AUD - Performing Further Procedures and Obtaining Evidence

Question 1

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the

Answer 1

efficiency of the audit

Question 2

the risk of incorrect acceptance and the risk of assessing control risk too low relate to

Answer 2

effectiveness of an audit

Question 3

An auditor who identifies a potential fraud that is significant within the context of the audit under generally accepted government auditing standards would most appropriately respond first in which of the following manners?

Answer 3

extend audit procedures as long as necessary to determine whether fraud did occur

Question 4

An accountant has been engaged to review a nonissuer’s financial statements that contain several departures from GAAP. Management is unwilling to revise the financial statements, and the accountant believes that modification of the standard review report is inadequate to communicate the deficiencies. Under these circumstances, the accountant should

Answer 4

Withdraw from the engagement and provide no further services concerning these financial statements.

Question 5

SSAE vs SSARS for Review

Answer 5

SSARS - preparation, compilation & reviews (of unaudited FS for nonissuers)

SSAE - agreed-upon procedures, examinations and projections/forecasts.

know the key points under each: restricted use, independence, reports & their respective wording!!

Question 6

For which of the following events would an auditor issue a report that omits any reference to consistency?

Answer 6

A change in the useful life used to calculate the provision for depreciation expense.

Question 7

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review

Answer 7

Consists principally of inquiries of company personnel and analytical procedures applied to financial data.

Answer (c) is correct because a review report includes a statement that a review consists principally of inquires of company personnel and analytical procedures applied to financial data. See SSARS for information that should be included in a review report.

Question 8

The current file of an auditor’s working papers most likely would include a copy of the

Answer 8

Bank reconciliation.

Question 9

What is the primary objective of using stratification as a sampling method in auditing?

Answer 9

To decrease the effect of variance in the total population.

Stratified sampling is a technique of breaking the population down into subpopulations and applying different sample selection methods to the subpopulations. Stratified sampling is used to minimize the variance within the overall population.

Question 10

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling?

Answer 10

Inclusion of zero and negative balances generally does not require special design considerations.

Question 11

Top-down approach in auditing

Answer 11

The top-down approach is used to select the controls to be tested in an audit of internal control over financial reporting. Under this approach, the auditor obtains an understanding of the overall risks to internal control over financial reporting. Following this activity, the auditor then examines entity-level controls, focusing on significant accounts and disclosures, as well as their relevant assertions. Entity-level controls include the following:

• Controls related to the control environment
• Controls over management override
• The entity’s risk assessment process
• Centralized processing and controls
• Controls to monitor the results of operations
• Controls to monitor other controls (such as the activities of the internal audit staff)
• Controls over the period-end financial reporting process
• Policies that address significant business control and risk management practices

By taking this approach, the auditor’s attention is directed towards those accounts, disclosures and assertions that have a reasonable possibility of being materially misstated within the financial statement package.

Question 12

A client is presenting comparative (two-year) financial statements. Which of the following is correct concerning reporting responsibilities of a continuing auditor?

Answer 12

The auditor should issue one audit report that is on both presented years.

Question 13

When an independent auditor reports on internal control based on criteria established by governmental agencies, the report should

Answer 13

The report should indicate matters covered by the consideration and whether the auditor’s consideration included tests of controls with the procedures covered by his/her consideration.

Additionally, the report should:

• describe the objectives and limitations of internal control and the accountant’s evaluation thereof;
• state the accountant’s conclusion, based on the agency’s criteria;
• and describe the purpose of the report and state that it should not be used for any other purpose.

Question 14

The professional standards state that management refusal to furnish written representations constitutes a limitation on the scope of the auditor’s examination sufficient to preclude an unqualified opinion.

Question 15

Which of the following services, if any, may an accountant who is not independent provide?

Answer 15

Both preparation and compilation of financial statements

Question 16

AT 601 does not allow the CPA to perform a review over compliance.

Question 17

The integrated audit of a public company resulted in the CPA’s issuance of an adverse opinion on internal control. Which of the following statements is correct when management believes that the material weakness is eliminated and the auditors, after performing appropriate procedures, agree?

Answer 17

The auditors may issue another report, this one indicating that the material weakness no longer exists.

Question 18

An accountant agrees to the client’s request to change an engagement from a review to a compilation of financial statements. The compilation report should include

Answer 18

No reference to the original engagement.

Question 19

The objective of a review of interim financial information is

Answer 19

to provide a basis for reporting on whether material modification should be made for such information to conform with generally accepted accounting principles.

Question 20

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonissuer’s financial statements?

Answer 20

The accountant does not contemplate obtaining an understanding of internal control.

Note, the auditor isn’t required to obtain a written managment representation letter for compilation; however, a mgmt representation letter is required for a review

Question 21

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s disclosures concerning this matter are adequate, the audit report may include a(n)

Answer 21

Disclaimer of opinion

Question 22

Which of the following procedures is usually the first step in reviewing the financial statements of a nonpublic entity?

Answer 22

Obtain a general understanding of the entity’s organization, its operating characteristics, and its products or services.

Question 23

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fieldwork. The auditor should

Answer 23

Advise management to disclose the acquisition in the notes to the financial statements.

Question 24

An auditor may report on a single item without performing a complete financial statement audit.

Question 25

The 4 assertions that Professional Standards identify for account balances at the end of the period

Answer 25

1. Existence
2. Completeness
3. Rights and obligations
4. Valuation and allocation

Question 26

When management prepares financial statements in conformity with generally accepted accounting principles, assertions are made about account balances and

Answer 26

classes of transactions and disclosures

Question 27

When an auditor concludes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to

Answer 27

Consider the adequacy of disclosure about the entity’s possible inability to continue as a going concern.

Question 28

Which of the following best describes the auditor’s responsibility for “other information” included in the annual report to stockholders which contains financial statements and the auditor’s report?

Answer 28

The auditor has no obligation to corroborate the “other information,” but should read the “other information” to determine whether it is materially inconsistent with the financial statements.

Question 29

When management does not provide reasonable justification of a change in accounting principles either a qualified or an adverse opinion is appropriate, not a disclaimer.

Question 30

Government Auditing Standards require that the audit documentation records the basis for findings, conclusions, and recommendations sufficiently so that a new auditor reviewing the documentation will be able to ascertain what work was performed without needing additional explanations.

Question 31

The PCAOB’s auditing standards (An Audit of Internal Control over Financial Reporting that is Integrated with An Audit of Financials Statements) states that when there are restrictions on the scope of the engagement, the auditor should withdraw from the engagement or disclaim an opinion.

Question 32

The professional standards state that an auditor is not responsible for controlling the distribution of restricted use reports

Question 33

auditors must obtain a representation that those signing the letter have no knowledge of fraud or suspected fraud committed by (1) management, (2) employees who have significant roles in internal control, or (3) others where the fraud could have a material effect on the financial statements.

Question 34

When financial statements of a prior period are presented on a comparative basis with financial statements of the current period, the continuing auditor is responsible for

Answer 34

Updating the report on the previous financial statements regardless of the opinion previously issued.

Question 35

Which of the following statistical selection techniques is least desirable for use by an auditor?

Answer 35

Block selection

Why? Because sample items should be selected in such a way that the sample can be expected to be representative of the population allowing all items in the population to have an equal opportunity of being selected. A block sample consisting of sequential items may preclude items from meeting the above criteria.

Question 36

AT 301 states that an accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that

Answer 36

1. the specified parties involved have participated in establishing the nature and scope of the engagement and take responsibility for the adequacy of the procedures to be performed,
2. use of the report is to be restricted to specified parties involved, and
3. the prospective financial statements include a summary of significant assumptions.

Question 37

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

Answer 37

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

Question 38

blank form of confirmations

Answer 38

one which includes no amount and asks the respondent to supply the amount due

Question 39

Which of the following procedures would a CPA ordinarily perform when reviewing the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS)?

Answer 39

Compare the financial statements with budgets or forecasts.

Question 40

An auditor’s tests of controls for completeness for the revenue cycle usually include determining whether

Answer 40

An invoice is prepared for each shipping document

Reason: When there is a shipping document, this suggests that a sale occurred in the sense that goods have been shipped to a customer; accordingly an invoice should be prepared and recorded. A situation in which there is a shipping document and no invoice will ordinarily be one in which a sale has not been recorded.

Question 41

An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s financial statements, but is reasonably certain to have a substantial effect in later years. If the change is disclosed in the notes to the financial statements, the auditor should issue a report with a(n)

Answer 41

Unmodified opinion

The auditor need not recognize the change in the audit report and may issue a standard unmodified opinion.

Question 42

Departures from GAAP result in either a qualified opinion or an adverse opinion—such lack of disclosure is a departure from generally accepted accounting principles.

Question 43

Which of the following is least likely to be a procedure included in an accountant’s review of interim financial information of a public entity?

Answer 43

Observe count of physical inventory

Reason: A review consists principally of performing analytical procedures and making inquiries, not procedures such as observation, inspection, and confirmation.

Question 44

The auditor’s report is dated when sufficient appropriate audit evidence has been obtained

Question 45

Which of the following controls most likely would be used to maintain accurate inventory records?

Answer 45

Periodic inventory counts are used to adjust the perpetual inventory records.

periodic inventory counts will assure that perpetual inventory records are accurate and, because employees will know that inventory differences are investigated, they will be less likely to steal any inventory.

Question 46

Which of the following best describes the operational audit?

Answer 46

It concentrates on seeking out aspects of operations in which waste would be reduced by the introduction of controls.

Question 47

Which of the following procedures is most likely to be an appropriate procedure when performed as an agreed-upon procedures engagement under the attestation standards?

Answer 47

Performance of mathematical computations.

Question 48

An accountant’s objective under a review engagement of the financial statements of a nonissuer (nonpublic company) is to provide what type of assurance?

Answer 48

limited (negative) assurance.

Question 49

An arm’s-length transaction would not suggest the existence of related parties.

Question 50

In which manner are significant deficiencies communicated by the auditors to the audit committee under Public Company Accounting Oversight Board Standard 5?

Answer 50

The communication must be in written form.

Question 51

The auditor notices significant fluctuations in key elements of the company’s financial statements. If management is unable to provide an acceptable explanation, the auditor should

Answer 51

Perform additional audit procedures to investigate the matter further.

Question 52

Before reissuing the prior year’s auditor’s report on the financial statements of a former client, the predecessor auditor should obtain a letter of representations from the

Answer 52

both management and the successor auditor.

Question 53

Which of the following statements is true regarding analytical procedures in a review engagement?

Answer 53

Analytical procedures involve the use of both financial and nonfinancial data.

Question 54

Which of the following procedures would an auditor most likely perform to obtain evidence about an entity’s subsequent events?

Answer 54

Obtain a letter from the entity’s attorney describing any pending litigation, unasserted claims, or loss contingencies.

Question 55

A client erroneously recorded a large purchase twice. Which of the following internal control measures would be most likely to detect this error in a timely and efficient manner?

Answer 55

Reconciling vendors’ monthly statements with subsidiary payable ledger accounts.

Question 56

During the year under audit, a company has completed a private placement of a substantial amount of bonds. Which of the following is the most important step in the auditor’s plan for the examination of bonds payable?

Answer 56

Tracing the cash received from the issue to the accounting records.

Question 57

Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is

Answer 57

Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion.

Rationale: Expressions of opinion as to certain identified items in financial statements (referred to as “piecemeal opinions”) should not be expressed when the auditor has disclaimed an opinion or has expressed an adverse opinion. Such opinions tend to overshadow or contradict the disclaimer or adverse opinion.

Question 58

In an accountant’s review of interim financial information, the accountant typically performs each of the following, except

Answer 58

Confirming major receivable accounts.

Question 59

Comfort letters typically give negative assurance on unaudited interim financial information.

Question 60

Audit workpapers generally include the manner in which exceptions and unusual matters were resolved. The workpapers should contain support for the auditor’s conclusions concerning significant aspects of the examination.

Question 61

An auditor concludes that a substantive auditing procedure considered necessary during the prior period’s audit was omitted. Which of the following factors would most likely cause the auditor promptly to apply the omitted procedure?

Answer 61

The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion.

Question 62

SSARS states that when a single financial statement is prepared the financial preparation standards apply, regardless of whether disclosures are presented.

Question 63

the negative form is useful when the assessed level of the risk of material misstatement is low, a large number of small balances are involved, and when the auditor has no reason to believe the persons receiving the requests are unlikely to give them consideration.

Question 64

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would

Answer 64

Ask the client to contact the customers to request that the confirmations be returned.

Question 65

Only a financial forecast is appropriate for general use. Any report on a projection must have limited use (restricted distribution).

Question 66

inconsistency in the application of GAAP usually results in an unmodified report with an emphasis-of-matter paragraph following the opinion paragraph.

Question 67

AU-C 800 requires that the report indicate that the income tax basis of accounting is a financial reporting framework other than GAAP.

Question 68

A compilation report should include the following statement: “Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.” There is no reference to “limited assurance” in the compilation report.

Question 69

test data approach is one in which client controls are tested through use of various types of data applied to the client’s computer; that data generally tests whether programmed controls operate effectively.

Question 70

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Answer 70

Compare the latest available interim financial information with the financial statements being reported upon.

Question 71

professional standards require that accountants make inquiries about the accounting principles used in the preparation of the prospective financial statements.

Question 72

tests of controls utilize attribute sampling. Attribute sampling is based on the binomial distribution which describes yes/no decisions, and error/non-error situations.

Question 73

An accountant has been engaged to compile the financial statements of a nonpublic entity. The financial statements contain many departures from GAAP because of inadequacies in the accounting records. The accountant believes that modification of the compilation report is not adequate to indicate the deficiencies. Under these circumstances, the accountant should

Answer 73

Withdraw from the engagement and provide no further service concerning these financial statements

Question 74

The audit report explicitly states that the examination of evidence is made on a test basis and implicitly assumes consistent application of accounting principles unless stated otherwise in the auditor’s report.

Question 75

material requisitions ordinarily are the basis for charging materials to work in process.

Question 76

Professional standards state that the auditor should consider obtaining representations from management that it has identified and disclosed to the auditor all laws and regulations that have a direct and material effect on the determination of financial statement amounts