A2 - Becker Wrong Answers Flashcards
Each of the following identifies one of the principal purposes of an auditor’s communication with those charged with governance, except:
A. To report timely observations arising from the audit that are relevant to the responsibilities of those overseeing the financial reporting process. B. To obtain approval of the planned scope of the audit procedures. C. To provide an overview of the scope and timing of the audit. D. To obtain information relevant to the audit.
Choice “B” is correct. Those charged with governance do not provide approval on the planned scope of the audit procedures. The planned audit procedures are the decision of the auditor based on their professional judgment.
Choice “A” is incorrect. Auditors report their observations arising from the audit to those charged with governance. One of the responsibilities of those charged with governance is to oversee the financial reporting process. Therefore, if there is an observation relevant to their responsibility, the auditor should report it timely.
Choice “C” is incorrect. The auditor is required to communicate the planned scope and timing of the audit with those charged with governance.
Choice “D” is incorrect. Auditors communicate those charged with governance to gather information relevant to the audit. This information may inform the auditor’s risk assessment as well as the planned response to those risks.
Which of the following should an auditor do when control risk is assessed at the maximum level?
A. Perform fewer substantive tests of details. B. Perform more tests of controls. C. Document the assessment. D. Document the control structure more extensively.
Choice “C” is correct. When an auditor assesses control risk at the maximum level, the assessment should be documented and the auditor should make decisions to potentially perform more substantive procedures.
Choice “A” is incorrect. When control risk is assessed at the maximum level, more, not fewer substantive tests of details would be performed.
Choice “B” is incorrect. When control risk is assessed at the maximum level, then the testing of controls is typically not required.
Choice “D” is incorrect. All control structure documentation should have been performed prior to assessing the control risk at the maximum level.
Which of the following is a violation of segregation of duties in internal control?
A. An employee adds vendors and makes changes to a vendor master file. B. An employee matches invoices to purchase orders and receiving reports, and applies coding of account distributions. C. An employee enters and approves purchase orders. D. An employee receives goods from vendors and signs off on the deliveries.
Choice “C” is correct. Segregation of duties is included in the control activities component of the COSO Internal Control—Integrated Framework. Segregation of duties involves making sure that different individuals complete various steps of a process to ensure that no individual has too much control. An employee who enters purchase orders and approves them violates this control because the employee could enter erroneous or fraudulent information that he or she would be approving (versus a different individual, who would be in a much better position to catch errors or fraudulent entries as an independent approver).
Choice “A” is incorrect. Adding vendors and making changes to a vendor master file is essentially part of the same step in a process, so there is less risk with this activity.
Choice “B” is incorrect. Matching invoices to purchase orders and receiving reports, as well as coding account distributions, is acceptable as responsibilities held by one person.
Choice “D” is incorrect. Receiving goods and signing off on deliveries is essentially the same step in a process.
While auditing the financial statements of a nonissuer, a CPA was requested to change the engagement to a review in accordance with Statements on Standards for Accounting and Review Services (SSARS) because of a scope limitation. If the CPA believes the client’s request is reasonable, the CPA’s review report should:
I.
Refer to the scope limitation that caused the change.
II.
Describe the auditing procedures that have already been applied.
A. I only. B. Neither I nor II. C. II only. D. Both I and II.
Choice “B” is correct. If the CPA believes the client’s request is reasonable, he/she must comply with the standards for a review and issue an appropriate report. The report should not refer to the original engagement, to any auditing procedures performed, or to the scope limitation.
Choice “A” is incorrect. The report should not refer to the scope limitation when a client had a justified reason to change the engagement type.
Choice “C” is incorrect. The report should not refer to the auditing procedures already applied when a client had a justified reason to change the engagement type.
Choice “D” is incorrect. The opposite is correct. The report should not refer to the auditing procedures already applied nor to the scope limitation when a client had a justified reason to change the engagement type.
Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?
A. Large amounts of liquid assets that are easily convertible into cash. B. Management's lack of interest in increasing the entity's stock trend. C. Inability to generate cash flows from operations while reporting substantial earnings growth. D. Inability to borrow necessary capital without granting debt covenants.
Choice “C” 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. 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 “B” 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.
Choice “D” is incorrect. The need to grant debt covenants when borrowing capital is an ordinary occurrence that would not heighten the auditor’s concern.
In using the work of a specialist, an auditor referred to the specialist’s findings in the auditor’s report. This would be an appropriate reporting practice if the:
A. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist. B. Auditor, as a result of the specialist's findings, adds an explanatory paragraph in a modified opinion emphasizing a matter regarding the financial statements. C. Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements. D. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.
Choice “B” is correct. When expressing an unmodified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in a departure from an unmodified opinion. The auditor may need the permission of the specialist before referencing the specialist in the report.
Choice “A” is incorrect. Lack of client familiarity with the specialist does not affect the auditor’s report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist’s qualifications.
Choice “C” is incorrect. The auditor must understand the form and content of the specialist’s findings in relation to the representations in the financial statements to be able to review the specialist’s work. However, this does not affect whether or not the auditor refers to the specialist in the auditor’s report.
Choice “D” is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.
Strand Inc.’s auditors have identified a major deficiency in regard to its controls. As a result of the deficiency, Strand:
A. Must reestablish its operating and compliance objectives. B. Cannot claim compliance with the requirements of an effective system of internal control. C. Cannot achieve any of its established objectives. D. Must restate its financial statements.
Choice “B” is correct. A major control deficiency implies that an entity cannot claim that it has met the requirements of an effective system of internal control.
Choice “A” is incorrect. A company will not have to reestablish its operating and compliance objectives just because of a major deficiency in its system of internal control.
Choice “C” is incorrect. A major deficiency makes it less likely (but not impossible) that a company can achieve its established objectives.
Choice “D” is incorrect. There is no requirement that a company with a major deficiency must restate its financial statements.
An auditor assesses control risk because it:
A. Is relevant to the auditor's understanding of the control environment. B. Provides assurance that the auditor's materiality levels are appropriate. C. Affects the level of detection risk that the auditor may accept. D. Indicates to the auditor where inherent risk may be the greatest.
Choice “C” is correct. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions.
.
Choice “A” is incorrect. The auditor assesses control risk after obtaining an understanding of internal control. Assessment is not required to obtain an understanding of the control environment or any of the other four components of internal control.
Choice “B” is incorrect. Assessment of control risk is unrelated to assessments of materiality levels.
Choice “D” is incorrect. Inherent risk is assessed independently of any consideration of relevant controls. Control risk does not affect inherent risk.
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
A. The CPA's lack of understanding of the entity's operations and industry. B. Management's unwillingness to make all financial records available to the CPA. C. The CPA's inability to review the predecessor auditor's working papers. D. Management reputation for failing to provide schedules to prior auditors on a timely basis.
Choice “B” is correct. A CPA most likely would not accept a new audit engagement if management is unwilling to make all financial records available to the CPA. This is a precondition for the audit.
Choice “A” is incorrect. A CPA could still accept a new audit engagement even if the CPA lacks an understanding of the entity’s operations and industry. However, the CPA will need to obtain the required level of knowledge (e.g., attending accounting conferences).
Choice “C” is incorrect. A CPA could still accept a new audit engagement even if the CPA is unable to review the predecessor auditor’s workpapers. Although review of the predecessor auditor’s workpapers are helpful in an initial audit, it is not a required procedure.
Choice “D” is incorrect. A CPA could still accept a new audit engagement even if management has a reputation for failing to provide schedules to prior auditors on a timely basis. Although it is helpful when management is timely when providing schedules, this is not a precondition for the audit. The auditor most likely would plan the engagement to allot more time for this audit or give management earlier deadlines than needed.
The nature and extent of a CPA firm’s quality control policies and procedures depend on:
The CPA
firm’s size
The nature
of the CPA
firm’s practice
Cost-benefit
considerations
A.
No
Yes
Yes
B. Yes
Yes
Yes
C. Yes
No
Yes
D. Yes
Yes
No
Choice “B” is correct. The nature and extent of a CPA firm’s quality controls depend on a number of factors, such as its size, the degree of operating autonomy allowed its personnel and its practice offices, the nature of its practice, its organization, and appropriate cost-benefit considerations.
Choice “A” is incorrect. The size of the CPA firm should be one of many considerations when establishing procedures to management engagement quality.
Choice “C” is incorrect. The nature and complexity of the CPA firm’s practice should be one of many considerations when establishing procedures to management engagement quality.
Choice “D” is incorrect. The cost-benefit considerations of management engagement quality should be one of many considerations.
When assessing an internal auditor’s competence, a CPA ordinarily obtains information about all of the following, except:
A. Educational level and professional experience. B. The audit plan and audit procedures. C. Access to information about related parties. D. Quality of audit documentation.
Choice “C” is correct. The degree of access the independent auditor has to information about related parties provides no information regarding an internal auditor’s competence.
Choice “A” is incorrect. When considering the competence of internal auditors, the independent auditor should inquire about the qualifications of the internal audit staff, including for example, consideration of the client’s practices for hiring, training, and supervising internal audit staff. This includes inquiries as to the internal auditor’s educational level and professional experience.
Choice “B” is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.
Choice “D” is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.
Edward was recently hired to be an internal auditor at Retail Co. His first assignment is to create a visual depiction of the entire revenue process. His manager noted that Edward should indicate whether processes are manual or automated and to label current controls and identify potential control deficiencies. Which documentation technique should Edward utilize?
A. Process narrative B. System interface diagram C. Flowchart D. Data flow diagram
Choice “C” is correct. Flowcharts visualize not only the logical flow of data through a process but also the physical aspects of that flow. This includes the form in which the information flows through the process and whether actions taken on the document are done manually or through the use of computers.
Choice “A” is incorrect. Narratives are written descriptions, not visual depictions of a process.
Choice “B” is incorrect. System interface diagrams focus on the interfacing of clients and systems and do not depict the physical flow of information.
Choice “D” is incorrect. Data flow diagrams depict the logical flow of data but do not detail the physical aspects of the process.
If differences of opinion arise between the engagement partner and the engagement quality control reviewer, then the engagement partner should:
A. Withdraw from the engagement when permissible under law or regulation. B. Follow the firm's policies and procedures for resolving differences of opinion. C. Discuss the differences of opinion with the entity's management and issue a modified auditor's report. D. Issue a disclaimer of opinion and report the issue to the entity's audit committee.
Choice “B” is correct. A difference of opinion between the engagement partner and engagement quality control partner would not be a basis to modify the opinion or withdraw from the engagement. One of the policies and procedures that a firm should establish under a system of quality control is a means to resolve differences of opinion; therefore, the engagement team should follow the firm’s policies and procedures for resolving those differences.
Choice “A” is incorrect. Withdrawing from the engagement would be the last step the accountant would perform after exhausting all other attempts to resolve the differences. The engagement team would follow the firm’s policies and procedures for resolving differences first.
Choice “C” is incorrect. Prior to raising the matter to the audit committee, the accountant should attempt to resolve the differences using the firm’s policies and procedures. The accountant would likely also discuss the difference with management prior to those charged with governance. The type of modified auditor’s report would then depend on the materiality of the differences and pervasiveness of the issue.
Choice “D” is incorrect. A disclaimer of opinion is issued when the engagement team is not able to obtain sufficient appropriate audit evidence and the issue is material and pervasive. A difference of opinion between the engagement partner and engagement quality control reviewer may not be indicative of either of those issues, and the engagement team should try to resolve the differences internally first by following the firm’s policies and procedures.
Which of the following factors would least likely affect the nature and extent of audit documentation?
A. The extent to which judgment was required in performing the specific audit procedures. B. The content of the representation letter. C. The nature of the specific audit procedures. D. The risk of material misstatement.
Choice “B” is correct. The content of the representation letter will generally not affect the nature and extent of audit documentation. Factors affecting the nature and extent of audit documentation include:
- The risk of material misstatement;
- The extent to which judgment was required in performing the work and evaluating the results;
- The nature of the specific auditing procedure;
- The significance of the evidence obtained;
- The nature and extent of any exceptions identified;
- The need to document conclusions that may not be obvious.
- The size and complexity of the entity; and
- The audit methodology and tools used.
Choice “A” is incorrect. The extent to which judgment was applied in the performance of audit procedures would be a consideration when determining the nature and extent of audit documentation. More documentation may be necessary when signficant judgment was applied.
Choice “C” is incorrect. The nature of specific auditing procedures would be a consideration when determining the nature and extent of audit documentation. More complex procedures may require additional documentation.
Choice “D” is incorrect. The risk of material misstatement would be a consideration when determining the nature and extent of audit documentation. More documentation may be necessary in areas with higher assessed risk.
Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?
A. There are significant differences between the entity's forecasted financial statements and the financial statements to be audited. B. The CPA becomes aware of the existence of related party transactions while reading the draft financial statements. C. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management. D. There have been substantial inventory write-offs just before the year-end in each of the past four years.
Choice “C” is correct. An auditor may question the integrity of management if the auditor is not permitted to have access to sensitive information regarding the salaries of senior management. The auditor should have access to all information that is relevant to the preparation and fair presentation of the financial statements
Choice “A” is incorrect. Significant differences between the entity’s forecasted financial statements and the financial statements to be audited does not necessarily raise questions about the integrity of management. There may be valid reasons for the differences (e.g., product sold better than anticipated, unexpected increase in expenses, etc.).
Choice “B” is incorrect. The existence of related party transactions does not typically raise questions about the integrity of management. Management may engage in related party transactions as part of business operations.
Choice “D” is incorrect. Substantial inventory write-offs just before year-end in each of the past four years does not necessarily raise questions about the integrity of management. The inventory write-offs appear to be consistent year over year and may be a characteristic of the business (e.g., obsolescence or spoilage of inventory).
