AUD 1

Question 1

What is the definition of material misstatement

Answer 1

The risk that the FS are misstated prior to the audit

Question 1

What is the definition of Audit Risk

Answer 1

The risk that an auditor expresses the incorrect opinion and the FS are in fact misstated

Question 2

The size of a sample designed for dual-purpose testing should be

The larger of the samples that would otherwise have been designed for the two separate purposes.

The smaller of the samples that would otherwise have been designed for the two separate purposes.

The combined total of the samples that would otherwise have been designed for the two separate purposes.

More than the larger of the samples that would otherwise have been designated for the two separate purposes, but less than the combined total of the samples that would otherwise have been designed for the two separate purposes.

Answer 2

The larger of the samples that would otherwise have been designed for the two separate purposes.

Question 3

Which of the following controls would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments?

Senior management verifies that securities in the bank safe-deposit box are registered in the entity’s name.

The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks.

The controller compares the current market prices of recorded investments with the brokers’ advices on file.

Answer 3

The internal auditor compares the securities in the bank safe-deposit box with recorded investments.

Completeness deals with whether all transactions are recorded, and the comparison of securities in the bank safe-deposit box with recorded investments may reveal securities which are in the safe-deposit box but are not recorded.

Question 4

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit?

Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts.

Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions.

Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment.

Answer 4

Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

This answer is correct because income statement account relationships tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts as of a point in time.

Question 5

In which of the following situations would an auditor ordinarily choose between expressing a qualified opinion or an adverse opinion?

The auditor did not observe the entity’s physical inventory and is unable to become satisfied about its balance by other auditing procedures.

Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed.

There has been a change in accounting principles that has a material effect on the comparability of the entity’s financial statements.

The auditor is unable to apply necessary procedures concerning an investor’s share of an investee’s earnings recognized on the equity method.

Answer 5

Conditions that cause the auditor to have substantial doubt about the entity’s ability to continue as a going concern are inadequately disclosed.

Departures from generally accepted accounting principles result in either a qualified opinion or an adverse opinion—such lack of disclosure is a departure from generally accepted accounting principles.

Question 6

Which of the following types of engagements is not permitted under the professional standards for reporting on an entity’s compliance?

Agreed-upon procedures on compliance with the specified requirements of a law.

Agreed-upon procedures on the effectiveness of internal control over compliance with a law.

Review on compliance with specified requirements of a law.

Examination on compliance with specified requirements of a law.

Answer 6

Review on compliance with specified requirements of a law.

AT 601 does not allow the CPA to perform a review over compliance.

Question 7

A compilation report is not required when compiled financial statements are expected to be used by

Management only.

Management and third parties.

Third parties only.

A compilation report is required whenever financial statements are compiled.

Answer 7

A compilation report is required whenever financial statements are compiled.

Question 8

The safeguarding of inventory most likely includes

Comparison of the information contained on the purchase requisitions, purchase orders, receiving reports, and vendors’ invoices.

Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

Analytical procedures for raw materials, goods in process, and finished goods that identify unusual transactions, theft, and obsolescence.

Application of established overhead rates on the basis of direct labor hours or direct labor costs.

Answer 8

Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

The safeguarding of inventory most likely includes periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count. In order to safeguard inventory, you need to check periodically to ascertain whether you have physical possession of the inventory you have recorded.

Question 9

Inclusion of inaccurate supplemental information required by the FASB will result in which of the following types of reports?

Standard unmodified.

Unmodified with an other-matter paragraph.

Qualified with a basis-for-modification paragraph.

Adverse.

Answer 9

Unmodified with an other-matter paragraph.

This answer is correct because such information is considered unaudited and accordingly an unmodified report with an other-matter paragraph is appropriate.

Question 10

In an integrated audit, which must the auditor communicate in writing to management?

Only material weaknesses.

Material weaknesses and significant deficiencies.

Material weaknesses, significant deficiencies and other control deficiencies.

Material weaknesses, significant deficiencies, other control deficiencies, and all suspected and possible employee law violations.

Answer 10

Material weaknesses, significant deficiencies and other control deficiencies.

Question 11

Which of the following auditing procedures is ordinarily performed last?

Reading of the minutes of the directors’ meetings.

Confirming accounts payable.

Obtaining a management representation letter.

Testing of the purchasing function.

Answer 11

Obtaining a management representation letter.

Question 12

When an auditor has chosen a random sample and is using nonstatistical attributes sampling, that auditor

Need not consider the risk of assessing control risk too low.

Has committed a nonsampling error.

Will have to use discovery sampling to evaluate the results.

Should compare the deviation rate of the sample to the tolerable deviation rate.

Answer 12

Should compare the deviation rate of the sample to the tolerable deviation rate.

The deviation rate of the sample should be compared to the tolerable deviation rate regardless of whether statistical or nonstatistical sampling is being used.

Question 13

Which of the following is the most important consideration of an auditor when examining the stockholders’ equity section of a client’s balance sheet?

Changes in the capital stock account are verified by an independent stock transfer agent.

Stock dividends and/or stock splits during the year under audit were approved by the stockholders.

Stock dividends are capitalized at par or stated value on the dividend declaration date.

Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings.

Answer 13

Entries in the capital stock account can be traced to a resolution in the minutes of the board of directors’ meetings.

This answer is correct because the auditor’s primary concern when examining the stockholders’ equity section of the balance sheet is that proper authorization exists for transactions affecting the capital stock account.

Question 14

GAAS require the auditor’s report to contain either an expression of opinion regarding the financial statements or an assertion to the effect that an opinion cannot be expressed.

The objective of this requirement is to prevent

An auditor from expressing different opinions on each of the basic financial statements.

Restrictions on the scope of the audit, whether imposed by the client or by the inability to obtain evidence.

Misinterpretations regarding the degree of responsibility the auditor is assuming.

An auditor from reporting on one basic financial statement and not the others.

Answer 14

Misinterpretations regarding the degree of responsibility the auditor is assuming.

Question 15

Use of the ratio estimation sampling technique to estimate dollar amounts is inappropriate when

The total book value is known and corresponds to the sum of all the individual book values.

A book value for each sample item is unknown.

There are some observed differences between audited values and book values.

The audited values are nearly proportional to the book values.

Answer 15

A book value for each sample item is unknown.

This answer is correct because the ratio estimation sampling technique is based upon comparing the ratio of the book value to the audited value of the sampled items. This method cannot be used when book values for the sample items are unknown.

Question 16

Under PCAOB auditing standards, the auditor should communicate all of the following matters to an issuer’s audit committee at the beginning of the audit engagement except for

Significant issues that the auditor discussed with management in connection with the auditor’s appointment/retention.

The terms of the engagement, including the objectives of the audit and the parties’ respective responsibilities.

The qualitative aspects of the entity’s significant accounting policies, including any indications of management bias.

An overview of the audit strategy and timing of the audit, along with any significant risks identified by the auditor.

Answer 16

The qualitative aspects of the entity’s significant accounting policies, including any indications of management bias.

These would be discussed at the end of the audit.

Question 17

An entity’s income statements were misstated due to the recording of journal entries that involved debits and credits to an unusual combination of expense and revenue accounts. The auditor most likely could have detected this fraudulent financial reporting by

Tracing a sample of journal entries to the general ledger.

Evaluating the effectiveness of internal control.

Investigating the reconciliations between controlling accounts and subsidiary records.

Performing analytical procedures designed to disclose differences from expectations.

Answer 17

Performing analytical procedures designed to disclose differences from expectations.

An objective of analytical procedures is identification of unusual transactions and events, and amounts, ratios and trends that might indicate misstatements.

Question 18

Which of the following types of evidence would an auditor most likely examine to determine whether internal control structure policies and procedures are operating as designed?

Confirmations of receivables verifying account balances.

Letters of representations corroborating inventory pricing.

Attorneys’ responses to the auditor’s inquiries.

Client records documenting the use of computer programs.

Answer 18

Client records documenting the use of computer programs.

Confirmation of receivables, representation letters, and attorneys’ responses are examples of evidence collected as a result of the performance of substantive procedures. Evidence collected to determine whether internal controls are operating as designed would result from the performance of tests of controls. The only test of control listed is the examination of client records documenting the use of computer programs.

Question 19

An auditor would be most likely to assess control risk at the maximum level in an electronic environment with automated system-generated information when

Sales orders are initiated using predetermined, automated decision rules.

Payables are based on many transactions and large in dollar amount.

Fixed asset transactions are few in number, but large in dollar amount.

Accounts receivable records are based on many transactions and are large in dollar amount.

Answer 19

Fixed asset transactions are few in number, but large in dollar amount.

When such transactions are few in number and involve large dollar amounts, it is likely that an audit trail would exist, which would support the auditor’s substantive tests.

Question 20

The employment restrictions in the Code of Professional Conduct apply to:

All covered members

All 10-hour people

All “partners and professional employees (POPEs)

All managers in a position to influence the audit team

Answer 20

All “partners and professional employees (POPEs)

Question 21

Which of the following statements is correct concerning an auditor’s required communication with an entity’s audit committee (or those charged with governance)?

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

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

Any significant matter communicated to the audit committee (or those charged with governance) also should be communicated to management.

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

Answer 21

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

The auditor is required to communicate with an entity’s audit committee (or those charged with governance) about such matters as significant accounting policies, management judgments and accounting estimates, significant audit adjustments, disagreements with management, consultation with other accountants, and difficulties encountered in performing the audit. Management changes in the application of significant accounting policies are included in this list of matters to be communicated.

Question 22

Although the quantity and content of audit working papers vary with each particular engagement, an auditor’s permanent files most likely include

Schedules that support the current year’s adjusting entries.

Prior years’ accounts receivable confirmations that were classified as exceptions.

Documentation indicating that the audit work was adequately planned and supervised.

Analyses of capital stock and other owners’ equity accounts.

Answer 22

Analyses of capital stock and other owners’ equity accounts.

This answer is correct because permanent files include information affecting more than 1 year, such as analyses of capital stock and other owners’ equity accounts. While these accounts include few transactions annually, they have substantial balances which carry over to each following year.

Question 23

For which of the following audit tests would an auditor most likely use attribute sampling?

Making an independent estimate of the amount of a

LIFO inventory.
Examining invoices in support of the valuation of fixed asset additions.

Selecting accounts receivable for confirmation of account balances.

Inspecting employee time cards for proper approval by supervisors.

Answer 23

Inspecting employee time cards for proper approval by supervisors.

The requirement is to determine the audit test for which an auditor would most likely use attribute sampling. Answer (d) is correct because attribute sampling is used to reach a conclusion about a population in terms of a rate of occurrence. Here the rate of occurrence will be the rate of (un)approved time cards. Answers (a), (b), and (c) are all incorrect because they all relate more directly to variables sampling which is generally used to reach conclusion about a population in terms of a dollar amount. See the AICPA Audit and Accounting Guide, Audit Sampling, and AU-C 530 for more information on audit sampling.

Question 24

When financial statements contain a departure from GAAP because, due to unusual circumstances, the statements would otherwise be misleading, the auditor should explain the unusual circumstances in a separate paragraph and express an opinion that is

Unmodified.
Qualified.
Adverse.
Qualified or adverse, depending on materiality.

Answer 24

Unmodified.

When strict adherence to GAAP would result in misleading financial statements, the auditor may issue an unmodified opinion accompanied by an emphasis-of-matter paragraph describing the GAAP departure.

Question 25

In obtaining written representations from management, materiality limits ordinarily would apply to representations related to

Amounts concerning related-party transactions.

Irregularities involving members of management.

The availability of financial records.

The completeness of minutes of directors’ meetings.

Answer 25

Amounts concerning related-party transactions.

This answer is correct because related-party transactions are so limited by the professional standards. That standard’s approach is that, unless stated otherwise, representations may be limited to those that are considered material to the financial statements.

Question 26

The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to provide an acceptable explanation, the auditor should

Consider the matter a scope limitation.

Perform additional audit procedures to investigate the matter further.

Intensify the examination with the expectation of detecting management fraud.

Withdraw from the engagement.

Answer 26

Perform additional audit procedures to investigate the matter further.

This answer is correct because the auditor should investigate fluctuations that are not expected. The investigation would ordinarily begin with inquiries of management. If management is unable to provide an acceptable explanation, the auditor should perform additional procedures to investigate the fluctuation further.

Question 27

The auditor can best verify a client’s bond sinking fund transactions and year-end balance by

Confirmation with individual holders of retired bonds.

Confirmation with the bond trustee.

Recomputation of interest expense, interest payable, and amortization of bond discount or premium.

Examination and count of the bonds retired during the year.

Answer 27

Confirmation with the bond trustee.

Confirmation with the bond trustee represents externally generated evidence received directly by the auditor. Such evidence is considered very reliable.

Question 28

The auditor’s report on internal controls and compliance with laws and regulations in accordance with Government Auditing Standards (the Yellow Book) is required to include

I. The scope of the auditor’s testing of internal controls.

II. Uncorrected misstatements that were determined by management to be immaterial.

I only.
II only.
Both I and II.
Neither I nor II.

Answer 28

I only.

Correct! Government Auditing Standards require that the auditor report on the scope and results of tests of internal control over financial reporting and compliance with laws and regulations.

The auditor is not required to report on immaterial items. The correct answer is A—the auditor’s report must identify the scope of testing of internal controls.

Question 29

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may

Not believe that the bank is obligated to verify confidential information to a third party.

Sign and return the form without inspecting the accuracy of the client’s bank reconciliation.

Not have access to the client’s cut-off bank statement.

Be unaware of all the financial relationships that the bank has with the client.

Answer 29

Be unaware of all the financial relationships that the bank has with the client.

A standard bank confirmation request, particularly the standard bank confirmation request for loan guarantee information, must be completed by an individual who is knowledgeable about the financial relationships and transactions that the bank has with the client. Otherwise, the usefulness of the confirmation is limited.