AUD (Misc. 3) Flashcards
(37 cards)
Hemp, CPA, is auditing the financial statements of a small Colorado rural municipality. The receivable balances represent residents’ delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Hemp would most likely
A Send positive confirmation requests
B Send negative confirmation requests
C Inspect the internal records such as copies of the tax invoices that were mailed to the residents
D Examine evidence of subsequent cash receipts
The correct answer is (A).
The positive (confirmation) form is preferable when individual account balances are relatively large or when there is reason to believe that there may be a substantial number of accounts in dispute or with errors or fraud. In this case, errors or fraud are likely since internal controls are weak.
With weak internal controls, the auditor needs to obtain third-party verification.
Evidence of subsequent cash receipts is an alternative procedure that is done when the confirmations don’t yield sufficient appropriate evidence due to a lack of responses.
An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that
A Fictitious credit sales have been recorded during the year
B Employees have stolen inventory just before the year-end
C The client recently tightened its credit-granting policies
D An employee has been lapping receivables in both years
A.
b/c the A/R balance would continue to rise since nobody is paying off that balance (it was fake)
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the:
A. Tolerable rate.
B. Risk of overreliance.
C. Expected population deviation rate.
D. Sample size.
D. Sample Size
On what date does the auditor’s active responsibility stop?
The date of the auditor’s report
When testing the completeness assertion for a given transaction cycle, the auditor may perform all of the following audit procedures except for:
A. Inspecting documents that support a transaction.
B. Performing analytical review procedures.
C. Observing processes and procedures.
D. Tracing a sample of transactions from the source documents to the accounting entries and financial statements.
A.
Independence requirements for the following:
Preparation
Compilation
Agreed-upon procedure
Review
Preparation - no independence
Compilation - no independence (but must disclose the lack of)
Agreed-upon procedure - Independence required
Review - independence required
An auditor’s decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the
A Availability of data aggregated at a high level
B Auditor’s familiarity with industry trends
C Timing of tests performed after the balance sheet date
D Relative effectiveness and efficiency of the tests
Relative effectiveness & efficiency of the tests
The auditor should
A Accumulate misstatements identified during the audit, other than those that are clearly trivial
B Accumulate uncorrected misstatements identified during the audit, other than those that are clearly trivial
C Communicate on a timely basis with the appropriate level of management all uncorrected misstatements accumulated during the audit
D Include in the audit documentation all uncorrected misstatements accumulated during the audit
A Accumulate misstatements identified during the audit, other than those that are clearly trivial
Which of the following is least likely to be a continuous activity that an auditor would be expected to perform throughout an audit engagement?
A Understanding the entity and its environment.
B Assessing risk of material misstatement.
C Considering client continuance.
D Inquiring as to the design of controls.
The activity least likely to be continuous throughout the audit engagement is considering client continuance.
Considering client continuance typically occurs at the beginning of the engagement to determine if the auditor should continue with the client relationship. Once this decision is made, it is not usually revisited continuously throughout the audit.
Fair Value Hierarchy (derivative estimates) is categorized into three levels:
Level 1
Level 2
Level 3
Level 1 inputs are quoted prices in active markets for identical assets or liabilities.
Level 2 inputs include quoted prices for similar (not identical) assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets.
Level 3 are unobservable inputs for the asset or liability. These are most often used where there is little, if any, market activity for the asset or liability at the measurement date.
An auditor is planning a test of control and expects numerous errors in the application of the control. Which approach is most appropriate?
A Discovery Sampling
B Sequential Sampling
C Dual-Purpose Sampling
D Variables Sampling
B Sequential Sampling
___ sampling is used when the auditor expects an extremely low error rate.
Discovery
____ sampling is used to test attributes and variable simultaneously; usually when a low error rate is expected for the application of the control.
Dual purpose
___ sampling is concerned with the details of transactions and account balances (substantive tests) rather than a test of controls.
Variables
Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?
A Hash total
B Parity check
C Encryption
D Check Digit
D. Check Digit
During an engagement to prepare financial statements, an accountant was precluded by management from including a statement on each page of the financial statements indicating that no assurance is provided. Which of the following actions would be appropriate?
A Issue an adverse opinion on the financial statements.
B Issue a disclaimer making clear that no assurance is provided.
C Limit the distribution of the financial statements to specific users.
D Perform sufficient procedures to allow the accountant to provide limited assurance on the financial statements.
B Issue a disclaimer making clear that no assurance is provided.
A CPA is required to comply with the provisions of Statements on Standards for Attestation Engagements when engaged to
A Report on financial statements that the CPA generated through the use of computer software
B Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC
C Provide the client with a financial statement format that does not include dollar amounts
D Audit financial statements that the client prepared for use in another country
B. Review management’s discussion and analysis (MD&A) prepared pursuant to rules and regulations adopted by the SEC
An attest engagement is one in which a CPA in public practice (or practitioner) is engaged to, or does, issue an examination, review, or agreed-upon procedures report on subject matter or an assertion about subject matter that is the responsibility of another party
As the acceptable level of detection risk decreases, the assurance directly provided from:
A. Substantive tests should increase.
B. Tests of controls should decrease.
C. Tests of controls should increase.
D. Substantive tests should decrease.
A. Substantive tests should increase.
As the acceptable level of detection risk (the risk that an auditor will not detect a MM 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.
During what stage of the audit do you consider the assessment of the risk of MM?
During every stage of the audit, the auditor should consider the assessment of the risk of material misstatement. During the overall review stage, the auditor should consider whether the results of any of the audit procedures affect the assessment of the risk of material misstatement due to fraud.
If the auditor is in the process of identifying client risks that may result in a material misstatement due to fraud, all of the following attributes should be considered with the exception of which of the following items?
A. Significance of the risk.
B. Pervasiveness of the risk.
C. Recurrence of risk identified in prior audit.
D. Type of risk.
C. Recurrence of risk identified in prior audit
The COSO Cube is used to illustrate the relationship between:
A. Internal controls, enterprise risk management, and Sarbanes-Oxley requirements.
B. Risk management strategies, internal control components, and the elements of the Audit Framework.
C. The five components of internal control, the three categories of objectives, and the 17 principles.
D. Categories of objectives, internal control components, and entity organizational levels.
D. Categories of objectives, internal control components, and entity organizational levels.
The Committee on Sponsoring Organizations prepared the Internal Control Integrated Framework:
A. To help businesses assess internal control.
B. To compliment the overarching concepts of the enterprise risk management framework.
C. As part of the Congressional task force known as the Treadway Commission.
D. To respond to the internal control assessment requirements of the Sarbanes-Oxley Act of 2002.
A. To help businesses assess internal control.
A client changes from FIFO to LIFO for accounting for inventory and appropriately discloses the change in the footnotes. This change does not have a material effect on the financial statements in the current year but the change is expected to have a material effect in later years. In the current-year auditor’s report, the auditor should:
A. Issue an unmodified opinion with an emphasis-of-matter paragraph.
B. Issue a qualified or adverse opinion.
C. Issue an unmodified opinion.
D. Issue an unmodified opinion with an other-matter paragraph.
C. Issue an unmodified opinion.
As the group auditor when we don’t reference the component auditor, what 2 things happen?
We assume responsibility for their work
and we determine the type of work to be performed
