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Flashcards in A5-3 Deck (17)
1

Which of the following matters would an auditor most likely communicate to those charged with governance?

a.

The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance.

b.

Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables.

c.

A list of negative trends that may lead to working capital deficiencies and adverse financial ratios.

d.

The level of responsibility assumed by management for the preparation of the financial statements.

Choice "a" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance.

Choice "c" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance.

Choice "d" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management.

Choice "b" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management.

2

In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether:

a.

It agreed with the auditor's assessed level of control risk.

b.

It consulted with another CPA firm about accounting matters.

c.

The turnover in the accounting department was unusually high.

d.

There were any subsequent events of which the auditor was unaware.

Choice "b" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter.

Choice "c" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance.

Choice "d" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!)

Choice "a" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management.

3

Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity.

a.

The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management.

b.

Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again.

c.

Any matters communicated to those charged with governance also are required to be communicated to the entity's management.

d.

Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved.

Choice "a" is correct. If those charged with governance are not involved with managing the entity, the auditor should communicate material, corrected misstatements brought to management's attention as a result of the audit. 

Choice "c" is incorrect. Certain matters communicated to those charged with governance, such as those related to the competence and integrity of management, might not be appropriate for discussion with management.

Choice "d" is incorrect. The auditor should communicate disagreements with management, whether or not resolved.

Choice "b" is incorrect. Previously communicated significant deficiencies that have not been corrected should be communicated again, in writing, during the current audit.

4

An auditor would least likely initiate a discussion with those charged with governance concerning:

a.

The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated.

b.

The methods used to account for significant unusual transactions.

c.

Disagreements with management as to accounting principles that were resolved during the current year's audit.

d.

Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor.

Choice "a" is correct. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality assessments are not typically discussed with those charged with governance.

Choice "b" is incorrect. The auditor should communicate with those charged with governance about the appropriateness of significant accounting policies, such as the methods used to account for significant unusual transactions.

Choice "d" is incorrect. The auditor should inform those charged with governance of illegal acts that come to the auditor's attention during the course of the audit. Fraud involving senior management should also be reported directly to those charged with governance.

Choice "c" is incorrect. The auditor should discuss with those charged with governance any disagreements with management, whether or not they were satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report.

5

Which of the following statements is correct concerning an auditor's required communication with those charged with governance?

a.

This communication is required to occur before the auditor's report on the financial statements is issued.

b.

Significant audit adjustments proposed by the auditor and recorded by management need not be communicated to those charged with governance.

c.

Any significant matter communicated to those charged with governance also should be communicated to management.

d.

This communication should include management changes in the application of significant accounting policies.

Choice "d" is correct. The auditor should determine that those charged with governance are informed about the initial selection of and changes in significant accounting policies or their application.

Choice "a" is incorrect. The communication is incidental to the audit; accordingly, it is not required to occur before the issuance of the auditor's report 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 filed with the SEC.)

Choice "c" is incorrect. Communication with management is not required.

Choice "b" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments that could, either individually or in the aggregate, have a significant effect on the entity's financial reporting process, regardless of whether the adjustment was recorded.

6

Which of the following matters is an auditor required to communicate to those charged with governance?

a.

The auditor's preliminary judgments about materiality levels.

b.

The process used by management in formulating sensitive accounting estimates.

c.

The justification for performing substantive procedures at interim dates.

d.

The basis for his or her assessment of control risk.

Choice "b" is correct. The auditor should ensure that those charged with governance are informed about the process used by management in formulating particularly sensitive accounting estimates and about the basis for the auditor's conclusions regarding the reasonableness of the estimates.

Choices "d", "a", and "c" are incorrect. The basis for assessing control risk, preliminary judgments about materiality levels, and the justification for performing substantive procedures at interim dates are matters of auditor judgment that need not be shared with those charged with governance.

7

Which of the following matters is an auditor not required to communicate to those charged with governance?

a.

The degree of reliance the auditor placed on the management representation letter.

b.

The level of responsibility assumed by the auditor under generally accepted auditing standards.

c.

The basis for the auditor's conclusions about the reasonableness of management's sensitive accounting estimates.

d.

Significant adjustments arising from the audit that were recorded by management.

Choice "a" is correct. The auditor is not required to communicate to those charged with governance the degree of reliance placed on the management representation letter.

Choice "d" is incorrect. Unless all those charged with governance are also involved with managing the entity, the auditor should inform those charged with governance about adjustments arising from the audit, regardless of whether or not management recorded them.

Choice "c" is incorrect. The auditor should communicate qualitative aspects of the process used by management in formulating sensitive accounting estimates, which would likely include discussion of the basis for the auditor's conclusions regarding the reasonableness of those estimates.

Choice "b" is incorrect. The auditor should communicate the level of responsibility that he/she is assuming under GAAS.

8

An auditor's communication with those charged with governance is required to include the:

a.

Basis for the auditor's preliminary judgment about materiality.

b.

Justification for the auditor's selection of sampling methods.

c.

Assessment of the quality of the entity's earnings as compared to the previous year.

d.

Discussion of disagreements with management about matters that significantly impact the entity's financial statements.

Choice "d" is correct. The auditor should discuss with those charged with governance any significant disagreements with management, whether or not satisfactorily resolved, about matters that are significant to the financial statements or to the auditor's report.

Choices "a" and "b" are incorrect. There is no requirement that the auditor's communication with those charged with governance include a justification for any of the judgments made in conducting the audit.

Choice "c" is incorrect. An auditor is required to discuss his or her judgment about the quantitative aspects of the entity's accounting principles and estimates, not the quality of the entity's earnings. Note too that that no comparison to prior year is required.

9

Which of the following matters is an auditor required to communicate to those charged with governance?

a.

The results of the auditor's analytical procedures performed in the review stage of the engagement that indicate significant variances from expected amounts.

b.

Adjustments that were suggested by the auditor and recorded by management that have a significant effect on the entity's financial reporting process.

c.

Changes in the auditor's preliminary judgment about materiality that were caused by projecting the results of statistical sampling for tests of transactions.

d.

The auditor's consideration of risk factors in assessing the risk of material misstatement arising from the misappropriation of assets.

Choice "b" is correct. The auditor is required to communicate significant audit findings to those charged with governance. Significant audit findings include material, corrected misstatements brought to management's attention as a result of the audit. Unless all of those charged with governance are also involved with managing the entity, such findings should be communicated by the auditor.

Choice "d" is incorrect. The auditor is not required to communicate with those charged with governance regarding his/her fraud risk assessment.

Choice "a" is incorrect. The auditor is not required to communicate with those charged with governance regarding the results of specific audit procedures.

Choice "c" is incorrect. The auditor is not required to communicate with those charged with governance regarding changes to his/her preliminary judgment about materiality.

10

Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

a.

Disagreements of the amount of the LIFO inventory layer based on preliminary information.

b.

Disagreements in the application of accounting principles relating to software development costs.

c.

Disagreements regarding management's judgment about accounting estimates for goodwill.

d.

Disagreements about the scope of the audit.

Choice "a" is correct. Disagreements based upon preliminary information need not be communicated by the auditor to those charged with governance.

Choice "c" is incorrect. Disagreements with management regarding the application of accounting principles have to be communicated by the auditor to those charged with governance.

Choice "d" is incorrect. Disagreements about the scope of the audit have to be communicated by the auditor to those charged with governance.

Choice "b" is incorrect. Disagreements in the application of accounting principles relating to software-development costs must be communicated by the auditor to those charged with governance.

11

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee?

a.

The firm must address all independence impairment issues on the date of the audit opinion.

b.

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence.

c.

Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.

d.

Communications related to independence may occur in any form prior to issuance of the financial statements.

Choice "b" is correct. Communication regarding independence must be made in writing prior to accepting the engagement.

Choice "c" is incorrect. Oral affirmation is not a proper mode of communication for independence issues.

Choice "a" is incorrect. This communication regarding independence must take place prior to accepting the engagement.

Choice "d" is incorrect. These communications must be in writing.

12

Which of the following matters is an auditor required to communicate to those charged with governance?

~~Significant audit adjustments
~~Changes in significant accounting policies
a.

No

Yes

b.

No

No

c.

Yes

Yes

d.

Yes

No


Explanation

Choice "c" is correct. Yes - Yes. Unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate significant audit adjustments. The auditor is always required to communicate changes in significant accounting policies.

Choices "d", "a", and "b" are incorrect, based on the above explanation.

13

Should an auditor communicate the following matters to those charged with governance of a public entity?

~~Significant audit adjustments recorded by the entity
~~Management's consultation with other accountants about significant accounting matters
a.

No

Yes

b.

Yes

Yes

c.

No

No

d.

Yes

No

Choice "b" is correct. Unless all of those charged with governance are also involved with managing the entity, significant audit adjustments and significant matters relating to consultation with other accountants should be communicated to those charged with governance.

Choices "d", "a", and "c" are incorrect, based on the above explanation.

14

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.

This communication should include disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.

c.

If matters are communicated in writing, the report is required to be distributed to both those charged with governance and management.

d.

This communication is required to occur before the auditor's report on the financial statements is issued.

Choice "b" 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 "c" 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 "d" 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.)

15

An auditor must inform those charged with governance about:

I.

Disagreements with management.

II.

Disagreements among the audit staff.

III.

Difficulties encountered in performing the audit.

a.

I and II only.

b.

I, II, and III.

c.

I and III only.

d.

III only.

Choice "c" is correct. An auditor must inform those charged with governance about disagreements with management and difficulties encountered in performing the audit, but need not inform those charged with governance about audit staff disagreements.

Choice "b" is incorrect. An auditor need not inform those charged with governance about audit staff disagreements.

Choice "a" is incorrect. An auditor need not inform those charged with governance about audit staff disagreements, but should inform those charged with governance about difficulties encountered in performing the audit.

Choice "d" is incorrect. An auditor must inform those charged with governance about disagreements with management.

16

Which of the following is true about the auditor's communication with those charged with governance?

a.

Written communications to those charged with governance are appropriate for general use.

b.

The auditor should not discuss matters with management prior to communicating those matters to those charged with governance.

c.

The auditor should not discuss the planned scope and timing of the audit with those charged with governance, since it will compromise the effectiveness of audit procedures by making them too predictable.

d.

The communication should be two-way: those charged with governance should also communicate relevant matters to the auditor.

Choice "d" is correct. The auditor's communication with those charged with governance should be two-way: those charged with governance should also communicate relevant matters to the auditor.

Choice "b" is incorrect. The auditor may discuss matters with management prior to communicating those matters to those charged with governance.

Choice "c" is incorrect. The auditor may discuss the planned scope and timing of the audit with those charged with governance, but should be careful not to compromise the effectiveness of audit procedures by making them too predictable.

Choice "a" is incorrect. Written communications to those charged with governance should include a limitation on the use of the communication, indicating for whom it is intended and warning that it should not be used by others.

17

According to the SEC, members of an issuer's audit committee may not:

a.

Be responsible for the compensation of any registered public accounting firm employed by the registrant to provide an audit report.

b.

Accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board.

c.

Establish procedures for employees to anonymously report fraud.

d.

Engage independent counsel as deemed necessary to carry out their duties.

Choice "b" is correct. According to the SEC, members of an issuer's audit committee may not accept any consulting, advisory, or other compensatory fee from the registrant for services other than as a member of the board.

Choice "c" is incorrect. Members of an issuer's audit committee may establish procedures for employees to anonymously report fraud.

Choice "a" is incorrect. Members of an issuer's audit committee are typically responsible for the compensation of the public accounting firm employed by the registrant to provide an audit report.

Choice "d" is incorrect. Members of an issuer's audit committee may engage independent counsel as deemed necessary to carry out their duties.