AUD

Question 1

5 Circumstances for Special Report

Answer 1

1. Financial statements that are prepared in conformity with OCBOA
2. Specified elements, accounts, or items of a financial statement
3. Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements
4. Financial representations to comply with contractual agreements or regulatory provisions
5. Financial information presented in prescribed forms or schedules that require a prescribed form of auditor’s report

Question 2

Interpretation No. 1 to AU-C 230, Audit Documentation, entitled “Providing Access to or Copies of Audit Documentation to a Regulator,” Who is considered a “regulator”?

Answer 2

Regulators include State Insurance and Utility regulators, various health care authorities, Federal agencies such as the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Department of Housing and Urban Development, the Department of Labor, and the Rural Electrification Administration.

Regulators do not include IRS.

Footnote 2 of AU-C 9230 states that “the guidance in this Interpretation does not apply to requests from the IRS, firm practice-monitoring programs to comply with AICPA or state professional requirements such as peer or quality reviews, proceedings related to alleged ethics violations, or subpoenas.”

Question 3

Review engagement

Answer 3

Under SSARS,
Limited assurance - no material modifications
Analytical and inquiry performed
Independence required

Does not include:
Obtaining an understanding of the entity’s internal control
Assessing fraud risk
Testing accounting records by obtaining sufficient appropriate audit evidence through inspection, observation, confirmation, or the examination of source documents; or other procedures ordinarily performed in an audit.

The accountant does not test the entity’s internal control system nor assess the risk of material misstatement (whether due to errors or fraud).

Question 4

Change in engagement from audit to review

Answer 4

Reasonable justification, the report should not include reference to

1) the original engagement
2) any audit procedures that may have been performed
3) scope limitations that resulted in the changed engagement

Question 5

What occurs in a review if the management rep letter is not received?

Answer 5

A management representation letter is required for the issuance of a review report. Without this letter from management, the scope of the review is restricted, and the review cannot be completed.

Accountant precluded from issuing a review report on the financial statements and would ordinarily be precluded from issuing a compilation report on the financial statements

Question 6

Entity-level controls include:

Answer 6

controls related to the control environment,
controls over management override,
the company’s risk assessment process,
centralized processing and controls, including shared service environments,
controls to monitor results of operations,
controls to monitor other controls, including activities to monitor the internal audit function, the audit committee, and self-assessment programs,
controls over the period-end financial reporting process, and
policies that address significant business control and risk management practices.

Question 7

Auditor’s consideration of the possibility of noncompliance under applicable law or regulations by clients

Answer 7

The auditor has the responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, including misstatements resulting from noncompliance under applicable law or regulations having a direct and material effect on the financial statements. (This is the same responsibility the auditor has for errors or fraud.)

Other noncompliance under applicable law or regulations may have a material indirect effect on the financial statements. While the auditor does not need to perform procedures to detect noncompliance under applicable law or regulations, if evidence of possible noncompliance comes to the auditor’s attention, the auditor should then apply procedures to determine if noncompliance has occurred.

If the auditor determines, after inquiring of management, consulting with an attorney, and examining documentation, that noncompliance under applicable law or regulations has occurred, the auditor must then evaluate its effect on the financial statements. If the noncompliance has a material effect on the financial statements and the act has not been properly accounted for or disclosed, then the auditor should express a qualified or adverse opinion.

Question 8

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Answer 8

Shipments to customers were properly invoiced.

Question 9

In evaluating reasonableness, the auditor should obtain an understanding of how management developed the estimate by doing one or more of the following 3 things:

Answer 9

1) Review and test the process used by management to develop the estimate.
2) Develop an independent expectation of the estimate to corroborate the reasonableness of management’s estimate.
3) Review subsequent events or transactions occurring prior to the date of the auditor’s report.

Question 10

When a party such as a broker-dealer or other financial intermediary, other than an underwriter or other party with a due diligence defense under section 11 of the Securities Act of 1933, requests a comfort letter but does not provide the required representation letter, accountants should

Answer 10

not provide a comfort letter but may provide another form of letter.

Question 11

Risk of material misstatement of accounting estimates increases with increases in the:

Answer 11

1) complexity and subjectivity of the estimation process
2) lack of availability and reliability of relevant data
3) number and significance of the assumptions that are made, and
4) degree of uncertainty associated with the assumptions

Question 12

Engagement letter should include:

Answer 12

the objective of the audit (an expression of an opinion on the financial statements);
the fact that management is responsible for:
the financial statements,
establishing and maintaining effective internal control over financial reporting,
identifying and ensuring that the entity complies with laws and regulations,
adjusting the financial statements to correct material misstatements,
making all financial records and related information available to the auditor, and
providing the auditor with a letter that confirms certain representations made during the audit;
the scope of the audit work to be performed (in accordance with GAAS);
the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements;
mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies;
additional work to be performed, such as tax, consulting, or other services (if applicable);
any limitations or restrictions on the scope of the study;
work to be performed by the client’s staff (if applicable);
the basis of the auditor’s fee; and
the audit work schedule and estimated date of completion.

Question 13

General controls in IT

Answer 13

1) data center and network operations,
2) system software acquisition, change, and maintenance,
3) access security, and
4) application system acquisition, development, and maintenance.

Question 14

Who is responsible for the prevention and detection of fraud?

Answer 14

Management & Those Charged With Governance

Question 15

Compilation Report on Projection

Answer 15

AT 301.18 explains that in a compilation report the accountant should include a statement that the prospective results of the projection may not be achieved. Thus, the accountant is expressing no assurance that the results may be achieved.

The standard report on a compilation of prospective financial statements does include:

a statement that a compilation of a projection is limited in scope.
a disclaimer of responsibility to update the report for events occurring after the report’s date.
a separate paragraph that describes the limitations on the presentation’s usefulness.

Question 16

When considering the risk of material misstatements due to fraud, which of the following is not considered?

Answer 16

The role/position of an individual is not considered. Rather, the following attributes would be considered:

1) The type of risk that may exist; that is, whether it involves fraudulent financial reporting or misappropriation of assets
2) The significance of the risk; that is, whether it is of a magnitude that could lead to result in a possible material misstatement of the financial statements
3) The likelihood of the risk; that is, the likelihood that it will result in a material misstatement in the financial statements
4) The pervasiveness of the risk; that is, whether the potential risk is pervasive to the financial statements as a whole or specifically related to a particular assertion, account, or class of transactions

Question 17

Not ordinarily a departure from GAAP

Answer 17

While required by GAAP, the omission of a disclosure regarding advertising costs would not ordinarily be material to the financial statements taken as a whole and, therefore, not a departure from GAAP requiring modification to the standard accountant’s report.

Question 18

The objective of tests of details of transactions performed as tests of controls is?

Answer 18

Same as other test of controls, To evaluate whether controls operated effectively

Question 19

The Securities Exchange Act of 1934

Answer 19

Created the SEC

Question 20

The Securities Act of 1933

Answer 20

is concerned with preventing fraud in securities sales

Question 21

Government Auditing Standards (the “Yellow Book”) require a written report

Answer 21

on internal control in all audits

Question 22

An accountant’s report that is restricted should contain a separate paragraph at the end of the report that includes the following elements:

Answer 22

1) A statement indicating that the report is intended solely for the information and use of the specified parties
2) An identification of the specified parties to whom use is restricted. The report may list the specified parties or refer the reader to the specified parties listed elsewhere in the report.
3) A statement that the report is not intended to be and should not be used by anyone other than the specified parties

Question 23

Compilation Report includes:

Answer 23

A statement that the compilation has been performed in accordance with SSARS issued by the AICPA
A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management
A statement that the financial statements have not been audited or reviewed and that the accountant does not express an opinion on them
A signature of the accounting firm or accountant
The date of the compilation report (dated as of the date of completion of the compilation)
The report does not include a description of the procedures performed during the compilation, and the accountant is permitted to perform the compilation even if she is not independent. In this circumstance, the report would state that the accountant is not independent but would not disclose the reason for the lack of independence.

Question 24

Under Government Auditing Standards, the auditor should recognize the need to disclose the fraud to parties outside the entity:

Answer 24

To comply with legal and regulatory requirements
To a successor auditor when the successor makes inquiries in accordance with SAS 84
In response to a subpoena
To a funding agency or other specified agency in accordance with requirements for the audits of entities that receive governmental financial assistance

Question 25

Auditor's actions in a a review after management refuses to revise GAAP departures include:

Answer 25

When an accountant determines the financial statements contain one or more departures from GAAP, the first action is to ask management to revise the financial statements. If management refuses, the next action is to consider modifying one or more paragraphs to illustrate the departure and disclose the dollar effects. If a modified report is not sufficient to express the deficiencies, the accountant should withdraw from the engagement.

Question 26

Comparative reporting when predecessor's report is not presented should include the following:

Answer 26

Prior year's statements were audited by another auditor The date of the other auditor's report The opinion issued An explanation if the opinion was other than unmodified. The name of the predecessor auditor should not be mentioned if his or her report is not presented.

Question 27

Supp. info in a review should state:

Answer 27

The accountant's review report should state the other data was subjected to the inquiry and analytical procedures applied in the review of the basic financial statements and provide the same negative assurance as the basic financial statements OR state that the other data has not been subjected to those procedures but has been compiled from information that is the representation of management and the accountant does not express an opinion or provide any assurance on the data.

Question 28

Auditor should communicate with those charged with governance (the audit committee)

Answer 28

Auditor's responsibilities under generally accepted auditing standards, an overview of the planned scope and timing of the audit, and significant findings from the audit. The significant findings from the audit that should be communicated include: the auditor's view about qualitative aspects of the entity's significant accounting practices, significant difficulties encountered during the audit, uncorrected misstatements (that are not trivial), disagreements with management, other findings or issues that the auditor believes to be significant or relevant to the audit committee's oversight of the financial reporting process, material, corrected misstatements that were brought to the attention of management as a result of audit procedures, representations the auditor is requesting from management, management's consultations with other accountants about accounting and auditing matters, and significant issues arising from the audit that were discussed with management.

Question 29

Which of the following procedures most likely would assist an auditor in determining whether management has identified all accounting estimates that could be material to the financial statements?

Answer 29

Review the lawyer's letter for information about litigation.

Question 30

In obtaining an understanding of an entity's internal control that is relevant to audit planning, an auditor is required to obtain knowledge about the:

Answer 30

Design of controls relevant to an audit of financial statements

Question 31

To compile financial statements, the accountant should possess

Answer 31

1) a general understanding of the nature of the entity's business transactions 2) the form of its accounting records the stated qualifications of its accounting personnel 3) the accounting basis on which the financial statements are to be presented 4) the form and content of the financial statements

Question 32

Quality control policy or procedure related to the review of work performed by other engagement team members

Answer 32

the work has been performed in accordance with professional standards and applicable regulatory and legal requirements, significant findings and issues have been raised for further consideration, appropriate consultations have taken place and the resulting conclusions have been documented and implemented, the nature, timing, and extent of work performed is appropriate and without need for revision, the work performed supports the conclusions reached and is appropriately documented, the evidence obtained is sufficient and appropriate to support the report, and the objectives of the engagement procedures have been achieved.

Question 33

If accountant distributes a restricted use compilation:

Answer 33

If the accountant becomes aware that the financial statements have been distributed to third parties, the accountant should discuss the situation with the client and determine the appropriate course of action, including considering requesting that the client have the statements returned. If the accountant requests that the financial statements be returned and the client does not comply with this request within a reasonable period of time, the accountant should notify known third parties that the financial statements are not intended for third party use, preferably in consultation with his or her attorney.” The accountant is not required to issue a compilation report in this situation.

Question 34

When expected to be used by a 3rd party in a compilation, the auditor should

Answer 34

Issue a compilation report

Question 35

An auditor used test data to verify the existence of controls in a certain computer program. Even though the program performed well on the test, the auditor may still have a concern that:

Answer 35

The program tested is the same one used in regular production runs. The auditor may still have a concern that the program tested is in fact the production version. The auditor should take steps to reduce this concern such as a surprise audit to verify programs used. The test data method is a technique used with audit software.

Question 36

The auditor determines that effective internal controls exist for all relevant assertions related to a material class of transactions, account balance, and disclosure. As a result, the auditor can elect to perform which of the following tests?

Answer 36

Both, | Test of Controls & Substantive Tests

Question 37

Test data approach:

Answer 37

is introduced into the client's computer system using the same program to operate the application being tested. The output is compared to the auditor's predetermined results. The test data approach does not involve a separate program.

Question 38

Integrated test facility:

Answer 38

introduces a fictitious entity (such as a dummy subsidiary) with real entries in the master files of the client's computer system. The auditor then compares the processing of data through the fictitious entity with what should be there in order to test that the data processing is reliable. Like the test data (or test deck) approach, an integrated test facility uses the client's system.

Question 39

Section 11(A) of the Securities Act of 1933:

Answer 39

shifts the burden of proof in a lawsuit from the investor to the CPA who audited the financial statements. A CPA who audits the financial statements associated with a registration statement may be sued by anyone who acquires the securities. The CPA must show that the misstatement in the financial statements was immaterial, that the financial statements were not misleading, or that he exercised due diligence in the audit. The burden of proof is shifted to the CPA. The investor does not have to prove fraud, deceit, or reliance in order to win the lawsuit.

Question 40

Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements?

Answer 40

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud. When formulating an audit opinion, the auditor considers whether the audit procedures detected material misstatements that occurred due to fraud.

Question 41

GAGAS/ Government Auditing Standards

Answer 41

For audits of governmental entities, the auditor reports on internal control by stating that an understanding of the design of relevant internal controls has been obtained and that it has been determined whether they have been placed in operation. This requirement is in addition to communication of significant deficiencies noted (same as GAAS), and the identification of those constituting material weaknesses.

Question 42

Under the “percentage of coverage rule” that is included in the Single Audit Act Amendments of 1996, the auditor must select and test major programs that account for at least

Answer 42

50% of the federal funding spent by that entity

Question 43

Assuming that appropriate disclosure is made, which fee arrangements generally would be permitted under the ethical standards of the profession?

Answer 43

An accountant in public practice cannot recommend a product for commission when the accountant also performs an examination of prospective financial information, a compilation, or an audit. A fee paid to the client's tax accountant for recommending a computer system to the client is admissible as long as the three requirements are met.

Question 44

Which audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments?

Answer 44

Discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments

Question 45

If compiled F/S are not expected to be used by 3rd party, then:

Answer 45

If the compiled financial statements are not expected to be used by a third party, the accountant is not required to issue a compilation report (but still may). If the accountant does not expect to issue a compilation report on the financial statements, the accountant should include in the engagement letter an acknowledgment of management's representation and agreement that the financial statements are not to be used by a third party. Each page of the financial statements should be restricted by placing “Restricted for Management's Use Only” (or a similar phrase) on each page. The accountant is still required to follow SSARSs. (AR 60.15: “An accountant must perform a compilation or review engagement of a nonissuer in accordance with SSARSs…”)

Question 46

Comprehensive Budget Omnibus Reconciliation Act (COBRA)

Answer 46

requires employers to offer former employees continued benefits after they leave a position for a certain period of time. However, employees are normally responsible for the insurance premiums

Question 47

To determine whether a particular assertion is relevant to a significant account balance or disclosure, the auditor should evaluate:

Answer 47

1) the nature of the assertion, 2) the volume of transactions or data related to the assertion, and 3) the nature and complexity of the systems, including the use of information technology, by which the entity processes and controls information supporting the assertion.

Question 48

Ordinarily, communications that fraud or noncompliance with laws and regulations may have occurred to parties other than the client's senior management (or the client's board of directors) is which of the following? I. Not part of the accountant's responsibility II. Would be precluded by the accountant's ethical or legal obligations of confidentiality

Answer 48

Both, I. and II. The disclosure of any evidence or information that comes to the accountant's attention during the performance of compilation or review procedures that fraud or noncompliance with laws and regulations may have occurred to parties other than the client's senior management (or those charged with governance, if applicable) ordinarily is not part of the accountant's responsibility and, ordinarily, would be precluded by the accountant's ethical and legal obligations of confidentiality. Under certain circumstances, the accountant may have a duty to disclose this information to parties outside the entity, for example, in order to comply with legal and regulatory requirements, to a successor accountant, or in response to a subpoena.

Question 49

An auditor using audit software probably would be least interested in which of the following fields in a computerized perpetual inventory file? A. Economic order quantity B. Warehouse location C. Date of last purchase D. Quantity sold

Answer 49

The auditor would be least interested in the economic order quantity because the auditor is not concerned with the efficiency of the inventory system, but with the effectiveness of the system. Economic order quantity enables the client to minimize inventory carrying costs but does not assist the auditor in verifying inventory quantity on hand or quality of inventory.

Question 50

Public Company Accounting Oversight Board was established by

Answer 50

The Sarbanes-Oxley Act of 2002

Question 51

Primary objective of probability proportional to sample size

Answer 51

To identify overstatement errors Probability-proportional-to-size (PPS) sampling selects a sample based on dollars, not individual items. If the sampling interval for accounts receivable is $12,000, every invoice that has a value of over $12,000 will be selected. Large-dollar-value items have a higher chance of being selected in the testing, and overstatements are more likely to be detected than understatements.

Question 52

These activities do not consist of generating or submission of F/S:

Answer 52

Preparing monthly journal entries, providing the client with software to generate financial statements, and providing a blank financial statement format or template are all consulting services. SSARS do not apply

Question 53

Analytical procedures alone may provide the appropriate level of assurance for some assertions is CORRECT about Analytical Procedures.

Answer 53

The auditor's substantive procedures to address the assessed risk of material misstatement for relevant assertions may be tests of details, substantive analytical procedures, or a combination of both. The decision about which audit procedures to perform, including whether to use substantive analytical procedures, is based on the auditor's professional judgment about the expected effectiveness and efficiency of the available audit procedures to reduce the assessed risk of material misstatement to an acceptably low level.

Question 54

A practitioner may perform an agreed-upon procedure attest engagement on prospective financial statements providing the following 10 conditions are met:

Answer 54

1. The practitioner is independent. 2. The practitioner and specified parties agree on the procedures performed. 3. The specified parties take responsibility for the sufficiency of the agreed-upon procedures for their purposes. 4. The prospective financial statements include a summary of significant assumptions. 5. The prospective financial statements to which the procedures are to be applied are subject to reasonably consistent evaluation against criteria that are suitable and available to the specified parties. 6. The criteria used in the determination of findings are agreed on between the practitioner and the specified parties. 7. The procedures to be applied are expected to result in reasonably consistent findings using the criteria. 8. The audit evidence related to the prospective financial statements to which the procedures are applied is expected to exist to provide a reasonable basis for expressing the findings in the practitioner's report. 9. Where applicable, the practitioner and the specified users agree on any agreed-upon materiality limits for reporting purposes. 10. Use of the report is to be restricted to the specified parties.

Question 55

If a registered public accounting firm is in violation of any rule or regulation of the SEC or PCAOB:

Answer 55

They may not prepare or issue any audit report with respect to that issuer.

Question 56

Registered public accounting firms will lose independence of its audit clients if they perform tax services for persons in financial accounting oversight roles unless:

Answer 56

A. The person is only in the oversight role because they serve on the board of directors. B. The person's relationship to the audit client is through an affiliate, and the financial statements of the affiliate are not material to the consolidated financial statements. C. The person in the financial accounting role is not in that role prior to a hiring, promotion, or change in employment event.

Question 57

Section 103 of the Sarbanes-Oxley Act dictates that the Public Company Accounting Oversight Board (PCAOB) has the authority

Answer 57

to set, amend, update, and modify auditing, quality control, and ethics standards.

Question 58

Title III, Section 303 of SOX

Answer 58

deals with any action taken to fraudulently coerce, manipulate, or mislead the auditor. It prohibits any director or officer from acting in this manner, as well as anyone acting under their direction. Refusal to answer auditor questions honestly could be considered an attempt to mislead the auditor.

Question 59

Self-interest

Answer 59

the threat that a financial or other interest will inappropriately influence judgment

Question 60

Self-review

Answer 60

the threat that an auditor will not properly evaluate the results

Question 61

Bias

Answer 61

the threat that an auditor will promote a position where objectivity is compromised

Question 62

Familiarity

Answer 62

the threat that a close relationship will impact objectivity

Question 63

The permanent workpaper file of the auditor should contain items

Answer 63

that remain relatively unchanged from year to year. Analysis of capital stock and other owner's equity accounts represent accounts which have very few transactions each year and would be appropriate for the permanent file.

Question 64

When a client refuses to allow correspondence with legal counsel (a required procedure for an audit) or to provide a representation letter (a required procedure for both an audit and a review), the accountant cannot ignore that there may be reasons behind the client's refusal to cooperate.

Answer 64

SSARSs ordinarily preclude the accountant from downgrading the engagement under these circumstances.

Question 65

For a compilation or review engagement, does an accountant have to discuss with predecessor accountant?

Answer 65

It is not required but the accountant may choose too.

Question 66

When an entity qualifies as low risk, the scope of audits under the “percentage of coverage” rule in the Single Audit Act Amendments of 1996 can be reduced to as low as

Answer 66

25% of the federal funding spent by the entity.

Question 67

If auditor becomes aware of departure from GAAP

Answer 67

If the accountant concludes that modification of the standard report is appropriate, the departure should be disclosed in a separate paragraph of the report, including disclosure of the effects of the departure on the financial statements if such effects have been determined by management or are known as the result of the accountant's procedures. The accountant is not required to determine the effects of a departure if management has not done so, provided the accountant states in the report that such determination has not been made.

Question 68

When planning a particular sample for a substantive test of details, the auditor should consider

Answer 68

the preliminary estimates of materiality levels

Question 69

A CPA provides an entity with controllership or other management services that include the submission of financial statements. The CPA is required to follow the provisions of Statements on Standards for Accounting and Review Services when:

Answer 69

ONLY, the CPA is not a stockholder, partner, director, officer, or employee of the entity.

Question 70

When an auditor assesses control risk at the maximum level, the auditor is required to document:

Answer 70

Both, the auditor's understanding of the entity's accounting system and the auditor's basis for concluding that control risk is at the maximum level. An auditor assesses control risk (and the risk of material misstatement) after obtaining an understanding of the internal control. The auditor is required to document, in a way that provides a reasonable record, how the auditor has complied with the standards of fieldwork, one of which is gaining a sufficient understanding of internal control. This would include an understanding of the entity's accounting system, part of the Information and Communication component. Regardless of control risk assessment, the auditor should document his or her understanding of the entity's accounting system. The auditor must document the assessment of the risks of material misstatement and the basis for the assessment. Control risk is part of the risk of material misstatement. The auditor, therefore, should document the assessment (that it was assessed at maximum) and why (the basis for the assessment).

Question 71

Reasonable basis for requesting a change:

Answer 71

A change in circumstances that affects the entity's requirement for an audit or a review, or a misunderstanding concerning the nature of an audit, review, or compilation would ordinarily be considered a reasonable basis for requesting a change in the engagement. A request for a change may also result from a scope restriction (imposed by the client or by the circumstances). The accountant should consider the implications of a scope restriction and evaluate the possibility that information affected by the scope restriction may be incorrect, incomplete, or unsatisfactory. The accountant ordinarily would be precluded from a change in engagement when a scope restriction is involved.

Question 72

Examples of audit objectives under the financial statement assertion of presentation and disclosure are:

Answer 72

inventories are properly classified in the balance sheet as current assets, the major categories of inventories and their bases of valuation are adequately disclosed in the financial statements, and the pledge or assignment of any inventories is appropriately disclosed.

Question 73

Payroll fraud:

Answer 73

is when an employee is paid for hours not worked or when a non-employee is paid under the category of “payroll.” Having a supervisor approve a summary of hours helps ensure only employees are paid and the amount is for hours actually worked.

Question 74

Assertions about account balances at the period-end include

Answer 74

that the entity holds or controls the rights to assets, and liabilities are obligations of the entity

Question 75

Select the internal control that most likely could assist an entity in preventing invoices from being sent to allies in a fraudulent scheme, and sales from being recorded for fictitious transactions

Answer 75

Comparing sales invoices with shipping documents and approved customer orders before invoices are mailed is the best control in preventing invoices from being sent to allies in a fraudulent scheme, and sales from being recorded for fictitious transactions. Fraudulent sales would not appear with the approved customer orders, but they would have a sales invoice and possibly a shipping document (depending on the scheme). Fictitious sales may have an invoice, but they would not have a shipping document. Comparing these three documents would highlight discrepancies and alert management to the sales schemes. This procedure is an example of authorization and documentation being used as a control.

Question 76

A CPA's report expressing management's description of a service organization's system and suitability of design of controls should contain

Answer 76

a description of the scope and nature of the CPA's procedures

Question 77

When the auditor reissues a report of the financial statements, the independent auditor should/ has

Answer 77

no responsibility to make further investigation or inquiry as to events which may have occurred during the period between the original report date and the date of the release of additional reports.

Question 78

Payroll transactions:

Answer 78

Existence - Inquire & Observe In payroll transactions, existence refers to the existence of valid employees being paid for authorized business activity only. Employment and timekeeping are personnel functions. The easiest way to pay a fictitious employee or to pay an employee for unauthorized time is to have no separation between employment/timekeeping duties and the payroll disbursement duty. In determining the effectiveness of an entity's policies and procedures relating to the existence assertion for payroll transactions, an auditor most likely would inquire about and observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Question 79

Which of the following transactions would increase the CURRENT RATIO?

Answer 79

The current ratio is computed by dividing current assets (CA) by current liabilities (CL). Thus, a current ratio of 4:1 means Heath has four times more current assets than current liabilities. Both inventory and accounts receivable are current assets which appear in the numerator when computing the current ratio. However, since inventory is sold on account at a price greater than its cost, current assets will increase by the sales price amount and decrease by the cost of inventory sold. Thus, selling inventory on account will increase the current ratio. Purchasing inventory on account increases current assets and current liabilities by the same amount. However, the absolute change is not all you need to consider. Because the current ratio is 4:1, the proportionate effect of an increase in CL will be greater than the effect of an equal increase in CA. Thus, the current ratio will decrease. Collecting an account receivable has no effect on the current ratio. Current assets increase (cash) and decrease (AR) by the same amount. Machinery is a noncurrent asset. Thus, purchasing machinery for cash decreases CA (cash) which decreases the current ratio.

Question 80

An engagement quality control review may include consideration of the following:

Answer 80

1) The engagement team's evaluation of the firm's independence in relation to the specific engagement 2) Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters and the conclusions arising from those consultations 3) Whether documentation selected for review reflects the work performed in relation to the significant judgments and support the conclusions reached

Question 81

Assertions about account balances at the period-end

Answer 81

include that the entity holds or controls the rights to assets, and liabilities are obligations of the entity.

Question 82

A CPA's report expressing management's description of a service organization's system and suitability of design of controls should contain

Answer 82

a description of the scope and nature of the CPA's procedures.

Question 83

In the course of an audit, the auditor realized that an internal control is deficient, but elects not to test that control. The auditor has determined that:

Answer 83

There is a direct relationship between the amount of risk that a material weakness may exist and the amount of evidence needed in a particular area. Therefore, the auditor focuses on areas that have the highest risk present. If a control would not present a risk of material misstatement to the financial statements, even if the control were deficient, it is not necessary to test that control.

Question 84

The engagement letter should contain information such as:

Answer 84

the objective of the audit (an expression of an opinion on the financial statements); the fact that management is responsible for: the financial statements, establishing and maintaining effective internal control over financial reporting, identifying and ensuring that the entity complies with laws and regulations, adjusting the financial statements to correct material misstatements, making all financial records and related information available to the auditor, and providing the auditor with a letter that confirms certain representations made during the audit; the scope of the audit work to be performed (in accordance with GAAS); the fact that the purpose of the audit is not to detect fraud but to enable the auditor to express an opinion as to the fairness of the financial statements; mention that an audit includes obtaining an understanding of internal control and that the audit committee will be made aware of any discovered significant deficiencies; additional work to be performed, such as tax, consulting, or other services (if applicable); any limitations or restrictions on the scope of the study; work to be performed by the client's staff (if applicable); the basis of the auditor's fee; and the audit work schedule and estimated date of completion. This list is not inclusive, but it is illustrative of items that should be present. Items that would not be addressed in an engagement letter would be the conditions under which the auditor may modify the preliminary judgment about materiality (these would not be known to the auditor), internal control activities that would reduce the auditor's assessment of control risk (the auditor has not obtained an understanding of the design of internal control or tested controls at this point), and materiality matters that could modify the auditor's preliminary assessment of fraud risk.

Question 85

An auditor is required to reach a conclusion in every audit regarding whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the auditor decides to mention the going concern problem in his or her report, he or she is precluded from:

Answer 85

Using conditional language in the auditor's conclusion about the entity's ability to continue as a going concern in a going concern emphasis-of-matter paragraph.

Question 86

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviewed evidence of follow-up on the errors reported by the customers. This test of controls most likely was performed to support management's financial statement assertion(s) of:

Answer 86

Presentation and disclosure: No; Rights and obligations: Yes An organization follows up on errors to the monthly statements to determine the accounts receivable dollar amount that the organization has the right to receive. The presentation assertion deals with whether components of the financial statements are properly listed and disclosed. The presentation would not be affected by management's following-up on errors reported by customers.

Question 87

Which of the following is not generally considered necessary if an auditor applies principal substantive tests to details of balance sheet accounts at an interim date?

Answer 87

Assessing control risk below the maximum is not required to have a reasonable basis for extending audit conclusions from an interim date to the balance sheet date. However, if the auditor assesses control risk at the maximum during the remaining period, he or she should consider whether the effectiveness of certain of the substantive tests to cover that period will be impaired.

Question 88

Which of the following circumstances would ordinarily preclude a CPA from issuing a review or a compilation report on the financial statements of a nonissuer client that had originally engaged the CPA to perform an audit? I. The CPA has been prohibited by the client from corresponding with the entity's legal counsel. II. The entity refuses to provide the CPA with a signed representation letter.

Answer 88

When a client refuses to allow correspondence with legal counsel (a required procedure for an audit) or to provide a representation letter (a required procedure for both an audit and a review), the accountant cannot ignore that there may be reasons behind the client's refusal to cooperate. SSARSs ordinarily preclude the accountant from downgrading the engagement under these circumstances.