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Flashcards in ENPL Deck (122):
1

Which of the following is not required when considering fraud in a financial statement audit?
a. Conduct an audit team discussion of the risk of material misstatement due to fraud.
b. Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor.
c. Conduct a continuing assessment of the risks of material misstatement due to fraud throughout the audit.
d. Inquire of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud.

Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor.

2

The Public Company Accounting Oversight Board’s third general standard states that due care is to be exercised in the performance of an audit. This standards is ordinarily interpreted to require

Critical review of the judgment exercised at every level of supervision.

3

Individuals who commit fraud are ordinarily able to rationalize the act and have

Incentive

4

Which of the following is most likely to be an overall response to fraud risks identified in an audit?
a. Increase emphasis on the audit of transactions in all areas of the audit.
b. Increase consideration of management’s selection and application of accounting principles.
c. Supervise members of the audit team less closely and rely more upon judgment.
d. Use only accountants with multiple years of experience on the engagement.

Increase consideration of management’s selection and application of accounting principles.

5

During an audit there is ordinarily a presumption of overstatements relating to

Revenue.

6

Quality control policies and procedures that are established to decide whether to accept a new client should provide the CPA firm with reasonable assurance that

The likelihood of associating with clients whose management lacks integrity is minimized.

7

An Accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided the

Distribution of the report is restricted to the specified users.

8

Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?
a. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.
b. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of acceptance of engagement.
c. Assessment of control risk below the maximum level.
d. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.

9

Which of the following procedures would least likely result in the discovery of possible illegal acts?
a. Reading the minutes of the board of directors’ meetings.
b. Performing test of details of transactions.
c. Reviewing an internal control questionnaire.
d. Making inquiries of the client’s management

Reviewing an internal control questionnaire.

10

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

Functions of the client and its environment while detection risk is not.

11

Which of the following procedures would be most effective in reducing attestation risk?
a. Analytical procedures.
b. Inquiries of senior management.
c. Discussion with responsible individuals.
d. Examination of evidence.

Examination of evidence.

12

Which of the following statement is not correct about materiality?
a. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to the financial statements.
b. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
d. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity GAAP, while other matters are not important.

An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to the financial statements.

13

During the audit of a new client, the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client’s board of directors, but the board decided to take no action because the amount involved were immaterial to the financial statements. Under these circumstances, the auditor should.

a. Consider withdrawing from the audit engagement and disassociating from future relationships with the client.

14

Which of the following statements is not correct about materiality?
a. An auditor’s assessment of planning materiality should be the smallest aggregate amount that would be material to the client’s financial position.
b. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements.
c. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
d. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

An auditor’s assessment of planning materiality should be the smallest aggregate amount that would be material to the client’s financial position.

15

An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?
a. Working papers.
b. Analytical procedures
c. Financial statements.
d. Checklists.

Working papers.

16

Which of the following procedures is least likely to be performed as a part of obtaining an understanding during an audit engagement of a new audit client previously audited by another CPA?
a. Communication with the predecessor auditor.
b. Performing analytical procedures.
c. Obtaining confirmation of cash balances.
d. Considering internal control.

Obtaining confirmation of cash balances.

17

Which of the following statements is correct concerning fraud risk factors that an auditor considers when performing a financial statement audit?
a. They must be considered individually, and not in combination, when conducting an audit.
b. They can easily be ranked in order of importance.
c. Their existence in an audit does not necessarily indicate the existence of fraud.
d. They must be combined into models before they are effective in identifying the existence of fraud.

Their existence in an audit does not necessarily indicate the existence of fraud.

18

An auditor’s engagement letter most likely would include a statement regarding

Management’s responsibility to provide certain written representations to the auditor.

19

Management’s emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when

A significant portion of management compensation is represented by stock options.

20

Which of the following statements best describes the auditor’s responsibility regarding the detection of material errors and fraud?
a. The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to confirm receivables or observer inventories.
b. Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and fraud may exist.
c. The auditor is responsible for the failure to detect material errors and fraud only when such failure results from the nonapplication of GAAP.
d. Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the existence of fraud risk factors.

Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the existence of fraud risk factors.

21

An auditor of a manufacturer would most likely question whether that client has committed illegal acts if the client has

Been forced to discontinue operations in a foreign country.

22

Which of the following is not an element of quality control for a CPA firm?
a. Relevant ethical requirements.
b. Acceptance and continuance of clients relationships and specific engagements.
c. Professional skepticism.
d. Monitoring.

Professional skepticism.

23

Before accepting an engagement to audit a new client that has previously been audited by another CPA firm, a CPA is required to obtain

The prospective client’s consent to make inquiries of the predecessor.

24

Which of the following statements is correct concerning an auditor’s responsibility to report fraud?
a. The disclosure of fraudulent activities to parties other than the client’s senior management and its audit committee is not ordinarily part of the auditor’s responsibility.
b. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC.
c. The auditor is required to communicate to the client’s audit committee all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved inconsequential.
d. The disclosure of material management fraud to principal stockholders is required when both senior management and the board of directors fail to acknowledge the fraudulent activities.

The disclosure of fraudulent activities to parties other than the client’s senior management and its audit committee is not ordinarily part of the auditor’s responsibility.

25

Which of the following has the lowest authoritative status but may be useful in assisting the auditor in applying the SASs?
a. Auditing Interpretations.
b. Statements on Auditing Standards.
c. Journal of Accountancy articles.
d. Auditing Statements of Position.

Journal of Accountancy articles.

26

When an auditor becomes aware of a possible client illegal act, the auditor should obtain an understanding of the nature of the act to

Evaluate the effect on the financial statements.

27

In a financial statement audit, inherent risk is evaluated to help an auditor assesses which of the following?
a. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion.
b. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.
c. The internal audit department’s objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee.
d. The risk that the internal control system will not detect a material misstatement of a financial statement assertion.

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

28

Which of the following procedures would a CPA most likely perform in the risk assessment stage of a financial statement audit?
a. Compare recorded financial information with anticipated results from budgets and forecasts.
b. Obtain representations from management regarding the availability of all financial records.
c. Communicate with the audit committee concerning the prior year’s audit adjustments.
d. Make inquiries of the client’s attorney regarding pending and threatened litigation and assessments.

Compare recorded financial information with anticipated results from budgets and forecasts.

29

Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement?
a. There will be a client-imposed scope limitation.
b. The client’s financial reporting system has been in place for 10 years.
c. Staff will need to be rescheduled to cover this new client.
d. The firm will have to hire a specialist in one audit area.

There will be a client-imposed scope limitation.

30

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
a. The details of most recorded transactions are not available after a specified period of time.
b. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
c. Management has a reputation for consulting with several accounting firms about significant accounting issues.
d. Internal control activities requiring the segregation of duties are subject to management override.

It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

31

Within the context of quality control, a primary purpose of the engagement performance element is to help ensure that

Engagements are adequately supervised.

32

The independent auditor’s plan for an examination in accordance with GAAs is influenced by the possibility of material misstatements. The auditor will therefore conduct the examination with an attitude of

Professional skepticism.

33

With respect to planning of a year-end audit, which of the following statements is always true?
a. It is an acceptable practice to carry out substantial parts of the examination at interim dates.
b. The client’s audit committee should not be told of the specific audit procedures which will be performed.
c. An inventory count must be observed at the balance sheet date.
d. An engagement should not be accepted after the fiscal year-end.

It is an acceptable practice to carry out substantial parts of the examination at interim dates.

34

Which of the following activities would most likely be considered an attestation engagement?
a. Advocating a client’s position on tax matters that are being reviewed by the IRS.
b. Issuing a report about a firm’s compliance with laws and regulations.
c. Preparing a client’s tax returns.
d. Consulting with management representatives of a firm to provide advice.

Issuing a report about a firm’s compliance with laws and regulations.

35

Which of the following professional services would be considered an attest engagement?
a. An income tax engagement to prepare federal and state tax returns.
b. An engagement to report on compliance with statutory requirements.
c. A management consulting engagement to provide computerized advice to a client.
d. An engagement to prepare the tax returns of the company’s CEO.

An engagement to report on compliance with statutory requirements.

36

An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes

Management’s responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.

37

Use the audit risk model to calculate audit risk (to the closest percent) in the following circumstance:
Control risk 40%
Inherent risk 40%
Detection risk 40%

6%

38

Which of the following is not likely response when an auditor has determined that a misstatement is, or may be, the result of fraud, and has determined that the effect on the financial statements may be material?
a. Attempt to obtain additional evidential matter to determine whether material fraud has occurred or is likely to have occurred.
b. Suggest that the client contact a local law enforcement authority to report the possible fraud.
c. Consider the implications for other aspects of the audit.
d. Discuss the matter and approach to further investigation with an appropriate level of management.

Suggest that the client contact a local law enforcement authority to report the possible fraud.

39

Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?
a. Criticizing.
b. Presumptive.
c. Judgmental.
d. Questioning.

Questioning.

40

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
a. Financial results of firms in the same industry.
b. The anticipated sample size for planned substantive tests.
c. The entity’s financial statements of the prior year.
d. The assertions that are embodied in the financial statements.

The entity’s financial statements of the prior year.

41

The technical standards that apply to consulting services engagements require the practitioner to do all of the following except
a. Give support for and clearly identify as estimates any quantifiable results that are based on estimates.
b. Maintain independence from the client.
c. Take no position which might impair the practitioner’s objectivity.
d. Obtain an understanding concerning the nature, scope, and limitations of the consulting advisory services engagement to be performed.

Maintain independence from the client.

42

Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
a. Management continues to employ an inefficient system of information technology to record financial transactions.
b. There are significant related-party transactions that management claims occurred in the ordinary course of business.
c. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
d. Internal control activities requiring the segregation of duties are subject to management override.

It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.

43

The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of

Timing of inventory observation procedures to be performed.

44

Which of the following types of services is most directly designed to improve the quality of information, or its context, for decision makers?
a. Attestation services
b. Assurance services
c. Audit services
d. Consulting services

Assurance services

45

An independent auditor must have which of the following?
a. A background in many different disciplines.
b. Technical training that is adequate to meet the requirements of a professional.
c. Experience in taxation that is sufficient to comply with GAAS.
d. A preexisting and well-informed point of view with respect to the audit.

Technical training that is adequate to meet the requirements of a professional.

46

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time?
a. The effects that inadequate controls may have over the safeguarding of assets.
b. The minimum amount of misstatements that may be considered to be significant deficiencies.
c. The schedules and analyses that the client’s staff should prepare.
d. The specific matters to be included in the communication with the audit committee.

The schedules and analyses that the client’s staff should prepare.

47

Following the Professional Standards what is not one of the assertions made by management for account balances?

Relevance and reliability

48

An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the

Illegal act affects the auditor’s ability to rely on management representations.

49

An auditor’s engagement letter most likely would include a statement that

Limits the auditor’s responsibility to detect errors and fraud.

50

Which of the following is an example of fraudulent financial reporting?
a. The treasurer diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses.
b. An employee bills his company for products not received, using the name of a fictitious supplier.
c. Company management improperly records as revenue the proceeds of a loan.
d. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.

Company management improperly records as revenue the proceeds of a loan.

51

If, during an audit, the successor auditor becomes aware of information that may indicate that financial statements reported on by the predecessor auditor may require revision, the successor auditor should

Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter.

52

Which of the following is correct concerning PCAOB guidance that uses the term “must”?
a. The auditor has complete discretion as to whether to perform the procedure.
b. The auditor should consider the guidance; whether the auditor follows depends on exercise of professional judgment in the circumstances.
c. The auditor must fulfill the responsibilities if relevant to the audit.
d. The auditor must comply with requirements unless s/he demonstrates that alternative actions were sufficient to achieve the objectives of the standards.

The auditor must fulfill the responsibilities if relevant to the audit.

53

Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?
a. Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.
b. The entity distributes financial forecasts to financial analysts that predict conservative operating results.
c. Several members of management have recently purchased additional shares of the entity’s stock.
d. Several members of the board of directors have recently sold shares of the entity’s stock.

Management is interested in maintaining the entity’s earnings trend by using aggressive accounting practices.

54

A CPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is

To minimize the likelihood of association with clients whose management lacks integrity.

55

As a lower acceptable level of materiality is established, the auditor should plan more work on individual accounts to

Find smaller misstatements.

56

Which of the following is an element of a CPA firm’s quality control policies and procedures applicable to the firm’s accounting and auditing practice?
a. Technology selection.
b. Professional skepticism.
c. Engagement performance.
d. Information processing.

Engagement performance.

57

Which of the following actions should a CPA firm take to comply with the AIPA’s quality control standards?
a. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.
b. Use attributes sampling techniques in testing internal controls.
c. Consider inherent risk and control risk before determining detection risk.
d. Establish policies to ensure that the audit work meets applicable professional standards.

Establish policies to ensure that the audit work meets applicable professional standards.

58

A basic objective of a CPA firm is to provide professional services to conform with professional standards. Reasonable assurance of achieving this basic objective is provided through

A system of quality control.

59

Which of the following information that comes to an auditor’s attention most likely would raise a question about the occurrence of illegal acts?
a. The failure to develop adequate procedures that detect unauthorized purchases.
b. The discovery of unexplained payments made to government employees.
c. The exchange of property for similar property in a nonmonetary transaction.
d. The presence of several difficult-to-audit transactions affecting expense accounts.

The discovery of unexplained payments made to government employees.

60

Which of the following is a conceptual similarity between GAAS and the attestation standards?
a. Both sets of standards require the CPA to report on the adequacy of disclosure in the financial statements.
b. The requirement that the CPA be independent in mental attitude is included in both sets of standards.
c. All of the standards of fieldwork in GAAS are included in the attestation standards.
d. Both sets of standards are applicable to engagements regarding financial forecasts and projections.

The requirement that the CPA be independent in mental attitude is included in both sets of standards.

61

Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that an auditor could tolerate most likely would cause the auditor to

Perform the planned auditing procedures closer to the balance sheet date.

62

What assurance does the auditor provide that errors, fraud, and direct effect illegal acts that are material to the financial statements will be detected?

Reasonable errors/Reasonable fraud/Reasonable direct effect illegal acts.

63

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?
a. The level of risk for the engagement.
b. The results of the internal control questionnaire.
c. Financial data bout firms in the client’s industry.
d. The entity’s annualized interim financial statements.

The entity’s annualized interim financial statements.

64

Which of the following, if material, would be fraud as defined in Statements on Auditing Standards?
a. Errors in the application of accounting principles.
b. Errors in the accounting data underlying the financial statements.
c. Misappropriation of assets.
d. Misinterpretation of facts that existed when the financial statements were prepared.

Misappropriation of assets.

65

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of material misstatement arising from fraudulent financial reporting?
a. There is a lack of interest by management in maintaining an earnings trend.
b. Computer hardware is usually sold at a loss before being fully depreciated.
c. Management had frequent disputes with the auditor on accounting matters.
d. Monthly bank reconciliations usually include several large checks outstanding.

Management had frequent disputes with the auditor on accounting matters.

66

An auditor reviews a client’s accounting policies and procedures when considering which of the following planning matters?
a. Preliminary judgments about materiality levels.
b. Nature of reports to be rendered.
c. Method of sampling to be used.
d. Understanding of the client’s operations and business.

Understanding of the client’s operations and business.

67

An auditor gathers information necessary to identify risks of material misstatement due to fraud by

nquiry of management/Considering fraud risk factors.

68

The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the

Management of the company.

69

Which of the following is correct concerning requirements about auditor communications about fraud?
a. Fraud with a material effect on the financial statements should be reported directly by the auditor to the SEC.
b. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.
c. All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee.
d. Fraud that causes an immaterial misstatement of the financial statements need not be reported to the audit committee.

All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee.

70

Detection risk differs from both control risk and inherent risk in the detection risk

Can be charged at the auditor’s discretion.

71

What is the most likely course of action that an auditor would take after determining that performing substantive tests on inventory will take less time than performing tests of controls?

Perform only substantive tests on inventory.

72

Which of the following is not a procedure performed primarily for the purpose of expressing an opinion on the financial statements, but may bring possible illegal acts to the auditor's attention?
a. Review of policies concerning effectiveness of management decision making policies.
b. Obtain an understanding of internal control.
c. Tests of balances.
d. Tests of transactions.

Review of policies concerning effectiveness of management decision making policies.

73

Holding all other factors constant, decreasing the extent of substantive audit procedures for accounts payable ordinarily has what effect on audit risk?

Increases.

74

Which of the following statements is correct regarding the auditor’s consideration of the possibility of illegal acts by clients?
a. If specific information concerning an illegal act comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.
b. The auditor’s training, experience, and understanding of the client should be used to provide a basis for the determination as to whether illegal acts have occurred.
c. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance that no illegal acts have been committed by clients.
d. If an illegal act has occurred, the auditor should express a qualified opinion or an adverse opinion on the financial statements taken as a whole.

If specific information concerning an illegal act comes to the auditor’s attention, the auditor should apply audit procedures specifically directed to ascertaining whether an illegal act has occurred.

75

In connection with the element of monitoring, a CPA firm’s system of quality control should ordinarily provide for the maintenance of

Documentation to demonstrate compliance with its policies and procedures.

76

As guidance for measuring the quality of the performance of an auditor, the auditor should refer to

GAAS.

77

Which of the following underlies the application of GAAS, particularly the standards of fieldwork and reporting?
a. The element of corroborating evidence.
b. The element of internal control.
c. The elements of materiality and audit risk.
d. The element of reasonable assurance.

The elements of materiality and audit risk.

78

Which of the following is not an attestation standard?
a. A sufficient understanding of internal control shall be obtained to plan the engagement.
b. The practitioner must have adequate technical training and proficiency to perform the attestation engagement.
c. The report shall identify the subject matter on the assertion being reported on and state the character of engagement.
d. The work shall be adequately planned and assistants, if any, properly supervised.

A sufficient understanding of internal control shall be obtained to plan the engagement.

79

One purpose of establishing quality control policies and procedures for acceptance and continuance of client relationships and specific engagements is to

Undertake engagements only that the accounting firm is competent to perform.

80

Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Hawkins’ decision concerning the

Integrity of management.

81

Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
a. A high turnover of senior management.
b. A strained relationship between management and the predecessor auditor.
c. A lack of independent checks.
d. An inability to generate cash flow from operations.

A lack of independent checks.

82

In which circumstance is the confirmation of receivables on October 31 most likely for a client with a December 31 year-end?
a. Tests of controls have revealed that the disbursements cycle is operating effectively.
b. Accounts were confirmed as of December 31 for the preceding year’s audit.
c. Appropriate audit tests indicate that control risk for receivables is low.
d. The receivables balance is material.

Appropriate audit tests indicate that control risk for receivables is low.

83

Early appointment of the independent auditor will enable

A more efficient audit to be planned.

84

As the acceptable level of detection risk decreases, the assurance directly provided from

Substantive procedures should increase.

85

Which of the following is a risk factor relating to the misappropriation of assets?
a. Large amounts of cash on hand.
b. Overly complex organizational structure involving numerous legal entities.
c. High turnover of legal counsel.
d. Inability to generate positive cash flows from operations.

Large amounts of cash on hand.

86

Which of the following factors most likely would cause a CPA to decline to accept a new audit engagement?
a. Management acknowledges that the entity has had recurring operating losses.
b. The CPA is unable to review the predecessor auditor’s working papers.
c. Management is unwilling to permit inquiry of its legal counsel.
d. The CPA does not understand the entity’s operations and industry.

Management is unwilling to permit inquiry of its legal counsel.

87

Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
a. Considering whether the client’s accounting estimates are reasonable in the circumstances.
b. Determining the extent of involvement of the client’s internal auditors.
c. Examining documents to detect illegal acts having a material effect on the financial statements.
d. Obtaining a written representation letter from the client’s management.

Determining the extent of involvement of the client’s internal auditors.

88

Which of the following factors is most important concerning an auditor’s responsibility to detect errors and fraud?
a. The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts.
b. The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.
c. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements.
d. The susceptibility of the accounting records to intentional manipulation, alterations, and the misapplication of accounting principles.

The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements.

89

The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the

Results are consistent with the conclusions to be presented in the auditor’s report.

90

Professional skepticism, when exercised during the consideration of the risk of misstatement due to fraud

Is an attitude that includes a questioning mind.

91

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should

Obtain a knowledge of matters that relate to the nature of the entity’s business.

92

An understanding with the client must include the objectives of the engagement, management’s responsibilities, and

The auditor’s responsibilities/Limitations of the audit.

93

Which is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client?
a. The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts.
b. The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.
c. The successor auditor has no responsibility to contact the predecessor auditor.
d. The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact.

The successor auditor should obtain permission from the prospective client to contact the predecessor auditor.

94

One of the objectives of the human resources element quality control mandates that a public accounting firm should establish policies and procedures for recruitment processes which provide reasonable assurance that all personnel

Perform engagements in accordance with professional standards.

95

Which of the following audit risk components may be assessed in non-quantitative terms?
a. Inherent risk/Control risk.
b. Inherent risk/Detection risk.
c. Control risk/Detection risk.
d. Inherent risk/Control risk/Detection risk.

Inherent risk/Control risk/Detection risk.

96

The purpose of establishing quality control policies and procedures for deciding whether to accept or continue a client relationship is to

Minimize the likelihood of associating with clients whose management lacks integrity.

97

In which of the following circumstances is it least likely that the auditor will have a responsibility to disclose a fraudulent act to parties other than the client’s senior management and its audit committee?
a. In response to question raised by an analyst who follows the stock of the company.
b. To comply with legal and regulatory requirements.
c. In response to a successor auditor.
d. To a funding agency in accordance with requirement for audit of entities that receive governmental financial assistance.

In response to question raised by an analyst who follows the stock of the company.

98

Which of the following is correct concerning a “fraud risk factor?”
a. It requires modification of planned audit procedures.
b. It has been observed in circumstances where frauds have occurred.
c. Its presence indicates that the risk of fraud is high.
d. It is also a material weakness in internal control.

It has been observed in circumstances where frauds have occurred.

99

Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?
a. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be though to bear on independence.
b. Prior to accepting the engagement, the firm must orally affirm its independence to the audit committee with all members present.
c. Communications related to independence may occur in any form prior to issuance for the financial statements.
d. The firm must address all independence impairment issues on the date of the audit opinion.

Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be though to bear on independence.

100

A client decides not to make an auditor’s proposed adjustments that collectively are not material and wants the auditor to issue the report based on the unadjusted numbers. Which of the following statements is correct regarding the financial statement presentations?
a. The financial statements are free from material misstatement, and no disclosure of the omitted proposed adjustments is required in the audit report.
b. The financial statements are free from material misstatement, but disclosure of the proposed adjustments is required in the notes to the financial statements.
c. The financial statements do not conform with GAAP.
d. The financial statements contain unadjusted misstatements that should result in a qualified opinion.

The financial statements are free from material misstatement, and no disclosure of the omitted proposed adjustments is required in the audit report.

101

The risk that an auditor will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as

Detection risk.

102

A successor auditor’s inquiries of the predecessor auditor should include questions regarding.

The predecessor’s understanding as to the reasons for the change in auditors.

103

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?
a. Resend confirmations for any significant customer balances remaining at year-end.
b. Send confirmations for all new customers balances incurred from the interim date to year-end.
c. Review cash collections subsequent to the interim date and the year-end.
d. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

104

Which of the following is a conceptual difference between the attestation standards and other AICPA professional standards?
a. The attestation standards do not permit an attest engagement be part of a business acquisition study or a feasibility study.
b. The attestation standards do not provide guidance for reviews of nonfinancial information.
c. The attestation standards do not apply to reviews of historical financial statements of non-issuer firms.
d. The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards.

The attestation standards do not apply to reviews of historical financial statements of non-issuer firms.

105

A predecessor auditor

Is not required to attempt communication with a successor since this is the successor’s responsibility.

106

Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following matters do the auditor and management agree upon at this time?
a. The coordination of the assistance of the client’s personnel in data preparation.
b. The determination of the fraud risk factors that exist within the client’s operations.
c. The control weaknesses to be included in the communication with the audit committee.
d. The appropriateness of the entity’s plans for dealing with adverse economic conditions.

The coordination of the assistance of the client’s personnel in data preparation.

107

Which of the following is an analytical procedure that an auditor most likely would perform when performing the risk assessment of an audit?
a. Recalculating inventory extensions of physical inventory counts.
b. Scanning accounts receivable for amounts over credit limits.
c. Comparing the current year account balances for conformity with predictable patterns.
d. Confirming bank balances with the financial institutions.

Comparing the current year account balances for conformity with predictable patterns.

108

Which of the following is not typically a characteristic of fraud?
a. Falsified documentation.
b. Unintentional.
c. Concealment.
d. Collusion.

Unintentional.

109

In developing an overall audit strategy, an auditor should consider

Reporting objectives of the engagement.

110

Which of the following is most likely to be considered a “further audit procedure?”
a. Preparation of an engagement letter.
b. Performance of tests of controls.
c. Preparation of a flowchart of the sales function.
d. Communication with the predecessor auditor.

Performance of tests of controls.

111

Which of the following is a definition of control risk?
a. The risk that the auditor’s assessment of internal control will be at less than the maximum level.
b. The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s system of internal control.
c. The susceptibility of material misstatement assuming there are no related internal control policies or procedures.
d. The risk that the auditor will not detect a material misstatement.

The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s system of internal control.

112

When establishing an understanding with an audit client, that understanding should be documented

Through a written communication with the client.

113

Which of the following statements is correct concerning materiality in a financial statement audit?
a. Analytical procedures performed during an audit’s review stage usually decrease materiality levels.
b. If the materiality amount used in evaluating audit findings increases from the amount used in planning, the auditor should apply additional substantive tests.
c. Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to the financial statements.
d. The auditor’s materiality judgments generally involve quantitative, but not qualitative, considerations.

Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to the financial statements.

114

Which of the following is least likely to be included in the auditor’s risk assessment process to identify and assess the risks of material misstatement?
a. Consider the likelihood that risks could result in misstatements of an amount which is less than material.
b. Relate risks to what can go wrong at the relevant assertion level.
c. Identify risks.
d. Consider whether risks are of a magnitude that could result in a misstatement that could be material.

Consider the likelihood that risks could result in misstatements of an amount which is less than material.

115

An auditor is concerned about a policy of management override as a limitation of internal control. What test would best assess the validity of the auditor’s concern?

Verifying that approved spending limits are not exceeded.

116

When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining

Whether the engagement should be accepted.

117

Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?
a. Senior management has an excessive interest in upgrading the entity’s information technology capabilities.
b. Supporting accounting records and files that should be readily available are not produced promptly when requested.
c. Senior financial management participates in the selection of accounting principles and the determination of significant estimates.
d. Related-party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm.

Supporting accounting records and files that should be readily available are not produced promptly when requested.

118

A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor’s

Understanding of the reasons for the change in auditors.

119

Which of the following factors most likely would heighten an auditor’s concern about the risk of fraudulent financial reporting?
a. Inability to borrow necessary capital without granting debt covenants.
b. Inability to generate cash flows from operations while reporting substantial earnings growth
c. Management’s lack of interest in increasing the entity’s stock trend.
d. Large amounts of liquid assets that are easily convertible into cash.

Inability to generate cash flows from operations while reporting substantial earnings growth

120

In performing an attestation engagement, a CPA typically

Expresses a conclusion about the assertion on the subject matter.

121

Which of the following statements most likely would be included in an engagement letter from an auditor to a client?
a. The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.
b. The CPA firm will adjust the financial statements to correct misstatements before issuing a report.
c. The CPA firm is responsible for ensuring that the client complies with applicable laws.
d. The CPA firm will involve information technology specialists in the performance of the audit.

The CPA firm will involve information technology specialists in the performance of the audit.

122

Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions?
a. Competence.
b. Liability for negligent performance.
c. Independence,
d. Due professional care.

Competence.