Wrong answers ALL SECTIONS Flashcards
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Unit A2
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. Results of the tests of transactions recently performed by the internal auditors. C. Materiality of the accounts recently inspected by the internal auditors. D. Internal auditing standards developed by The Institute of Internal Auditors.
Choice “D” 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. 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.
Choice “C” 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.
UNIT A1
Which of the following reporting options is least likely with regard to supplementary information that is required by GAAP?
A. The auditor's report on the financial statements includes both an opinion on the supplementary information and a statement restricting the use of the report. B. The auditor's report on the financial statements includes a separate section stating that the auditor has applied the required procedures. C. The auditor's report on the financial statements includes an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole. D. A disclaimer of opinion is issued on supplementary information.
Choice “A” is correct. There is no requirement that the auditor’s report on supplementary information required by GAAP be restricted.
Choice “B” is incorrect. An auditor is not required to audit required supplementary information, but the audit report should include a separate report section with the heading “Required Supplementary Information” related to the supplementary information. This section should state that the required supplementary information is included and the auditor has applied the required procedures.
Choice “C” is incorrect. When the auditor chooses to apply auditing procedures to the supplementary information, he or she may express an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole.
Choice “D” is incorrect. An auditor would include a statement within a separate section with the heading “Required Supplementary Information” that the supplementary information is the responsibility of management and the auditor does not express an opinion on such information.
UNIT A4
In confirming a client’s accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year’s audit, the auditor most likely would choose:
A. Individual invoices. B. Individual overdue balances. C. Small account balances. D. Customers with credit balances.
Choice “A” is correct. Because of the significant discrepancies on past confirmations, the auditor would most likely choose to use individual invoices in the current year’s audit. Depending on the client’s accounting system, these invoices could provide more confirmation detail including individual transactions instead of a balance at a point in time. By confirming individual transaction detail on the individual invoices, there should be fewer discrepancies than confirmations sent out to customers in years past.
Choice “B” is incorrect. The confirmation process typically does not focus on overdue balances because confirmation is primarily a test of existence and not valuation.
Choice “C” is incorrect. When confirming accounts receivable, the auditor is unlikely to focus on confirming small account balances because misstatements in accounts with small balances are unlikely to be material and because the confirmation process is primarily a test of existence, or overstatement.
Choice “D” is incorrect. An auditor is unlikely to focus the confirmation process on customers with credit balances because credit balance accounts receivable are unlikely to be overstated. Confirmation is primarily a test of existence, or overstatement.
A3
Which of the following factors would most likely raise substantial doubt about a nonissuer’s ability to continue as a going concern?
A. A substantial decline in net income as a result of one-time charges for obsolete inventory in an otherwise profitable reporting unit. B. A loss of key management personnel in accordance with the succession plan instituted by those charged with governance. C. The bankruptcy of the nonissuer's primary supplier as a result of declining margins and performance in the industry. D. The modification of an outstanding bank note that results in an impending balloon payment being refinanced and paid over a period of 10 years.
Choice “C” is correct. The bankruptcy of a key supplier and declining margins in the supplier industry is an example of an external matter that would likely raise substantial doubt about an entity’s ability to continue as a going concern. Based on the circumstances, it may be difficult for the client to find a new supplier and continue to operate.
Choice “A” is incorrect. A substantial decline in net income that is expected to be temporary in nature would not raise substantial doubt about an entity’s ability to continue as a going concern.
Choice “B” is incorrect. The loss of key management personnel, when it is in accordance with a plan instituted by management or those charged with governance, would not be an indicator of substantial doubt about an entity’s ability to continue as a going concern as it is the result of decisions made intentionally by the company’s leadership.
Choice “D” is incorrect. The ability to refinance an outstanding bank loan to avoid an impending balloon payment by spreading the payment over 10 years would support the entity’s ability to continue as a going concern. This information would not raise substantial doubt about the entity’s ability to continue as a going concern.
A2
Which of the following components (elements) of an entity’s system of internal control includes the development of personnel manuals documenting employee promotion and training policies?
A. Monitoring. B. Control environment. C. Information and communication system. D. Quality control system.
Choice “B” is correct. The control environment element of an entity’s system of internal control relates to the tone of the organization, which includes human resource policies and practices.
Choice “A” is incorrect. Monitoring activities assess the quality of control performance over time.
Choice “C” is incorrect. The information and communication system relates to the identification, capture, and exchange of information.
Choice “D” is incorrect. A quality control system is not a component of an entity’s system of internal control. An auditor uses a system of quality control to manage engagement quality.
A3
An accountant needs to join two data sets using an inner join. The first data set has 500 records; the second data set has 400 records. There are 175 matching records in the two data sets. What total number of records will be in the resulting data set?
A. 175 B. 900 C. 325 D. 500
Choice “A” is correct. An inner join uses only the records that both data sets have in common. Therefore, the correct answer is 175 records because there are 175 matching records in the two data sets.
Choice “B” is incorrect. An inner join uses only the records that both data sets have in common, so the correct answer is 175. 900 would assume that both of the data sets, including the matching records, would be included in the resulting data set.
Choice “C” is incorrect. An inner join uses only the records that both data sets have in common, so the correct answer is 175. 325 would assume that only the first data set is used but the 175 matching items are removed.
Choice “D” is incorrect. An inner join uses only the records that both data sets have in common, so the correct answer is 175. 500 would assume that only the first data set is used.
A3
While performing an audit, the auditor compares the client’s inventory turnover ratio for this year to the prior year, and to the client’s main competitor. The above would be most appropriately considered a:
A. Substantive analytical procedure. B. Substantive recalculation procedure. C. Standard audit procedure. D. Test of details.
Choice “A” is correct. The above procedure performed by the auditor is a substantive analytical procedure. This analytical procedure is used to test relationships among data (ratios) in the current period and the past period as well as the client’s main competitor.
Choice “B” is incorrect. Because the auditor is comparing relationships among data (ratios) and not recalculating the accuracy of the corresponding data, the procedure would not be a substantive recalculation procedure.
Choice “C” is incorrect. Standard audit procedures represent a general category of various audit procedures used to gather audit evidence.
Choice “D” is incorrect. A test of details is usually performed by an auditor to support the client’s ending balance or the specific details of transactions.
A3
In performing tests of controls over authorization of cash disbursements, which of the following statistical sampling methods would be most appropriate?
A. Stratified. B. Ratio estimation. C. Attributes. D. Variables.
Choice “C” is correct. Attributes sampling is the statistical sampling method used when testing controls.
Choice “A” is incorrect. Stratified sampling is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.
Choice “B” is incorrect. Ratio estimation is used in conjunction with variables sampling, and is therefore used in substantive testing, not in tests of controls.
Choice “D” is incorrect. Variables sampling is used in substantive testing, not in tests of controls.
What sampling methods are used for substantive testing?
- Stratified
- Ratio estimation
- Variables
What is the difference between substantive (analytical) procedures, test of details, and control testing.
Substantive procedures identify errors or discrepancies in financial statements or accounting procedures.
In contrast, the test of details examines details (data, numbers, accounts, etc.) to verify accuracy and detect errors.
Control testing evaluates the effectiveness of the testing system itself.
What is the difference between test of details and substantive testing procedures in an audit?
The terms are used interchangeably, but technically, substantive testing procedures include test of details and analytical procedures. Test of details relates to obtaining source documentation and reconciling, tracing, vouching, etc. Analytical procedures relate more to using financial and nonfinancial information to derive expected balances and comparing to the actually reported balance.
What are the main types of substantive procedures?
- Test of details
- Substantive analytical procedures
What is vouching invoices, sending bank confirmations, reconciling information, and searching for unrecorded liabilities?
Test of details
What is using financial and non-financial information including ratios to derive expected balances to compare to the actual balances?
Substantive Analytical Procedures
A2
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. External quality reviews of the internal auditor's activities. B. Previous experience with the internal auditor. C. The results of analytical procedures. D. Discussions with management personnel.
Choice “C” 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 external quality reviews of internal audit activities.
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 previous experience with the internal audit function.
Choice “D” 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.
