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Flashcards in AUD MCQ Notes Deck (73):

What are the types of consulting services a CPA can provide?

Advisory Services
EDP System Implementation
Product Services
Transaction Services
Support Services
Tax Consulting


Of the five full-time members of the Public Company Accounting Oversight Board (PCAOB), how many are CPAs?

As established by Title I of the Sarbanes-Oxley Act of 2002, exactly two of the five full-time members of the PCAOB must be CPAs.


Under which of the following circumstances may a CPA charge fees that are contingent upon finding a specific result?

If fixed by courts, other public authorities, or in tax matters if based on the results of judicial proceedings.


How often are firms that are registered with the Public Company Accounting Oversight Board (PCAOB) subject to periodic inspections?

For firms working with companies that issue securities to the public, the inspection process by the PCAOB takes the place of peer review. Firms that audit more than 100 companies that issue securities are inspected by the PCAOB annually. The rest of the CPA firms registered with the PCAOB will be inspected every three years.


Which organization has oversight over the audit of employee benefit plans?

The Department of Labor (DOL)


What are the 5 elements of quality control?

Quality control comprises the methods used to ensure that the firm meets its professional responsibilities to clients and others. There are five elements of quality control: (1) independence, integrity and objectivity; (2) personnel management; (3) acceptance and continuation of clients and engagements; (4) engagement performance; and (5) monitoring.


Which section of the Sarbanes-Oxley Act requires management to issue an internal control report?

Section 404 of the Sarbanes-Oxley Act requires auditors of public companies to assess and report on the effectiveness of internal control over financial reporting.


What is a test of details?

A test of details is a substantive test, which might include analytical procedures, but may also include other types of procedures.


Does an auditor have to state whether or not principles have been applied consistently in their report?

No, the auditor only has to identify circumstances when the client fails to consistently apply principles from year to year.


What are some of the difficulties encountered during the audit that should be communicated to those charged with Governance?

Significant delays in management providing required information

An unnecessarily brief time within which to complete the audit

Extensive unexpected effort required to obtain sufficient appropriate audit evidence

The unavailability of expected information

Restrictions imposed on the auditor by management

Management's unwillingness to make or extend its assessment of the entity's ability to continue as a going concern when requested


According to IFRS, what matters must be communicated to those in charge of Governance?

The auditor's responsibilities in relation to the financial statement audit

The planned scope and timing of the audit

Significant timing of the audit

Auditor independence


What is a WebTrust?

An engagement in which a CPA is engaged to determine if a client's website meets certain defined criteria


What is the purpose of an engagement letter?

To help avoid misunderstandings with respect to the engagement.


Generally accepted government auditing standards use which of the following terms to describe a professional requirement to comply with a standard or provide a special explanation for not doing so?

Presumptively mandatory requirement


What are some of the functions of an Audit Committee?

The committee typically:

selects and appoints the independent auditor,
assures that the auditor is independent,
reviews the nature and details of the engagement,
reviews the quality of the auditor's work,
reviews the scope of the audit,
maintains lines of communication, and
helps solve any disagreements.


For what percentage of federal expenditures can an entity qualify as "low risk" under the “percentage of coverage” rule in the Single Audit Act Amendments of 2013?



What should the audit strategy involve?

The audit strategy should involve:

defining the scope of the audit (such as the basis of reporting, any industry-specific reporting requirements, and the locations of the entity);

determining reporting deadlines and key dates for expected communications with those charged with governance (this information helps to determine the timing of the audit); and

considering factors that direct the audit team efforts (such as materiality levels, preliminary identification of risks of material misstatement and material account balances, and recent industry or financial developments affecting the client).


Why would management choose not to correct an internal control weakness?

The cost to do so outweighs the benefits.


Which of the following terms identifies a requirement for audit evidence?



What are the types of inherent risks?

human errors due to misunderstanding of instructions,

mistake of judgment, carelessness, distractions, or fatigue,

collusion which circumvents the segregation of duties,

management override that may override the structure to commit fraud or misstate the financial statements, and

changing conditions that may weaken a system which was adequate before the change.

Inherent limitations means that, no matter how well designed and operated, internal controls cannot provide absolute assurance that an entity can achieve its financial, operational, and compliance objectives.


Which controls are considered application controls?

Application controls are classified as follows:

Input controls
Processing controls
Output controls


Control risk should be assessed in terms of?

financial statement assertions


The risk of material misstatement of accounting estimates increases with increases in the:

complexity and subjectivity of the estimation process,

lack of availability and reliability of relevant data,

number and significance of the assumptions that are made,

degree of uncertainty associated with the assumptions.


In auditing accounts payable, an auditor's procedures most likely would focus primarily on which management assertion?



What are some of the risks that IT systems pose?

Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both

Unauthorized access to data that may result in destruction of data or improper changes to data

Possibility of IT personnel gaining access privileges beyond those necessary to perform assigned duties

Unauthorized changes to data in master files

Failure to make necessary changes to systems or programs

Inappropriate manual intervention

Potential loss of data or inability to access data as required.


For effective internal control, the accounts payable department generally should perform what procedures?

Establish the agreement of the vendor's invoice with the receiving report and purchase order.


The acceptable level of detection risk is inversely related to what?

Assurance provided by substantive tests.


What should an auditor do when control risk is assessed at the maximum level?

Document the assessment

If control risk (or the risk of material misstatement) is assessed at the maximum level, it means that the auditor cannot rely on the controls.

This assessment should be documented, as it helps the auditor to determine the nature, timing, and extent of further audit procedures (most likely performing more, rather than fewer, substantive tests of details in order to lower audit risk).

The control structure should be documented thoroughly as part of obtaining the understanding of the entity and its environment, including its internal control. Documenting it more extensively will do nothing to reduce the control risk. Likewise, performing more tests of controls will not assist the auditor if he or she knows that the controls cannot be relied upon.


What are some examples of application controls?

Input Controls
Processing Controls
Output Controls


Two assertions for which confirmation of accounts receivable balances provides primary evidence are?

Rights and Obligations and Existence

AU-C 315.A114 states that (1) assertions about existence deal with whether assets (receivables are assets) exist at a particular date and that (2) assertions about rights and obligations deal with whether assets are the rights of the entity at a particular date. Confirmation of receivables verifies both the existence of the receivable and the rights of the entity to be paid the amount owed by the debtor.


What are some red flags that may indicate the existence of related parties?

borrowing or lending on an interest-free basis or significantly above or below market rates,

selling real estate at a price significantly different from appraised value,

exchanging property for similar property in a nonmonetary transaction, or

making loans with no scheduled terms for when or how the funds will be repaid


What should the auditor document when performing risk assessment procedures?

The auditor should document the following:

The discussion among the audit team regarding the susceptibility of the entity's financial statements to material misstatement due to error or fraud, including how and when the discussion occurred, the subject matter discussed, the audit team members who participated, and significant decisions reached concerning planned responses at the financial statement and relevant assertion levels

Key elements of the understanding obtained regarding each of the aspects of the entity and its environment, including each of the components of internal control identified to assess the risks of material misstatement of the financial statements; the sources of information from which the understanding was obtained; and the risk assessment procedures

The assessment of the risks of material misstatement both at the financial statement level and at the relevant assertion level and the basis for the assessment

The risks identified and related controls evaluated


Proper authorization of write-offs of uncollectible accounts should be approved by which department?


The proper authorization of write-offs of uncollectible accounts would be an example of asset accountability and authorization, and this is completed in the treasurer's department.


Which internal controls most likely addresses the completeness assertion for inventory?

Receiving reports are prenumbered and periodically reconciled.

The completeness assertion for inventory states that recorded inventory quantities include all products, materials, and supplies owned by the entity (i.e., goods on hand, in transit, stored, or on consignment at some other location).

The control which would most directly address this assertion would assure that all goods received are recorded.

Receiving reports provide evidence that merchandise has been received and has become part of inventory. Thus, prenumbering receiving reports and periodically reconciling these reports to recorded inventory would directly address the completeness assertion for inventory.


How do you calculate the allowance for sampling risk?

It is the difference between the upper precision limit and the sample deviation rate.


What should analytical procedures used in planning an audit should focus on?

Enhancing the auditor's understanding of the client's business.


What should analytical procedures used in the review stage of an audit should focus on?

To evaluate the adequacy of evidence gathered concerning unusual balances.


What is an integrated test facility?

An integrated test facility involves the use of a set of transactions belonging to a dummy entity. These transactions have a predetermined result against which the computer processing will be compared. These transactions are run during the regular processing of data and often without the computer operator's knowledge.


What are the recommended procedures for determining if slow-moving, excess, defective, and obsolete items included in inventories are properly identified?

Examine and analyze inventory turnover

Review industry experience and trends

Analytically review the relationship of inventory balances to anticipated sales volume

Tour the plant

Inquire of production and sales personnel concerning possible excess or obsolete inventory items


What is performance materiality?

Performance Materiality is the amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.


When the auditor reissues a report of the financial statements, what is the responsibility of the auditor with respect to the reissued report?

Obtain a representation letter from the successor auditor.


If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), which kind of opinion should the auditor issue?

An unmodified opinion with an additional explanatory paragraph.


What is included in the introductory paragraph of an Auditor's Report?

The introductory paragraph in the auditor's report should:

identify the entity whose financial statements have been audited,

state that the financial statements have been audited,

identify the title of each statement that the financial statements comprise, and

specify the date or period covered by each financial statement that the financial statements comprise.


When an independent U.S. auditor is engaged to report on financial statements prepared for use in another country, the auditor should perform audit procedures that are necessary to comply with?

U.S. GAAS and the auditing standards of the other country or International Standards on Auditing (ISAs) when specifically requested to do so.


What are the three forms of attest engagements?

Agreed Upon Procedures


Which type of engagement is not permitted under the professional standards for reporting on an entity's compliance?

Review on compliance with specified requirements of a law.


When should the auditor's report be dated?

No earlier than the date on which the auditor has obtained sufficient appropriate audit evidence.


Which conditions must be met in order for an auditor to accept an engagement for an examination of a company's internal control?

An auditor may perform an examination of internal control only if the following conditions are met:

Management accepts responsibility for the effectiveness of the entity's internal control.

Management evaluates the effectiveness of the entity's internal control using suitable and available criteria.

Management supports its assertion about the effectiveness of the entity's internal control with sufficient appropriate evidence...

Management provides its assertion about the effectiveness of the entity's internal control in a report that accompanies the auditor's report.


What is a primary objective of analytical procedures used in the final review stage of an audit?

Assist the auditor in evaluating the overall financial statement presentation.


When using the work of a specialist, when may an auditor may refer to the specialist in the auditor’s report?

If as a result of the specialist's findings, the auditor becomes aware of conditions causing substantial doubt about the entity's ability to continue as a going concern.


What is the purpose of applying analytical procedures in planning the audit?

To assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions.


How long do the standards require a firm to retain documentation for engagements other than audits?

The firm should establish policies and procedures for the retention of the records for a sufficient period.


Does SSARS require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant?

SSARS does not require either item.

AR-C 80.A20 states that the signature of the accountant may be a “manual, printed, or digital as appropriate,” but nothing is stated about plain stationery or letterhead.


What should be included in the accountant's documentation in a review engagement?

The accountant's documentation in a review engagement should include the following:

The engagement letter

The analytical procedures performed

The expectations when the expectations are not otherwise readily determinable from the documentation of the work performed, and factors considered in the development of those expectations

Results of the comparison of the expectations to the recorded amounts or ratios developed from recorded amounts

Management's responses to the accountant's inquiries regarding fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount

Any additional procedures performed in response to significant unexpected differences arising from the analytical procedure and the results of such additional procedures

The significant matters covered in the accountant's inquiry procedures and the responses thereto

Any findings that are significant

Unusual matters that the accountant considered during the performance of the review procedures, including their disposition

Communications, whether oral or written, to the appropriate level of management regarding fraud or noncompliance with laws and regulations that come to the accountant's attention

The representation letter


What are the five principles of the International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants?

Professional competence and due care
Professional behavior


Prior to rules of the PCAOB becoming effective, they must be approved by who?



A cooling-off period of how many years is required before a member of an issuer's audit engagement team may begin working for the registrant in a key position?

The Securities and Exchange Commission (SEC) requires a cooling-off period of one year for a former member of an audit client engagement team before he or she can be employed in a financial oversight role for that same client. This requirement is necessary to preserve auditor (firm) independence.


When is a CPA allowed to charge contingent fees?

Contingent fees are permitted when they involve a legal proceeding or ruling.

Contingent fees are prohibited for a CPA performing an audit, a review of a financial statement, or an examination of prospective financial information.


According to the Sarbanes-Oxley Act of 2002, what is the maximum number of years an audit partner can perform audit services for an issuer before the auditor rotation is required?

5 years


Which of the following laws requires that benefits be provided to employees after they leave a position?

The Comprehensive Budget Omnibus Reconciliation Act (COBRA) 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.


What is considered a direct financial interest in an audit client?

A direct financial interest is a financial interest:

owned directly by an individual or entity, or

under the control of an individual or entity, or

beneficially owned through an investment vehicle, estate, trust, or other intermediary when the beneficiary:

controls the intermediary or

has the authority to supervise or participate in the intermediary's investment decisions.


Which services would be would be considered consulting services?

Advisory services, implementation services, and product services all fall within the broad category of “consulting services.” Such services are subject to the Statements of Standards for Consulting Services and also include consultations, transaction services, and staff and other support services.


What is the difference between an audit strategy and an audit plan?

The audit strategy determines the characteristics of the engagement that defines its scope, allows the auditor to determine key dates and reporting objectives, and considers factors such as materiality and preliminary identification of areas where there may be a higher risk of material misstatement. The audit strategy helps the auditor assign resources.

The audit plan, however, is more detailed than the audit strategy and includes the nature, timing, and extent of audit procedures to be performed by audit team members in order to obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.


SOX Title II prevents a registered public accounting firm from performing an audit if a person employed at the client in a significant accounting position was previously employed at the registered public accounting firm and engaged on that audit. How long must the firm wait prior to being allowed to conduct the audit?

1 year


Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?

Under the Sarbanes-Oxley Act of 2002, the lead audit partner must rotate off an audit of an issuer every five years.


What is an advantage of using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

The selection of negative balances requires no special design considerations.


What is the objective of a dual-purpose test of details of transactions performed as tests of controls?

Evaluate whether controls operated effectively.


What are the advantages/disadvantages of using blank confirmations?

Blank confirmation requests lower the risk that respondents may sign and return the confirmation without checking the information against their records.

However, they increase the risk that fewer people may respond due to the additional effort required to complete the form. A low response rate with positive confirmations means that the auditor must perform additional procedures.


What are the three types of audit opinions that can be given?

Qualified opinion:

In the accountant's opinion, the prospective financial statements depart from AICPA presentation guidelines (such as failure to disclose significant accounting policies).

Adverse opinion:

There is a measurement departure, an unreasonable assumption, or a limitation on the scope of the practitioner's examination that prohibits the issuance of an unmodified opinion.

Departure from AICPA presentation guidelines is because the presentation fails to disclose assumptions that appear to be significant. One or more significant assumptions do not provide a reasonable basis for the forecast.

Disclaimer of opinion:

The accountant was precluded from applying one or more procedures considered necessary in the circumstances in order to express any opinion.


What is the primary management assertion of an auditor in the examination of liabilities?



What is the primary objective of procedures performed to obtain an understanding of internal control?

To provide an auditor with knowledge necessary for audit planning.


What is the objective of a review of interim financial information of an issuer?

The objective of a review of interim financial information of an issuer is to provide the CPA with a basis for reporting whether material modifications should be made to the interim information to comply with the applicable financial reporting framework.


Which committee issues Statements on Standards for Accounting and Review Services (SSARSs)?

The Accounting and Review Services Committee (ARSC)