AUD Flashcards
(166 cards)
1
Q
Statement on Auditing Standards (SASs)
A
Most authoritative level of auditing guidance for non-public companies. Auditors have to comply to these standards when auditing non-public companies.
2
Q
When is Other-Matter Paragraph Required?
A
- Subsequent facts discovered that would change audit opinion
- FS of the prior period were audited by a predecessor/previous auditor and predecessor/previous audit report is not reissued
- Comparative FS with prior period being either reviewed or not audited or compiled
- To restrict use of report when the audit was for FS prepared in accordance with regulatory basis
- Report on compliance included in auditors report of FS
- Anytime the auditor mentions restriction of use
- Note, there are other optional reasons to include other-matter paragraph
3
Q
Disclaimer or Withdraw from engagement
A
When the undetected misstatements due to scope limitation are both material and pervasive.
4
Q
Disclaimer of Opinion
A
The auditor does not express an opinion on the FS/Scope limitation
5
Q
Adverse Opinion
A
FS do not present fairly the financial position of the company. Both material and pervasive.
6
Q
Qualified Opinion
A
Except for the effects of the matter(s) to which the qualification relates, the FS present fairly the financial position of company. Or if there is a scope limitation.
7
Q
What is the only opinion to be issued if auditor is not independent?
A
Disclaimer of Opinion
8
Q
Can you comply with multiple auditing standards in the same engagement?
A
Yes, an audit may be conducted in accordance with two sets of auditing standards in their entirety.
9
Q
Opinion section of auditors report should include:
A
- Include a statement regarding opinion
- Indication of the applicable financial reporting framework & its origin (Also in management’s responsibility section)
- The nature of the engagement. I.e. FSs covered, name of entity and dates of coverage.
- Refer to GAAP (only public companies)
10
Q
Explicitly represented in audit report
A
- Examination of evidence on a test basis
- Management’s responsibilities
- Auditor’s responsibilities
11
Q
Implicitly represented in audit report
A
1.Consistent application of accounting principles
12
Q
Critical Audit Matter (CAM)
A
A CAM is a matter that was communicated or is required to be communicated to the audit committee and involves an especially challenging judgement made by the auditor. Immediately follows the basis for opinion section
13
Q
Emphasis of matter paragraph
A
Purpose of Emphasis of Matter paragraph in an auditor’s report is to draw users’ attention to a matter that is appropriately presented or disclosed in the FS and is considered fundamental to their understanding, without modifying the auditor’s opinion. I.E. the applicable financial reporting framework
14
Q
What is the only opinion to be issued in an audit where the auditor is not independent?
A
Disclaimer of Opinion
15
Q
Wording in opinion paragraph when there is a scope limitation
A
When an auditor qualifies his opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
16
Q
Does a material weakness get reported in an unmodified opinion?
A
No, but it must be reported to those charged with governance.
17
Q
When is an emphasis-of-matter (explanatory) paragraph required?
A
- When FS are prepared in accordance with an applicable special purpose framework, like the cash basis of accounting.
- When there is a justified change in accounting principle that has a material effect on the entity’s FS
18
Q
Difference between Other Matter and Emphasis of Matter?
A
An “emphasis of matter” paragraph in an auditor’s report highlights matters appropriately presented or disclosed in the financial statements that are considered fundamental to users’ understanding, while an “other matter” paragraph addresses matters not presented or disclosed in the financial statements that are relevant to users’ understanding.
19
Q
What is the opinion on an audit report for going concern with no other significant findings?
A
Unqualified with an emphasis of matter or explanatory if public.
20
Q
T/F - Consistency is only mentioned in the audit report if the auditor cannot gather sufficient evidence about the consistency of the FS?
A
True and the lack of consistency should be reported in the emphasis of matter paragraph.
21
Q
Comparative FS that include PY FS that were audited by a previous auditor whose report is not presented, but was unmodified. What should the current auditor do?
A
The current auditor should indicate in an other matter paragraph that the previous auditor issued an unmodified opinion on the PY FS
22
Q
When group auditor makes no reference to component auditor in report?
A
Assumes responsibility for work of component auditor
23
Q
What should a successor auditor do when they are auditing comparative FSs but do not present the previous auditor’s report?
A
1.That the statements were audited by a predecessor auditor. The predecessor auditors should not be named unless the practice of the predecessors was acquired by or merged with that of the successor.
2. The type of opinion expressed by the predecessor auditor and, if the opinion was modified, the reason for the modification.
3. The nature of any emphasis-of-matter, other-matter, or explanatory paragraph included in the predecessor auditor’s report.
4. The date of the predecessor auditor’s report.
24
Q
What does it mean if an audit report is dual dated before the issuance of a FS?
A
When an auditor issues a report that is dual dated for a subsequent event occurring after the original date of the auditor’s report, but before issuance of the related financial statements, the auditor’s responsibility for events occurring subsequent to the original report date is limited to the specific event referenced.
25
What does the auditor do with supplementary information?
The auditor should perform limited procedures on required supplementary information accompanying the financial statements. In addition, the auditor's report on the financial statements should include a separate section with the heading, "Supplementary Information.
26
If FS are prepared in accordance with a special purpose framework other than GAAP where should the auditor right about this?
Emphasis-of-matter paragraph usually
27
What happens to the work already done by a CPA if an attestation engagement is changed to a review engagement half way through?
The auditor should make NO reference to the scope limitation that may have forced the change or the audit procedures that have already been applied.
28
T/F Contact w the predecessor auditor is mandatory?
True, but client permission is required
29
If predecessor auditor refuses to provide current auditor on a nonissuer access to their workpapers what should the current auditor do?
Review the risk assessment of the opening balances of the financial statements
30
What are the six elements of quality control for a CPA firm?
Human resources
engagement/client acceptance and continuance
leadership responsibilities
performance of the engagement
monitoring
ethical requirements
A CPA firm is required to adopt a system of quality control
31
T/F A successor auditor should ordinarily request to review the predecessors audit documentation relating to contingencies and internal control.
True, A review of the predecessor's audit documentation related to matters of continuing accounting and auditing significance would be permitted and ordinary.
32
Which is required before an engagement from the predecessor auditor?
The current auditor must inquire of the predecessor auditor regarding management integrity
33
What must a independent CPA do that is associated with the financial statements of a public company but has not audited or reviewed the statements?
When an accountant is associated with the financial statements of a public entity, but has not audited or reviewed such statements, the accountant must issue a report disclaiming any opinion on the statements.
34
What is a representation letter?
A formal written statement from management to the auditor, confirming the accuracy and completeness of information provided during the audit and affirming management's responsibility for the FS.
35
What should you do with other information on the FS as an auditor?
You're only required to read the information
36
When is the documentation completion date?
Fourteen days following the report release date.
37
Maximum number of days in which a non-issuer's auditor should complete the assembly of the final audit file following the report release date?
60 days (non-issuer) 14 days (issuer)
38
How long should an audit firm retain its workpapers?
7 Years (public, SOX) 5 Years(Non public)
39
COSO Framework - 3 categories of entity objectives
Reliability of Financial Reporting
Effectiveness and efficiency of operations
Compliance with laws and regulations
40
Components of Internal Control
Control Environment
Monitoring
Information and communication systems
Risk Assessment
Control activities
41
Control Environment Principles (COSO)
Commitment to ethics and integrity
Board independence and oversight
Organizational Structure
Commitment to competence
Accountability
42
Risk Assessment Principles (COSO)
Specify Objectives
Identify and assess changes
Consider potential for fraud
Identify and analyze risks
43
Information and Communication Principles (COSO)
Obtain and use information
Internally communicate information
communicate with external parties
44
Monitoring Activities Principles (COSO)
Ongoing and/or separate evaluations
Communications of deficiencies
45
(Existing) Control Activities Principles (COSO)
Select and develop control activities
Select and develop technology controls
Deployment of policies and procedures
46
What is the difference between an audit strategy and audit plan?
An audit strategy outlines the scope of the engagement, objectives, timing of the audit, required communications, and other factors that determine the focus of the audit. The audit plan is how you are going to execute based on your strategy. The auditor must document the audit plan according to GAAS normally having to do with nature, extent, and timing.
47
What is the difference between the CPA's audit plan and IA's audit plan?
IA's audit plan is more detailed and covers area that would normally not be covered by the CPA's audit plan.
48
When should an auditor refer to the use of a specialist?
Only if the a modified/qualified opinion is issued and it relates to the actuary's findings.
49
The auditor intends to modify an opinion due to the use of an external specialist. In this case, what should the auditor indicate to in their report?
The reference to the auditor's external specialist does not reduce the auditor's responsibility for that opinion.
50
What can IA not do in assisting with the independent audit?
The independent auditor cannot rely on the professional judgement of the IA manager
51
What is usually used in the preliminary determination?
The entity's PY financial statements
52
What percentage range should an audit firm use in its guidance for PM?
If high likelihood of misstatement then would probably use the lower range to get PM lower and vice versa.
53
What level should audit risk be at?
It should be able to be mitigated to a low level
54
Risk of material mistatement
Is assessed by auditor
55
Detection risk
Controlled by Auditor
56
What is the audit risk model
audit risk = risk of material misstatement x detection risk
57
What is the relationship between risk of material misstatement to detection risk?
They are inversely related. For example if risk of material misstatement (RMM=IR x CR) is high, detection risk should be set at a low level and vice versa.
58
What is the difference in testing when RMM and DR are inversely related?
Increased assurance required from substantive testing when detection risk low and risk of material misstatement high. And less assurance required from substantive testing when detection risk is high and risk of material misstatement is low.
59
If fraud risk is high what should the ET do?
Design audit procedures appropriately to minimize detection risk. This helps ensure that the auditor will obtain reasonable assurance about whether the financial statements are free of material misstatement caused by fraud.
60
T/F Control risk and detection risk are inversely related?
True, I.E. as control risk increases the auditor must reduce detection risk by performing more audit procedures to maintain a reasonable level of audit risk.
61
What is detection risk?
The risk that an auditor's procedures will fail to detect a material misstatement that exists in the financial statements.
62
What should the auditor do if the FS were prepared in accordance with a comprehensive basis of accounting other than GAAP that are not titled correctly?
Issue a qualified opinion with a basis for modification paragraph.
63
What may IA help the independent auditor with?
Obtaining an understanding of internal control
Performing tests of controls
Performing substantive tests
Nothing Judgement based though.
64
Statement: An auditor uses the assessed level of control risk to determine the risk of material misstatement, which in turn determines the acceptable level of detection risk for financial statement assertions.
Know the above.
65
What must an auditor note in the engagement letter in relation to the Auditor's Responsibility of controls?
The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the auditor's attention.
66
What are some leading indicators to predict economic activity/business cycles?
Orders for goods, building permits, and unfilled orders are all examples of leading indicators
67
How do you describe a trough in a business cycle?
An economic low point with no positive indicators for the future. It is characterized by unused productive capacity and an unwillingness to risk new investments.
68
Describe the steps of a business cycle in order.
Expansion, peak, contraction, trough
69
General Controls
Policies and procedures that relate to many applications and support the effective functioning and proper operation of the information system.
70
What is the most likely reason an auditor would change their documentation on Internal controls?
The implementation of IT controls
71
If there is substantial doubt about going concern and it is appropriately disclosed what should the auditor include in a separate section of the auditor's report?
Heading='Substantial Doubt About the Entity's Ability to Continue as a Going Concern' - Does not bring up the time period
72
If doubt is mitigated about going concern what does an auditor put instead of an extra paragraph with the heading titled 'Substantial Doubt About the Entity's Ability to Continue as a Going Concern'
Emphasis-of-matter paragraph
73
What does the auditor's risk assessment do?
Affects the nature, extent, and timing of audit procedures.
Note: Does NOT determine the relevance of audit evidence
74
T/F Would a client's IT system being extensively integrated throughout their accounting system increase tests of controls?
True = Because evidence for a substantive audit test may not be available and the auditor will have to rely more heavily on tests of internal controls related to the IT system.
75
Which account classifications tend to be more predictable when using analytical procedures?
Income Statement accounts that are not subject to management discretion.
76
Are analytical procedures required to be used in substantive testing?
No - there most likely to be used for accounts that are more predictable.
77
Which assertion would an auditor use for understated/overstated expenses?
Overstatement: Existence Assertion
Understatement: Completeness Assertion
78
Vouching
Testing for existence
Risk of overstatement for revenue and assets
From FS to source
79
Tracing
Testing for completeness
Risk of understatement for expenses and liabilities
From source to FS
80
Completeness audit procedures
Tracing
Analytical review
Observation
81
Cutoff audit procedures
Cutoff procedures
82
Valuation, Allocation, and Accuracy procedures
Inspection
Footing
Recalculation
Reconciliation
83
Existence and Occurence
Confirmation
Observation, Inspection, and examination
Vouching
84
Rights and Obligations
Inspection
Confirmation
85
Understandability of Presentation and Classification procedures
Inspection
Review
Inquiry
86
What does it mean to stratify the population?
You stratify the population if the auditor plans to give greater representation to large recorded amounts. Often used when the population has highly variable recorded amounts and involves grouping the population into similar groups such as grouping large recorded items as a group.
87
When is ratio estimation sampling most effective?
If there is a correlation between book values and audit amounts.
88
Attribute Sampling
Estimates rate of occurrence and is primarily used for testing controls
Often deals with yes-or-no questions
89
Variables sampling or probability-proportional-to-size (PPS) sampling
Estimates a numerical quantity and is generally used for substantive testing
90
T/F The auditor’s allowable risk of assessing control risk too low has an inverse relationship with sample size when planning a sample for a test of controls
True
91
Is population size and sample size related?
No, Population size is not an issue in determining a sample size, provided the population is relatively large
92
T/F Is sample size determined based on sampling risk?
True, In both statistical and nonstatistical sampling, the sample size is determined based on the sampling risk that the auditor is willing to accept based on their professional judgment.
93
Why would an auditor most likely stratify a sample?
The population has highly variable recorded amounts. The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of some characteristic related to the specific audit objective.
94
For the most effective internal control for cash monthly bank statements should be received directly from the banks and reviewed by who?
The internal auditor
95
Where would an auditor most likely find a contingent liability?
By obtaining a standard bank confirmation
96
What internal control most likely addresses the completeness assertion for inventory?
Receiving reports are prenumbered and periodically reconciled.
97
What management assertion is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance?
Inventory is complete.
98
An auditor testing long-term investments would ordinarily use analytical review as the primary audit procedure to ascertain the reasonableness of the
Completeness of recorded investment income. Analytical review is generally used to ascertain the reasonableness of investment income in relationship to the amount invested.
99
T/F Should the auditor consider the impact of misstatements on both prior year uncorrected misstatements and the current year misstatements on the prior year?
Yes, true.
100
What is a summary of items included in the management representation letter?
The management representation letter typically includes information regarding the financial statements, the completeness of information, recognition, measurement, and disclosure, and subsequent events. Representations regarding internal control are not typically included in a management representation letter.
101
An auditor should assess whether an issuer's management philosophy and operating style promote the development of what?
Effective internal controls are critical to ensuring the reliability of the financial statements, so an auditor's role will include assessing whether a company supports effective internal control over financial reporting. Maintaining effective internal control over financial reporting is management's responsibility.
102
T/F Does the SEC require all public entities to have an audit committee?
No, The SEC has strongly recommended that companies establish audit committees, but does not require this action.
103
What is the definition of a material weakness?
A material weakness is a deficiency, or combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented or detected/corrected.
104
Should material weaknesses and significant deficiencies be separately identified?
Yes, material weaknesses and significant deficiencies should be identified separately.
105
What approach is used when selecting controls to test in an integrated audit?
Top-down approach
106
What is Attestation Agreement?
An attest engagement is one in which a CPA in public practice (i.e., practitioner) is engaged to, or does, issue an examination/audit, review, compilation or agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party (usually management).
Can include attestation of financial Information beyond historical FS.
107
Variables Sampling
Variable sampling, also known as variable-rate sampling or continuous sampling, is a statistical method used for auditing or quality control. Unlike attribute sampling, which looks at data in a binary way (e.g., pass/fail, yes/no, defective/non-defective), variable sampling evaluates characteristics that can be measured and quantified on a continuous scale. These characteristics can include weight, length, time, cost, temperature, and so on.
The main objective of variable sampling is often to determine the mean, variance, or other statistical attributes of a population based on a sample. By using variable sampling, auditors or quality control professionals can make inferences about the entire population from which the sample is drawn.
108
Attribute Sampling
Attribute sampling is defined as the method of measuring quality that consists of noting the presence (or absence) of some characteristic (attribute) in each of the units under consideration and counting how many units do (or do not) possess it.
109
Do agreed upon procedures provide assurance?
Agreed-upon procedure engagements provide no assurance. Reviews provide limited (negative) assurance.
110
What is a Partial Presentation of prospective Financial information?
"Partial presentations" are presentations of prospective financial information which would not ordinarily be appropriate for general use because they omit one or more of these essential elements: (a) sales or gross revenue, (b) gross profit or cost of sales, (c) unusual or infrequently occurring items, (d) provision for income taxes, (e) discontinued operations or extraordinary items, (f) income from continuing operations, (g) net income, (h) earnings per share, and (i) significant changes in financial position.
111
Financial Forecast
A financial forecast is an estimate of what a business expects to happen, based on its current plans and historical data. May have a restricted use clause.
112
Financial Projection
A financial projection explores potential scenarios or outcomes based on hypothetical assumptions.
113
SOC 1 Report
A report on the internal controls over financial reporting at a service organization
114
SOC 2 Report
A report on internal controls related to one or more of the Trust Services Criteria. The Trust Services Criteria include security, availability, confidentiality, privacy, and processing integrity.
115
SOC 1 Type 2 report
The SOC 1® Type 2 report provides a user auditor with assurance about the design, implementation, and operating effectiveness of a service organization's internal controls
116
SOC 1 Type 1
A SOC 1 Type 1 report, also known as a point-in-time report, focuses on the design of a service organization's internal controls over financial reporting (ICFR) as of a specific date. No operating effectiveness tested.
117
T/F In order for an auditor to issue a report on a client's compliance in connection with a financial statement audit, the auditor must have audited the client's financial statements and expressed an unmodified or qualified opinion?
True, In order for an auditor to issue a report on a client's compliance in connection with a financial statement audit, the auditor must have audited the client's financial statements and expressed an unmodified or qualified opinion. The auditor may only issue negative assurance on compliance in this situation.
118
Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess what?
Before performing substantive tests at an interim date, the auditor must assess the difficulty in controlling the incremental audit risk from the interim date (on which the substantive procedures are performed) to the year-end date (on which an opinion is rendered)
119
As the acceptable level of detection risk decreases, the assurance directly provided from what should increase?
As the acceptable level of detection risk (the risk that an auditor will not detect a material misstatement that exists in an assertion) decreases, the assurance directly provided from substantive tests should increase. The level of detection risk will decline as the benefit of direct tests increases.
120
Presumptively Mandatory Requirement
Presumptively mandatory indicates that the requirement must be followed in all cases where the requirement is relevant, except in rare circumstances in which auditors and audit organizations determine it is necessary to depart from the presumptively mandatory requirement. If, in rare circumstances, auditors judge it necessary to depart from a relevant presumptively mandatory requirement, they must provide a special explanation, which includes their justification for the departure and how the alternative procedures performed in the circumstances were sufficient to achieve the intent of that requirement. Generally accepted government auditing standards uses the term "should" to describe presumptively mandatory items.
121
Which has greater reporting responsibilities for an auditor?
(GAGAS v GAAS)
GAGAS
An auditor's reporting requirements under Generally Accepted Government Auditing Standards (GAGAS or the Yellow Book) are expanded to include reports on the audited entity's compliance with laws, rules, and regulations that have a material impact on the financial statements and on internal controls over financial reporting.
122
What is a 2 CFR 200 Audit?
A 2 CFR 200 audit, also known as a "Single Audit" or a "Uniform Guidance Audit", is an audit conducted on non-federal entities that receive $750,000 or more in federal funds annually. It ensures compliance with federal statutes, regulations, and the terms of the federal awards. These audits are required to verify that the recipient organization is using the federal funds appropriately and in accordance with established guidelines.
123
When does Statement on Standards for Accounting and Review Services (SSARS) apply?
SSARS apply when an accountant prepares, compiles, or reviews financial statements.
124
What is the objective of a review of interim financial information of a public entity?
It is to provide an accountant with a basis for reporting whether
Material modifications should be made to conform with generally accepted accounting principles.
125
The Public Company Accounting Oversight Board consists of?
The PCAOB consists of exactly two CPAs and three non-CPAs.
126
At least how often should the PCAOB inspect a registered public accounting firm that regularly issues audit reports to 50 issuers?
The PCAOB must conduct an inspection once every three years for registered public accounting firms that issue 100 or fewer audit reports. 100 or more is an annual inspection.
127
Rules issued under the Sarbanes-Oxley Act of 2002 restrict former members of an audit engagement team from accepting employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission. How many annual audit period(s) must be completed before such employment can be accepted?
To impose a disincentive to fraud, an audit team member may not accept employment as a chief executive, chief financial or chief accounting officer, or controller of an audit client that files reports with the Securities and Exchange Commission for one year.
128
Pursuant to the Sarbanes-Oxley Act of 2002, an accountant who destroys documents to impede an investigation by a U.S. agency can be:
Fined and/or imprisoned not more than 20 years.
129
An issuer’s auditor is prohibited from providing tax services to which of the following individuals?
An issuer’s auditor is prohibited from providing tax services to corporate officers, the audit client, or to immediate family members of corporate officers. Corporate officers manage the day-to-day operations of the corporation and include positions such as the CEO, CFO, and COO.
130
Can an auditor review the engagement letter of a predecessor auditor?
No, it is not appropriate for the auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the current period audit.
131
A CPA firm has decided to rely on the audit work performed by another audit firm in the audit of a nonissuer. Should the CPA firm review the auditor's workpapers and reperform a subset of audit testing to validate the firm's conclusions?
Yes, when a CPA firm decides to take responsibility for another firm's audit work, the CPA firm should review the other firm's audit workpapers and reperform a subset of audit testing to validate the firm's conclusions.
132
In trying to predict how long the economy will be in its current recovery phase before entering an expansionary phase, what will economists look at as an indicator?
(Average time for unemployment) is a lagging indicator, which means it follows economic activity and provides signals after the fact. If economists are trying to predict the length of business cycles, they will look to leading indicators.
133
An organization has installed an uninterrupted power supply at its facility. This can most accurately be categorized as what type of control?
An uninterrupted power supply is considered a physical control. Physical controls monitor and control the environment of the workplace and computing facilities. They also monitor and control access to and from such facilities.
134
Under which circumstance would an auditor be most likely to perform substantive tests before the balance sheet date?
The account in question has very little activity from year to year.
The account in question is not reasonably predictable in terms of its relative significance to the financial statements.
The account in question fluctuates based on management's discretion.
The account in question has a high level of both inherent risk and control risk.
An account that doesn't change much from year to year is reasonably predictable with respect to amount, relative significance, and composition, making it a prime candidate for interim testing.
135
At which level would an auditor most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment?
The control environment is pervasive and reflects the overall tone of the organization. Therefore, the auditor is most likely to focus on the highest level of risk of material misstatement, which is risk assessed at the financial statement level.
136
Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?
Blank confirmations should be used if recipients are likely to sign confirmations without careful investigation. Blank confirmations require the recipient to fill in the balance, so the recipient cannot simply sign off without checking the balance.
137
Do Attestation Engagements include advocacy services and consulting services?
No, Attestation engagements specifically exclude advocacy services and consulting services.
138
Which term is used to describe the unique attribute that identifies a specific record in a table?
A primary key serves as a unique identifier to allow a user to identify a specific record in a database. A primary key is required so that a table record is always uniquely identifiable.
139
After performing risk assessment procedures, an auditor decided not to perform tests of controls. The auditor most likely decided that because?
After performing risk assessment procedures, an auditor might decide not to perform tests of controls because it would be inefficient. In other words, the time required to perform tests of controls would be greater than the reduction in time spent on substantive testing.
140
What is the only section of the auditors report that is affected by division of responsibility between two CPAs when one CPA does not want to assume responsibility of the other on their opinion of a wholly owned subsidiary?
Modifying the opinion section (reasoning); The opinion itself, auditors responsibility, and basis for opinion sections have no change.
141
The authority to accept incoming goods in receiving should be based on a (an):
Approved purchase order
142
In a well designed internal control, employees in the same department most likely would approve purchase orders, and also
In a well designed internal control, employees in the purchasing department most likely would approve purchase orders and also negotiate terms with vendors.
143
What is a data integrity error and possible example?
Data integrity relates to the assurance that data is consistent and accurate. Spreadsheets with manual inputs carry a higher risk of errors than those produced from automated processes. A spreadsheet with manual entry inputs from a printed report carries a high risk of data integrity errors.
144
What factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures?
Strong, effective controls improve the reliability of data.
145
(T/F) Does an effective internal control structure provide more assurance about the reliability of audit evidence?
True, reliability of audit evidence is enhanced by a satisfactory internal control structure.
146
In assessing the tolerable rate of deviations of a test of controls that was performed using statistical sampling, an auditor should consider that:
an auditor should consider that deviations from pertinent controls at a given rate ordinarily result in misstatements at a lower rate. In other words, sometimes the control is not working but that does not mean there is a dollar misstatement. Therefore, the actual misstatement rate could be lower than the control deviation rate.
147
Which of the following statements is not correct about materiality?
A.
An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
B.
The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
C.
Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
D.
An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.
Choice "A" is correct. Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements.
148
An auditor is assessing the appropriateness of management's rationale for selecting a model to measure the fair value of debt securities. If, during the current year, an active trading market for the debt security was introduced, the auditor should validate each of the following criteria, except whether the valuation model is:
A.
Appropriate for the debt security being valued.
B.
Evaluated and appropriately applied based on generally accepted accounting principles.
C.
Consistently applied from prior periods.
D.
Appropriate for the environment in which the entity operates.
Choice "C" is correct. Because an active trading market was introduced this year, it is likely that the method utilized would be inconsistent with the prior year. Specifically, the auditor would most likely expect the client to use a valuation model in the current year that uses observable quoted prices in the active market (Level 1), rather than the use of inputs other than quoted market prices (Level 2) or unobservable inputs (Level 3), one of which was most likely used in the prior year.
149
After considering an entity's negative trends and financial difficulties, an accountant engaged to review the financial statements has substantial doubt about the entity's ability to continue as a going concern. The accountant considered management's plans and determined that the substantial doubt about the entity's ability to continue as a going concern was alleviated and report disclosures were adequate. According to Statements on Standards for Accounting and Review Services, the accountant:
In a review engagement under SSARS, when there is substantial doubt about the entity's ability to continue as a going concern and those doubts are alleviated, then the accountant may, but is not required to, include an emphasis-of-matter paragraph.
150
The COSO Cube is used to illustrate the relationship between what?
The COSO Cube shows the three categories of objectives as columns, the five internal control components as rows, and the four levels of an entity’s organization as the third dimension.
151
A company hired a practitioner to perform an examination of prospective financial statements. The practitioner concluded that the assumptions did not provide a reasonable basis for the prospective financial statements. Which of the following types of opinion should the practitioner issue?
A.
Adverse.
B.
Disclaimer.
C.
Qualified.
D.
Unmodified.
Choice "A" is correct. In an examination of prospective financial statements, if the assumptions do not provide a reasonable basis for the prospective financial statements, then the practitioner should express an adverse opinion.
152
What are the parties typically charged with governance?
Those charged with governance may include the board of directors, audit committee, or certain government agencies external to the entity.
153
An accountant agreed to perform a compilation of a company's financial statements under Statements of Standards for Accounting and Review Services (SSARS). During fieldwork, the accountant decided to perform some analytical procedures. what would the accountant do related to the compilation engagement?
An accountant should issue a compilation report even though review procedures were performed on the engagement because the accountant was engaged to perform a compilation engagement. An accountant is not required, but may, perform other procedures, such as analytical procedures, to verify information supplied by management.
154
What are some ways to limit sampling risk?
Evaluating the sample results is a method used by auditors to limit sampling risk.
Evaluating the sample through random sample selection is a method used by auditors to limit sampling risk.
Ensuring that the sample items have equal probability of being selected is a method used by auditors to limit sampling risk.
155
An auditor may not issue a qualified opinion when?
If the auditor lacks independence with respect to an audit client, the auditor must disclaim an opinion on the financial statements. A qualified opinion is not an option.
156
When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except:
A.
Whether a separate audit report is to be issued on the component.
B.
Whether there has been any turnover of the component's board members.
C.
The legal requirements regarding the appointment of the auditor.
D.
The degree of independence of the component management from the parent entity.
Choice "B" is correct. Turnover of the component's board of directors generally would not influence the decision to obtain an additional engagement letter from the component.
157
1. Do you have to be independent for a compilation?
2. Do you have to be independent for agreed upon procedures?
1. No
2. Yes
158
What is a compensating balance arrangement?
A compensating balance is a minimum amount of funds that a borrower is required to keep in a non-interest-bearing account with a bank as part of a loan or line of credit agreement. It essentially serves as a form of collateral and an indirect payment for the loan or banking services.
159
Does an auditor express an opinion on a review report?
No, auditors do not express an opinion in review reports. Instead, they provide a negative assurance, meaning they state that they are not aware of any material modifications that should be made to the financial statements for them to be presented fairly, in all material respects, in accordance with the applicable financial reporting framework.
160
What is a sampling risk associated with efficiency of an audit?
What is a sampling risk associated with the effectiveness of an audit?
Risk of assessing control risk too high
This risk of incorrect acceptance
161
When is the only time customer confirmation is least effective?
Contingent Liabilities
162
Unreturned negative confirmation requests rarely provide significant explicit evidence?
True, although returned negative confirmations may provide evidence about the financial statement assertions, unreturned negative confirmation requests do not provide explicit evidence that the intended third parties received the confirmation requests and verified that the information contained in them is correct
163
In order to obtain an initial understanding of the system of internal control sufficient to assess the risk of material misstatement of the financial statements, an auditor would most likely perform which of the following procedures?
Risk-assessment procedures to evaluate the design of relevant controls.
164
Which of the following statements concerning control risk is correct?
A.
When assessing control risk, an auditor should not consider evidence obtained in prior audits about the operation of control activities.
B.
Control risk may be assessed sufficiently low to eliminate substantive testing for significant transaction classes.
C.
Control risk may be assessed sufficiently high to eliminate substantive testing for significant transaction classes.
D.
Assessing control risk and obtaining an understanding of an entity's system of internal control may be performed concurrently.
Choice "D" is correct. Assessing control risk and obtaining an understanding of an entity's system of internal control may be performed concurrently.
165
For a nonissuer, which of the following procedures would an auditor most appropriately perform to provide an opinion on whether supplementary information presented with financial statements is fairly stated in relation to the financial statements?
A.
Obtain verbal representations from management stating that it acknowledges its responsibility for the presentation of the supplementary information.
B.
Inquire of management about the purpose of the supplementary information and the criteria used by management to prepare the information.
C.
Obtain verbal representations from management about any significant assumptions or interpretations underlying the measurement of the supplementary information.
D.
Evaluate the appropriateness, but not the completeness, of the supplementary information.
Choice "B" is correct. The auditor should inquire of management regarding the purpose of the supplementary information and the criteria used to prepare the information. This is done in addition to the procedures performed during the audit of the financial statements.
166
When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor would least likely:
A.
Increase the assessed level of detection risk for the valuation assertion.
B.
Search for subsequent cash receipts.
C.
Examine shipping documents and sales invoices.
D.
Send a second positive confirmation request.
Choice "A" is correct. The auditor would only increase detection risk in response to a decrease in inherent and/or control risks, which is not the case here. Additionally, confirmation relates to the existence assertion, not the valuation assertion.
