12.27.18 Flashcards
An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it
Changes the company’s operating results from a net loss to a net income.
The circumstances of some misstatements may indicate that they are material, either individually or accumulated with others, even if they are below materiality for the statements as a whole. These circumstances include the extent to which a misstatement changes income into a loss or a loss into income.
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
The prospective client is unwilling to make all financial records available to the CPA.
The terms of the engagement should include management’s responsibility to provide access to all information and persons deemed necessary to the audit. If the prospective client is unwilling to make all financial records available to the CPA, the result may be a scope limitation that would require qualification of the opinion or a disclaimer of an opinion should the engagement be accepted.
An auditor who discovers that a client’s employees paid small bribes to municipal officials most likely would withdraw from the engagement if
Management fails to take the appropriate remedial action.
When the auditor concludes that an illegal act has or is likely to have occurred, (s)he should discuss the matter with the appropriate level of management and request that any necessary remedial actions be taken. If the alleged noncompliance has a material effect on the financial statements or the client does not take the remedial action that the auditor considers necessary, the auditor should express a qualified or adverse opinion, depending on the level of materiality, or withdraw from the engagement.
With respect to the auditor’s planning of a year-end audit, which of the following statements is always true?
It is an acceptable practice to carry out part of the audit at interim dates.
Much of the audit planning, including obtaining a sufficient understanding of internal control, assessing control risk, and the application of substantive tests to transactions can be conducted prior to the balance sheet date.
Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the public interest, and AICPA members in public practice shall not seek to obtain clients in such a manner. Such activities include all the following except those that
Indicate the CPA’s educational and professional attainments.
Advertising and solicitation are acceptable if they do not involve falsehood or deception.
Which of the following is prohibited by the AICPA Code of Professional Conduct?
Prematurely expressing an opinion based on an audit because of time pressures from the client.
The Integrity and Objectivity Rule prohibits a member from subordinating his or her judgment to others. The auditor must complete the audit prior to signing the report.
When a CPA is associated with financial statements that do not comply with promulgated GAAP because the statements would be misleading without the departure, the CPA is not required to disclose
The reason the departure does not have a material effect on the statements.
Under the Accounting Principles Rule, a CPA who performs services that require representations of conformity with promulgated GAAP is required to describe (1) the departure, (2) the approximate effects of the departure (if practicable), and (3) the reasons compliance would result in misleading financial statements. But this requirement applies only if the effect on the statements or data is material.
An auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor’s
Understanding of the reasons for the change in auditors.
Inquiries should include (1) facts that are relevant to the integrity of management; (2) disagreements with management about accounting principles, audit procedures, or other similar matters; (3) communications to those charged with governance (e.g., the audit committee) about fraud and noncompliance with laws and regulations; (4) communications to management and those charged with governance about significant deficiencies and material weaknesses in internal control; and (5) the predecessor’s understanding as to the reason for the change in auditors.
The engagement partner responsible for coordinating the field work usually schedules a pre-audit conference with the audit team primarily to
Give guidance to the staff regarding both technical and personnel aspects of the audit.
A pre-audit conference is useful to provide guidance to the staff regarding such technical issues as the expected use of client personnel and the expectations of the audit team.
If accounts receivable turned over 7.1 times in Year 1 as compared with only 5.6 times in Year 2, it is possible that there were
Fictitious sales in Year 2.
The accounts receivable turnover is the ratio of sales to average receivables. Fictitious sales would increase both the numerator and denominator. Adding an equal amount to both the numerator and denominator decreases a fraction greater than 1.0. For example, adding 1 to both parts of the fraction 3/2 decreases it to 4/3. The turnover ratio would decrease still more in the next period because the fictitious items would continue to increase receivables (which are cumulative) but not sales (which are closed periodically).
Which result of an analytical procedure suggests the existence of obsolete merchandise?
Decrease in the inventory turnover rate.
Inventory turnover is equal to cost of sales divided by average inventory. If inventory is increasing at a faster rate than sales, the turnover rate decreases and suggests a buildup of unsalable inventory.
According to the AICPA Code of Professional Conduct, under which of the following circumstances may a CPA receive a contingent fee for services?
Representing a client in an IRS examination of the client’s federal income tax return.
A contingent fee is permitted for representing a client in an IRS examination by a revenue agent of the client’s federal (or state) income tax return. A contingent fee also is permitted for representing a client who is (1) seeking a private letter ruling from the IRS or (2) lobbying with regard to the drafting of a statute or regulation.
In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the
Financial statement assertions.
Most audit work consists of obtaining and evaluating evidence about relevant financial statement assertions. They are management representations embodied in the financial statements that are used by the auditor to consider the types of possible material misstatements.
When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except
The cost of correcting the misstatements.
The auditor should determine whether uncorrected misstatements are material, individually or in the aggregate. The auditor should consider the size and nature of misstatements relative to (1) classes of transactions, account balances, or disclosures and (2) the financial statements as a whole. The auditor also considers the circumstances of each misstatement and the effect of uncorrected misstatements in prior periods on the relevant classes of transactions, etc. However, the authoritative guidance does not address the cost of correcting the misstatements.
One reason the independent auditor applies analytical procedures with regard to the client’s operations is to identify
Unusual transactions.
Analytical procedures are evaluations of financial information made by a study and comparison of the relationships among data. The premise is that certain relationships prevail in the absence of known conditions to the contrary. Analytical procedures identify such things as the existence of unusual transactions and events and amounts, ratios, and trends that might indicate matters that have financial statement and audit planning ramifications (AU-C 520). These matters may then be examined and investigated by the auditor.
