financial statements to eliminate the departure from GAAP.
In all circumstances, resign the engagement.
Issue an adverse opinion on the financial statements.
Disclose the material misstatement on the face of the financial statements or in a note to the financial statements.
This answer is correct because the accountant should disclose the material misstatement on the face of the financial statements or in a note to the financial statements.
In which of the following situations would an auditor ordinarily issue an unmodified audit opinion without an emphasis-of-matter paragraph?
The auditor wishes to emphasize that the entity had significant related-party transactions.
The auditor decides to make reference to the report of an auditor who audited a component of group financial statements.
The entity issues financial statements that present financial position and results of operations, but omits the statement of cash flows.
The entity has a material change in accounting principle but has accounted properly for the effects of the change in accordance with GAAP.
The auditor decides to make reference to the report of an auditor who audited a component of group financial statements.
When an auditor makes reference to the report of another auditor no emphasis-of-matter paragraph is added to the report.