AUD Becker Mock Exam 3 Part 2 Flashcards
Lake, CPA, is auditing the financial statements of Gill Co. Gill uses the EDP Service Center, Inc., to process its payroll transactions. EDP’s financial statements are audited by Cope, CPA, who recently issued a report on management’s description of EDP’s system and the suitability of the design and operating effectiveness of controls. Lake is considering Cope’s report on EDP’s system in assessing control risk on the Gill engagement. What is Lake’s responsibility concerning making reference to Cope as a basis, in part, for Lake’s own opinion?
Lake may not refer to Cope under the circumstances above.
Audit evidence is obtained by the auditor when performing all of the following, except when:
Reviewing the previous audit.
Determining the sample size.
Performing substantive procedures.
Completing a risk assessment.
Determining the sample size.
Which of the following is an inherent limitation in internal control?
a.
Faulty human judgment.
b.
Lack of an audit committee.
c.
Lack of segregation of duties.
d.
Incompatible duties.
Explanation
Choice “a” is correct. Inherent limitations in internal control are limitations that exist despite implementation of appropriate controls. For example, faulty human judgment may result in errors in the design or use of internal controls.
Choice “d” is incorrect. Assigning incompatible duties to a particular individual indicates a missing control, rather than an inherent limitation in internal control.
Choice “c” is incorrect. Lack of segregation of duties indicates a missing control, rather than an inherent limitation in internal control.
Choice “b” is incorrect. Lack of an audit committee indicates a missing control, rather than an inherent limitation in internal control.
An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to:
a.
Records produced by investment services.
b.
Annual audited financial statements of investee companies.
c.
Stock ledgers maintained by independent registrars.
d.
Dividend records on file with the SEC.
Choice “A” is correct. Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services such as “Moody’s Dividend Record.” These books state the dividend that was declared and paid by the investee.
Choice “c” is incorrect. Stock ledgers maintained by independent registrars indicate how many shares of stock are issued and outstanding, and identify the shareholders of record, but they do not contain information concerning dividends.
Choice “d” is incorrect. Dividend records on file with the SEC would probably include appropriate information, but it is more efficient to use a single source (such as “Moody’s”) than it is to obtain and review SEC records for each investee.
Choice “b” is incorrect. Annual audited financial statements of the investee companies give the total dividends paid, but there may not be enough information to determine exactly how much went to each type of stock and hence to each stockholder. In addition, it is more efficient to use a single source (such as “Moody’s”) than it is to obtain and review the financial statements of each investee.
What is an auditor’s responsibility for supplementary information required by the GASB that is placed outside the basic financial statements?
Apply limited procedures to the information
Apply limited procedures to the information
An auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample
Louise, CPA is a registered accounting firm that is conducting the audit of violin industries, an issuer. Which of the following services may Louise provide?
Tax Services.
Tax Services are permissible if pre approved by the audit committee
Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls?
Inquiry.
The following tests are presented in the order of the sufficiency and appropriateness of the evidence they ordinarily produce (least to most): (1) inquiry, (2) observation, (3) inspection of relevant documentation, and (4) reperformance of a control. Inquiry alone does not provide sufficient, appropriate evidence to support a conclusion about the effectiveness of a control.
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods
Influence the design of internal control
All of the following would be associated with fraud risk in the revenue cycle, except for:
Failure to record sales (product) returns by customers on a timely basis.
Materially understating the allowance for uncollectible accounts.
Holding the company’s books open past the close of the accounting period.
Recording revenue on “trial sales” after the consignment period to the customer expires.
Recording revenue on “trial sales” after the consignment period to the customer expires.
A written client representation letter most likely would be an auditor’s best source of corroborative information of a client’s plans to:
Discontinue a line of business.
Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
Make a public offering of its common stock.
Terminate an employee pension plan.
Discontinue a line of business.
All of the following are effective ways to prevent and/or detect lapping, except for
- Comparing the dollar amounts and dates on the bank deposit slips with customer remittance credits entered into the accounts receivable ledger.
- Preparing a bank transfer schedule
- Requiring the customers send their payments directly to a lockbox
- Independently comparing the recorded cash receipts with funds actually deposited in the bank.
Preparing a bank transfer schedule
The Auditor’s Responsibility paragraph of an auditor’s report contains the following sentences:
We did not audit the financial statements of EZ Inc., a wholly-owned subsidiary, which statements reflect total assets and revenues constituting 27 percent and 29 percent, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors.
These sentences:
a. Indicate a division of responsibility.
b. Are an improper form of reporting.
c. Assume responsibility for the other auditor.
d. Require a departure from an unmodified opinion.
A. proper form of disclosure when another auditor performs a substantial portion of the audit. When the group engagement partner makes reference to the audit of another auditor (component auditor), the report should indicate clearly the division of responsibility between the portion of the financial statements covered by each audit
A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA’s independence with the client?
a. No, because the CPA would not have a direct financial interest in the client.
b. Yes, because the stock would be a direct financial interest and materiality is a factor.
c. Yes, because the stock would be an indirect financial interest and materiality is not a factor.
d. Yes, because the stock would be a direct financial interest and materiality is not a factor.
d- The Independence Rule requires that a CPA not have any direct financial interests in the client, regardless of materiality. This rule extends to the covered member’s spouse and dependents.
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
1) accounts receivable
2) credit
3) accounts payable
4) treasurer
2
As part of the process of observing a client’s physical inventories, an auditor should be alert to:
a. The verification of inventory values assigned to goods in process.
b. The existence of outstanding purchase commitments.
c. Any change in the method of pricing from prior years.
d. The inclusion of any obsolete or damaged goods.
The inclusion of any obsolete or damaged goods.
Which of the following is true about the assurance provided by special reports?
a.
All special reports result in positive assurance.
b.
A list of procedures and findings (but no assurance) is provided in some special reports.
c.
All special reports result in negative assurance.
d.
A positive opinion may be rendered in some types of special reports.
Choice “d” is correct. Positive assurance is provided in OCBOA reports, reports on specified elements, accounts, or items, and reports on special-purpose financial presentations to comply with contractual agreements or regulatory provisions. Where applicable, the emphasis-of-matter paragraph in the report indicates that the financial statements (elements, accounts, items) were prepared in accordance with the applicable special purpose framework (positive assurance).
A CPA is engaged to audit the financial statements of a nonissuer. After the audit begins, the client’s management questions the extent of procedures and objects to the confirmation of certain contracts. The client asks the accountant to change the scope of the engagement from an audit to a review. Under these circumstances, the accountant should do each of the following, except
issue an accountant’s review report with a separate paragraph discussing the change in engagement scope.
In evaluating the reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are
Susceptible to bias
reasonableness of an entity’s accounting estimates, an auditor normally would be concerned about assumptions that are
Susceptible to bias
By following the firm’s policies and procedures
Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?
- Observing the entity’s distribution of payroll checks.
- Confirming a sample of recorded receivables by direct communication with the debtors.
- Reviewing standard bank confirmations for indications of cash manipulations.
- Comparing a sample of shipping documents to related sales invoices.
Comparing a sample of shipping documents to related sales invoices.
Which of the following procedures most likely would not be included in a review engagement of a nonpublic entity?
Assessing control risk
Janus Company, a client of Peterman, CPA, has recently automated its accounting system. While Peterman has been the auditor of Janus for several years, this will be the first audit encompassing the new system. Which of the following is most likely a result of this change?
I.
Peterman will need to take courses to develop an appropriate level of IT skill.
II.
Peterman will need to revise his audit objectives from prior years to reflect the new situation.
III.
Peterman will need to revise his audit program from prior years to reflect the new situation.
a.
III only.
b.
Both II and III.
c.
Both I and II.
d.
I, II, and III.
Choice “A” is correct. The audit program will likely need to be revised to reflect the risks and capitalize on the strengths inherent in an automated system. For example, there will likely be a greater risk of unauthorized access, while there may also be greater opportunities for data analysis and review. Audit objectives are the same in a computerized environment as they are in a manual environment. If specialized IT skills are needed, the auditor is less likely to take IT courses than he or she is to seek the assistance of an IT professional.Choices “b”, “c”, and “d” are incorrect, based on the above explanation.
A document in an auditor’s working papers includes the following statement: “Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential.”
The above passage is most likely from:
an engagement letter
