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Flashcards in Becker 3 Deck (54):
1

Pell, CPA, decides to serve as principal auditor in the audit of the financial statements of Tech Consolidated, Inc.  Smith, CPA, audits one of Tech's subsidiaries.  In which situation(s) should Pell make reference to Smith's audit?

I. Pell reviews Sith's working papers and assumes responsibility for Smith's work, but expresses a qualified opinion on Tech's financial statements.

II. Pell is unable to review Smith's working papers; however, Pell's inquiries indicate that Smith has an excellent reputation for professional competence and integrity.

II only

2

In which of the following circumstances would an auditor not express an unqualified opinion?

a. There has been a material change between periods in accounting principles.

b. Quarterly financial data required by the SEC has been omitted.

c. The auditor wishes to emphasize an unusually important subsequent event.

d. The auditor is unable to obtain audited financial statements of a consolidated investee.

b. Quarterly financial data required by the SEC has been omitted.

3

Under which of the following circumstances would a disclaimer of opinion not be appropriate?

a. The auditor is unable to determine tha amounts associated with an employee fraud scheme.

b. Management does not provide reasonable justification for a change in accounting principles.

c. The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.

d. The chief executive officer is unwilling to sign the management representation letter.

b. Management does not provide reasonable justification for a change in accounting principles.

4

An auditor most likely would express an unqualified opinion and would not add explanatory language to the report if the auditor

a. Wishes to emphasize that the entity had significant transactions with related parties.

b. Concurs with the entity's change in its method of computing depreciation.

c. Discovers that supplementary information required by FASB has been omitted.

d. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

d. Believes that there is a probable likelihood of a material loss resulting from an uncertainty that is sufficiently supported and disclosed.

5

Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved.  Management is unable to make a reasonable estimate of the amount or range of the potential loss, but fully discloses the situation in the notes to the financial statements.  If management does not make an accrual in the financial statements, the auditor should express a(an)

a. Qualified opinion due to a scope limitation.

b. Qualified opinion due to a departure from GAAP.

c. Unqualified opinion with an explanatory paragraph.

d. Unqualified opinion in a standard auditor's report.

d. Unqualified opinion in a standard auditor's report.

6

When disclaiming an opinion due to a client-imposed scope limitation, and auditor should indicate in a separate paragraph why the audit did not comply with generally accepted auditing standards.  The auditor should also omit the

a. Opinion paragraph.

b. Scope paragraph and Opinion paragraph.

c. Neither.

d. Scope paragraph.

d. Scope paragraph.

7

A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usuall result when management

a. Is unable to obtain audited financial statements supporting the entity's invetment in a foreign subsidiary.

b. Refuses to disclose in the notes to the financial statements related party transactions authorized by the Board of Directors.

c. Does not sign an engagement letter specifying the responsibilities of both the entity and the auditor.

d. Fails to correct a reportable condition communicated to the audit committee after the prior year's audit.

a. Is unable to obtain audited financial statements supporting the entity's invetment in a foreign subsidiary.

8

If a publicly held company issues financial statements that purport to present its financial position and results of operations but omits the statement of cash flows, the auditor orinarily will express a(an)

a. Disclaimer of opinion.

b. Qualified opinion.

c. Reiview report.

d. Unqualified opinion with a separate explanatory paragraph.

b. Qualified opinion.

9

An auditor was unable to obtain sufficient competent evidential matter concerning certain transactions due to an inadequacy in the entity's accounting records.  The auditor would choose between issuing a(an)

a. Qualified opinion and an unqualified opinion with an explantory paragraph.

b. Unqualified opinion with an explanatory paragrpah and an adverse opinion.

c. Adverse opinion and a disclaimer of opinion.

d. Disclaimer of opinion and a qualified opinion.

d. Disclaimer of opinion and a qualified opinion.

10

In which of the following situations would an auditor ordinarily issue an unqualified audit opinion without an explanatory paragraph?

a. The auditor wishes to emphasize that the entity had significant related party transactions.

b. The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion.

c. The entity issues financial statements that present financial position and results of operations, but but omits the statement of cash flows.

d. The auditor has substantial doubt about the entity's ability to continue as a going concern, but the circumstances are fully disclose in financial statements.

b. The auditor decides to make reference to the report of another auditor as a basis, in part, for the auditor's opinion.

11

If management (of a governmental body) declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(an) 

a. Adverse opinion.

b. Qualified opinion with an explanatory paragraph.

c. Unqualified opinion.

d. Unqualified opinion with an additional explanatory paragrph.

d. Unqualified opinion with an additional explanatory paragrph.

12

Jewel, CPA, auditied Infinite Co.'s prior-year financial statements.  These statements are presented with those of the current year for omparative purposes without Jewel's auditor's report, which expressed a qualified opinion.  In drafting the current year's auditor's report, Crain, CPA, the successor auditor, should

I. Not name Jewel as the predecessor auditor.

II. Indicate the type of report issued by Jewel.

III. Indicated the substantive reasons for Jewel's qualification.

I, II, & III.

13

What is an auditor's reporting responsibility concerning information accompanying the basic financial statements in an auditor-submitted document?

a. The auditor should report on all the accompanying information included in the document.

b. The auditor should report on the accompanying information only if the auditor participated in its preparation.

c. The auditor should report on the accompanying information only if the auditor did not participate in its preparation.

d. The auditor should report on the accompanying information only if it contains obvious material misstatements.

a. The auditor should report on all the accompanying information included in the document.

14

If the standard report on condensed financial statements that are derived from a public entity's audited financial statements, a CPA should indicate that the 

a. Condensed financial statements are prepared in conformity with another comprehensive basis of accounting.

b. CPA has audited and expressed an opionion on the complete financial statements.

c. Condensed financial statements are not fairly presened in all material respects.

d. CPA express limited assurance that the financial statements conform with GAAP.

b. CPA has audited and expressed an opionion on the complete financial statements

15

During an engagement to review the financial statements of a nonpublic entity, an accountant becomes aware that several leases that should be coapitalized are not capitalized.  The accountant considers these leases to be material to the financial statements.  The accountant decides to modify the standard review report because management will not capitalize the leases.  Under these circumstances, the accountant should

a. Issue an adverse opinion because of the departure from GAAP. 

b. Express no assurance of any kind on the entity's financial statements.

c. Emphasize that the financial statements are for limited use only.

d. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

d. Disclose the departure from GAAP in a separate paragraph of the accountant's report.

16

An accountant's standard report on a review of the financial statements of a nonpublic entity should state that the accountant

a. Does not express an opinion or any form of limited assurance on the financial statements.

b. Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP.

c. Obtained reasonable assurance about whether the financial statements are free of material misstatement.

d. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.

b. Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP.

17

When unaudited financial statements are presented in comparative form with audited financial statements in a document filed with the SEC, such statments should be

a. Marked as "unaudited."

b. Marked as "unaudited" and Referred to in the auditors report.

c. Withheld until audited and Referred to in the auditors report.\

d. Withheld until audited.

a. Marked as "unaudited."

18

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when 

a. Testifying as an expert witness in accounting and auditing matters given stipulated facts and Compiling a client's financial projection that presents a hypothetical course of action.

b. Testifying as an expert witness in accounting and auditing matters given stipulated facts.

c. Compiling a client's financial projection that presents a hypothetical course of action.

d. Neither.

c. Compiling a client's financial projection that presents a hypothetical course of action.

19

An entity engaged a CPA to determine whether the client's web sites meet defined criteria for standard business practices and controls over transaction integrity and information protection.  In performing this engagement, the CPA should comply with the provisions of

a. Statement on assurance Standards.

b. Statement on Standards for Attestation Engagements.

c. Statements on Standards for Management Consulting Services.

d. Statements on Auditing Standards.

b. Statement on Standards for Attestation Engagements.

20

An examination of a financial forecast is a professional service that involves 

a. Compiling or assembling a financial forecast that is based on management's assumptions.

b. Limiting the distriution of the accountant's report to management and the board of directors.

c. Assuming responsibility to update management on key events for one year after the report's date.

d. Evaluating the preparation of a financial forecast and the support underlying management's assumptions.

d. Evaluating the preparation of a financial forecast and the support underlying management's assumptions.

21

An accountant's report on a review of proforma financial information should include a 

a. Statement that the entity's internal control was not relied on in the review.

b. Disclaimer of opinion on the financial statements from which the pro forma financial information is derviced.

c. Caveat that it is uncertain whether the transaction or event reflected in the pro forma financial information will ever occur.

d. Reference to the financial statments from which the historical information is derived.

d. Reference to the financial statments from which the historical information is derived.

22

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

a. Large amounts of liquid assets that are easily convertible into cash.

b. Low gorwth and profitability as compared to other entity's in the same industry.

c. Financial management's participation in teh initial selection of accounting principles.

d. An overly complex organizational structure involving unusual lines of authority.

d. An overly complex organizational structure involving unusual lines of authority.

23

An auditor suspects that certain client employees are ordering merchandise for themselves over the internet without recording the purchase or receipt of the merchandise.  When the vendors' invoices arrive, one of the employees apprvoes the invoices for payment.  After the invoices are paid, the employee detroys the invoices and the related vouchers.  In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all

a. Cash disbursements.

b. Approved vouchers.

c. Receiving reports.

d. Vendors' invoices.

a. Cash disbursements.

24

The existence of audit rish is recognized by the statement in the auditor's standard report that the

a. Auditor is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

b. Financial statements are presented fairly, in all material respects, in conformity with GAAP.

c. Audit includes examining, on a test bais, evidence supporting the amounts adn disclosures in the financial statements.

d. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

d. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.

25

Which of the following procedures would an auditor least likely perform in planning a financial statement audit?

a. Coordinating the assistance of entity personnel in data preparation.

b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity.

c. Selecting a sample of vendors' invoices for comparison to receiving reports.

d. Reading the current year's interim financial statements.

c. Selecting a sample of vendors' invoices for comparison to receiving reports.

26

Which of the following documentation is required for an audit in accordance with GAAS?

a. A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's internal control.

b. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.

c. An indication in the working papers that the accounting records agree or reconcile with the financial statements.

d. The basis for the auditor's conclusions when the assessed level of control risk is at the maximum level for all financial statement assertions.

c. An indication in the working papers that the accounting records agree or reconcile with the financial statements.

27

Several sources of accounting principles for federal governmental entities are in conflict as to the application of an accounting principle.  Which of the following should the auditor consider the most authoritative?

a. Technical Releases of the Accounting and Auditing Policy Committee of the Federal Accounting Standards Advisory Board.
b. Federal Accounting Standards Advisory Board Interpretations.

c. Implementation guides published by the Federal Accounting Standards Advisory Board staff.

d. AICPA Industry Audit and Accounting Guides specifically made applicable to federal governmental agencies by the AICPA and cleared by the Federal Accounting Standards Advisory Board.

d. AICPA Industry Audit and Accounting Guides specifically made applicable to federal governmental agencies by the AICPA and cleared by the Federal Accounting Standards Advisory Board.

28

Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?

a. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

b. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

c. The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political reprecussion.

d. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general.

a. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

29

In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from meateriality under generally accepted auditing standards. Under the Single Audit Act, materiality is

a. Calculated in relation to the financial statements taken as a whole.

b. Determined separately for each major federal financial assistance program.

c. Decided in conjunction with the auditor's risk assessment.

d. Ignored, because all account balances, regardless of size, are fully tested.

b. Determined separately for each major federal financial assistance program.

30

For an entity that does not receive gpvernmental financial assistance, an auditor's standard report on financial statements generally would not refer to

a. Significant estimates made by management.

b. An assessment of the entity's accounting principles.

c. Management's responsibility for the financial statements.

d. The entity's internal control.

d. The entity's internal control.

31

In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is required to report on the entity's compliance with laws and regulations.  This report should

a. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is a part of obtaining reasonable assurance that the financial statements are free of material misstatements.

b. Describe the laws and regulations that the entity must comply with.

c. Provide and opinion on overall compliance with laws and regulations.

d. Indicate that the auditor does not possess legal skills and cannot make legal judgments.

a. State that tests of compliance with laws and regulations that have a direct and material effect on the financial statements is a part of obtaining reasonable assurance that the financial statements are free of material misstatements.

32

Which of the following is a documentation requirement that an auditor should follow when auditing in accordance with Government Auditing Standards?

a. The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste.

b. The auditor's working papers should contain sufficient information so that supplementary oral explanations are not required.

c. The auditor should document the procedures that assure discovery of all illegal acts and contingent liabilities resulting from noncompliance.

d. The auditor's working papers should contain a caveat that all instances of material errors and fraud may not be identified.

 

 

b. The auditor's working papers should contain sufficient information so that supplementary oral explanations are not required.

33

Reporting on internal control under Government Auditing Standards differs from reporting under generally accepted auditing standards in that Government Auditing Standards requires a

a. Written report describing the entity's internal controls specifically designed to prevent fraud, abuse, and illegal acts.

b. Written report describing each reportable condition observed including identification of those considered material weaknesses.

c. Statement of negative assurance that internal controls not tested have an immaterial effect on the entity's financial statements.

d. Statement of positive assurance that internal controls designed to detect material errors and fraud were tested.

b. Written report describing each reportable condition observed including identification of those considered material weaknesses.

34

In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

a. Inquiry and analytical procedures.

b. Reperformance and observation.

c. Comparison and confirmation.

d. Inspection and verification.

b. Reperformance and observation.

35

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

a. Monitor the design and use of entity documents such as prenumbered shipping forms.

b. Determine whether internal controls have been placed in operation.

c. Detect material misstatements in the account balances of the financial statements. 

d. Evaluate whether internal controls operated effectively.

c. Detect material misstatements in the account balances of the financial statements

36

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both

a. Journalize entries and prepare financial statements.

b. Record cash receipts and cash disbursements.

c. Establish internal controls and authorize transactions.

d. Perpetrate and conceal errors or fraud.

d. Perpetrate and conceal errors or fraud.

37

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities?

a. Vouch a sample of accounts payable entries recorded just before year end to the unmatched receiving report file.

b. Compare a sample of puchase orders issued just after year end with the year-end accounts payable trial balance.

c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices.

d. Scan the cash disbursements entries recorded just before year end for indications of unusual transactions.

c. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices.

38

Which of the following internal control activities is not usually performed in the vouchers payable department?

a. Matching the vendor's invoice with the related receiving report.

b. Approving vouchers for payment by having an authorized employee sign the vouchers.

c. Indicating the asset and expense accounts to be debited.

d. Accounting for unused prenumbered purchase orders and receiving reports.

d. Accounting for unused prenumbered purchase orders and receiving reports.

39

Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?

a. Comparing control totals for shipping documents with corresponding totals for slaes invoices.

b. Using computer programmed controls on the pricing and mathematical accuaracy of sales invoices.

c. Matching shipping documents with approved sales orders before invoice preparation.

d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

40

Under properly designed internal control, the same employee most likely would match vendors' invoices with receving reports and also

a. Post the detailed accounts payable records.

b. Recompute the calculations on vendors' invoices.

c. Reconcile the accounts payable ledger.

d. Cancel vendors' invoices after paymetn.

b. Recompute the calculations on vendors' invoices.

41

Which of the following internal controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

a. Daily sales summaries are compared to daily postings to the accounts receivable ledger. 

b. Each sales invoice is supported by a prenumbered shipping document.

c. The accounts receivable ledger is reconciled daily to the control account in the general ledger.

d. Each shipment on credit is supported by a prenumbered sales invoice.

a. Daily sales summaries are compared to daily postings to the accounts receivable ledger. 

42

Dunn, CPA, is auditing the financial statements of Taft Co.  Taft uses Quick Service Center (QSC) to process its payroll, Price, CPA, is expressing an opinion on a description of the controls placed in operation at QSC regarding the processing of its customers' payroll transactions.  Dunn expects to consider the effects of Price's report on the Taft engagement.  Price's report should contrain a (an) 

a. Description of the scope and nature of Price's procedures.

b. Statement that Dunn may assess control risk based on Price's report.

c. Assertion that Price assumes no responsibility to determine whether QSC's controls are suitable designed.

d. Opinion on the operating effectiveness of QSC's internal controls.

c. Assertion that Price assumes no responsibility to determine whether QSC's controls are suitable designed.

43

Which of the following statements is correct concerning internal control in an electronic data interchange (EDI) system?

a. Preventive controls generally are more important than detective controls in EDI systems.

b. Control objectives for EDI systems generally are different from the objectives for other information systems.

c. Internal controls in EDI systems rarely permit control risk to be assessed at below the maximum.

d. Internal controls related to the segregation of duties generally are the most important controls in EDI systems.

a. Preventive controls generally are more important than detective controls in EDI systems.

44

Which of the following controls most likely could prevent EDP personnel from modifying programs to bypass programmed controls?

a. Periodic management review of computer utilization reports and systems documentation.

b. Segregation of duties within EDP for computer programming and computer operations.

c. Participation of user department personnel in designing and approving new systems.

d. Physical security of EDP facilities in limiting access to EDP equipment.

b. Segregation of duties within EDP for computer programming and computer operations.

45

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan.  To calculate the required sample size, the auditor usually determines the

a. Variability in the dollar amounts of inventory items and Risk of incorrect acceptance.

b. Variability in the dollar amounts of inventory items.

c. Risk of incorrect acceptance.

d. Neither.

a. Variability in the dollar amounts of inventory items and Risk of incorrect acceptance.

46

The likelihood of assessing control risk too high is the risk that the sample selected to test controls

a. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

b. Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes.

c. Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist in the balance or class as a whole.

d. Does not support the tolerable error for some or all of management's assertions.

a. Does not support the auditor's planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment.

47

The sample size of a test of controls varies inversely with

a. Expected population deviation rate and Tolerable rate.

b Neither.

c. Expected population deviation rate.

d. Tolerable rate.

d. Tolerable rate.

48

As a result of sampling procedures applied as test of controls, an auditor incorrectly assesses control risk lower than appropriate.  The most likely explanation for this situation is that

a. The deviation rate of both the auditor's sample and the population exceed the tolerable rate.

b. The deviation rates of both the auditor's sample and the population is less than the tolerable rate.

c. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

d. The deviation rate in the auditor's sample exceeds the tolerable rate, but the deviation rate in the population is less than the tolerable rate.

c. The deviation rate in the auditor's sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate.

49

Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses?

a. The current year's accounts receivable with the prior year's accounts receivable.

b. The current year's payroll expense with the prior year's payroll expense.

c. The budgeted current year's sales with the prior year's sales.

d. The budgeted current year's warranty expense with the current year's contingent liabilities.

b. The current year's payroll expense with the prior year's payroll expense.

50

Which of the following would not be considered an analytical procedure?

a. Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked.

b. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.

c. Computing accounts receivable turnover by dividing credit sales by the average net receivables.

d. Developing the expected current-year sales based on the sales trend of the prior five years.

b. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics.

51

Which of the following internal controls most likely would prevent direct labor hours from being charged to manufacturing overhead?

a. Periodic independent counts of work in process for comparison to recorded amounts.

b. Comparison of daily journal entries with approved production orders.

c. Use of time tickets to record actual labor worked on production orders.

d. Reconciliation of work-in-process inventory with periodic cost budgets.

c. Use of time tickets to record actual labor worked on production orders.

52

Which of the following explanations most likely would satisfy an auditor who questions management about significant debits to the accumulated depreciation accounts?

a. The estimated remaining useful lives of plant assets were revised upward.

b. Plant assets were retired during the year.

c. The prior year's depreciaiton expense was erroneously understated.

d. Overhead allocations were revised at year end.

b. Plant assets were retired during the year.

53

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

a. Inspecting correspondence with lawyers for evidence of unreported contingent liabilities.

b. Vouching accounting records for recurring transactions recorded just after the balance sheet date.

c. Reviewing confirmations of loans receivable and payable for indications of guarantees.

d. Peforming analytical procedures for indications of possible financial difficulties.

c. Reviewing confirmations of loans receivable and payable for indications of guarantees.

54

Which of the following auditing procedures most likely would assist an auditor in identifying related party transactions?

a. Retesting ineffective internal controls previously reported to the audit committee.

b. Sending second requests for unanswered positive confirmations of accounts receivable.

c. Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.

d. Inspecting communications with law firms for evidence of unreported contingent liabilities.

c. Reviewing accounting records for nonrecurring transactions recognized near the balance sheet date.