FINAL Flashcards by Estefany Hernandez

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

A. The risk that the internal control system will not detect a material misstatement of a financial statement assertion.

B. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion.

C. The internal audit department’s objectivity in reporting to the audit committee a material misstatement of a financial statement assertion it detects.

D. The susceptibility of a financial statement assertion to a material misstatement before consideration of related controls.

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Inherent risk and control risk differ from detection risk in that they

A. Arise from the misapplication of auditing procedures.

B. Exist independently of the financial statement audit.

C. May be assessed in either quantitative or nonquantitative terms.

D. Can be changed at the auditor’s discretio

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After testing a client’s internal control activities, an auditor discovers a number of significant deficiencies in the operation of a client’s internal controls. Under these circumstances, the auditor most likely would

A. Issue a qualified opinion of this finding as part of the auditor’s report.

B. Issue a disclaimer of opinion about the internal controls as part of the auditor’s report.

C. Increase the assessment of control risk and increase the extent of substantive tests.

D. Withdraw from the audit because the internal controls are ineffective.

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In developing an audit plan, an auditor should

A. Evaluate findings from substantive procedures performed at interim dates.

B. Consider whether the inquiry of the client’s attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.

C. Determine whether the allowance for sampling risk exceeds the achieved upper precision limit.

D. Perform risk assessment procedures

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When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the

A. Extent of tests of controls.

B. Level of detection risk.

C. Level of inherent risk.

D. Extent of tests of details.

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The scope and nature of an auditor’s contractual obligation to a client is ordinarily set forth in the

A. Engagement letter.

B. Scope paragraph of the auditor’s report.

C. Introductory paragraph of the auditor’s report.

D. Management representation letter.

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In assessing whether to accept a client for an audit engagement, a CPA should consider the

Client’s Business Risk

CPA’s Business Risk

-both are yes or no?

both are yes

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Before accepting an engagement to audit a new client, an auditor is required to

A. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client.

B. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan.

C. Obtain the prospective client’s signature to the engagement letter.

D. Discuss the management representation letter with the prospective client’s audit committee.

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Regardless of the assessed risks of material misstatement, an auditor should perform some

A. Tests of controls to determine their effectiveness.

B. Analytical procedures to verify the design of controls.

C. Substantive procedures to restrict detection risk for significant transaction classes.

D. Dual-purpose tests to evaluate both the risk of monetary misstatement and preliminary control risk

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In developing written audit plans, an auditor should design specific audit procedures that relate primarily to the

A. Timing of the audit.

B. Financial statements as a whole.

C. Financial statement assertions.

D. Costs and benefits of gathering evidence.

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The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is

A. Audit risk.
B. Detection risk.
C. Control risk.
D. Inherent risk.

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Madison Corporation has a few large accounts receivable that total $1,000,000. Nassau Corporation has a great number of small accounts receivable that also total $1,000,000. The importance of a misstatement in any one account is therefore greater for Madison than for Nassau. This is an example of the auditor’s concept of

A. Reasonable assurance.
B. Audit risk.
C. Materiality.
D. Comparative analysis.

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Which one of the following statements is correct concerning the concept of materiality?

A. Materiality depends only on the dollar amount of an item relative to other items in the financial statements.

B. Materiality is determined by reference to AICPA guidelines.

C. Materiality is a matter of professional judgment.

D. Materiality depends on the nature of an item rather than the dollar amount.

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Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality for the financial statements as a whole?

A. The entity’s year-to-date financial results and position.
B. The contents of the representation letter.
C. The results of the internal control questionnaire.
D. The anticipated sample size of the planned substantive procedures.

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In the course of the audit of financial statements for the purpose of expressing an opinion, the auditor will normally prepare a schedule of uncorrected misstatements. The primary purpose served by this schedule is to

A. Point out to the responsible entity officials the errors made by various entity personnel.

B. Summarize the corrections that must be made before the entity can prepare and submit its federal tax return.

C. Identify the potential financial statement effects of misstatements that were not considered clearly trivial when discovered.

D. Summarize the misstatements made by the entity so that corrections can be made after the audited financial statements are released

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Based on new information gained during an audit of a nonissuer, an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate?

A. The auditor is required to reperform audit procedures already completed on the audit using the revised materiality.

B. The auditor should consider disclaiming an opinion due to a scope limitation.

C. The revision of materiality at the financial statement level will not affect the planned nature and timing of audit procedures, only the extent of those procedures.

D. Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised.

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An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it

A. Arises from a transaction cycle with controls that were determined to be operating effectively.

B. Decreases management’s incentive compensation for the period.

C. Changes the company’s operating results from a net loss to a net income.

D. Is the first time a misstatement has arisen from the relevant transaction cycle.

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When determining whether uncorrected misstatements are material, individually or in the aggregate, an auditor of a nonissuer would consider each of the following, except

A. The size and nature of the misstatements.

B. The effect of uncorrected misstatements related to prior periods.

C. The particular circumstances of each misstatement.

D. The cost of correcting the misstatements.

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When expressing an unmodified opinion, the auditor who evaluates the audit findings should determine whether

A. The amount of identified misstatement is documented in the management representation letter.

B. Uncorrected misstatements are material.

C. Estimates of total misstatement include the amounts of adjusting entries already recorded by the client.

D. The amount of identified misstatement is acknowledged and recorded by the client.

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Which of the following is a false statement about materiality?

A. 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.

B. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.

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

D. 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.

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Analytical procedures performed to assist in forming an overall conclusion suggest that several accounts have unexpected relationships. The results of these procedures most likely indicate that

A. Misstatements exist in the relevant account balances.

B. The communication with the audit committee should be revised.

C. Internal control activities are not operating effectively.

D. Additional audit procedures are required.

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Which of the following items tend to be the most predictable for purposes of analytical procedures applied as substantive procedures?

A. Relationships involving balance sheet accounts.

B. Transactions subject to management discretion

C. Data subject to audit testing in the prior year.

D. Relationships involving income statement accounts.

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Which of the following factors has the least influence on an auditor’s consideration of the reliability of data for purposes of analytical procedures?

A. Whether the data were subjected to audit testing in the current or prior year.

B. Whether sources within the entity were independent of those who are responsible for the amount being audited.

C. Whether the data were processed in a computer system or in a manual accounting system.

D. Whether the data were obtained from independent sources outside the entity or from sources within the entity.

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Analytical procedures used as risk assessment procedures should focus on

A. Testing individual account balances that depend on accounting estimates.

B. Identifying material weaknesses in internal control.

C. Evaluating the adequacy of evidence gathered concerning unusual balances.

D. Enhancing the auditor’s understanding of the entity and its environment.

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Which of the following procedures would an auditor most likely perform in planning a financial statement audit? A. Examining computer-generated exception reports to verify the effectiveness of internal control. B. Comparing the financial statements with anticipated results. C. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities. D. Inquiring of the client’s legal counsel concerning pending litigation

For all audits of financial statements made in accordance with generally accepted auditing standards, the auditor should apply analytical procedures to some extent as Risk Assessment Procedures Substantive Procedures In the Review Stage answer yes or no

Risk Yes Assessment Procedures Substantive No Procedures In the Yes Review Stage

Analytical procedures reveal significant unexpected differences between recorded amounts and the expectations developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should A. Intensify the audit with the expectation of detecting management fraud. B. Perform additional audit procedures to investigate the matter further. C. Withdraw from the engagement. D. Consider the matter a scope limitation.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonissuer? A. Ratio Analysis B. Risk analysis. C. Regression analysis. D. Trend analysis.

The objective of performing analytical procedures in planning an audit is to identify the existence of A. Noncompliance with laws and regulations that went undetected because of internal control deficiency. B. Recorded transactions that were not properly authorized. C. Unusual transactions and events. D. Related party transactions.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit? A. Reading the minutes of stockholder and director meetings to discover whether any unusual transactions have occurred. B. Obtaining a written representation letter from the client to emphasize management’s responsibilities. C. Reviewing investment transactions of the audit period to determine whether related parties were involved. D. Performing analytical procedures to identify areas that may represent specific risks

Internal controls are designed to provide reasonable assurance that A. Management’s plans have not been circumvented by worker collusion. B. Material errors or fraud will be prevented, or detected and corrected, within a timely period by employees in the course of performing their assigned duties. C. The internal auditing department’s guidance and oversight of management’s performance is accomplished economically and efficiently. D. Management’s planning, organizing, and directing processes are properly evaluated.

The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because A. Evidence supporting accrued liabilities is nonexistent, whereas evidence supporting accounts payable is readily available. B. Accrued liabilities at year end will become accounts payable during the following year. C. Accrued liability balances are less material than accounts payable balances. D. Accrued liabilities usually pertain to services of a continuing nature whereas accounts payable are the result of completed transactions.

Which of the following is a component part of the COSO’s internal control framework? A. Audit strategy and planning. B. Information systems. C. Event identification. D. Audit risk.

It is important for the auditor to consider the competence of the audit client’s employees, because their competence bears directly and importantly upon the A. Relationship of the costs of internal control and its benefits. B. Timing of the tests to be performed. C. Comparison of recorded accountability with assets. D. Achievement of the objectives of internal control.

An auditor uses the knowledge provided by the understanding of internal control and the assessed risks of material misstatement primarily to A. Determine whether procedures and records concerning the safeguarding of assets are reliable. B. Determine whether the opportunities to allow any person to both perpetrate and conceal fraud are minimized. C. Modify the initial assessments of inherent risk and judgments about materiality levels for planning purposes. D. Determine the nature, timing, and extent of substantive procedures for financial statement assertions.

An auditor uses the assessed risks of material misstatement to A. Evaluate the effectiveness of the entity’s internal control. B. Identify transactions, account balances, and disclosures for which inherent risk is significant. C. Determine the acceptable level of detection risk for financial statement assertions. D. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high

The primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with A. A basis for modifying tests of controls. B. Evidence to use in assessing inherent risk. C. An evaluation of the consistency of application of management’s policies. D. Knowledge necessary for audit planning.

Which of the following is not a component of internal control? A. Control risk B. Monitoring of controls. C. Information system. D. The control environment.

An auditor would most likely be concerned with controls that provide reasonable assurance about the A. Appropriate prices the entity should charge for its products. B. Efficiency of management’s decision-making process. C. Entity’s ability to initiate, authorize, record, process, and report financial data. D. Decision to make expenditures for certain advertising activities.

Internal control cannot be designed to provide reasonable assurance that A. Fraud will be eliminated B. Transactions are executed in accordance with management’s authorization. C. Access to assets is permitted only in accordance with management’s authorization. D. The recorded accountability for assets is compared with the existing assets at reasonable intervals.

Which of the following procedures is an auditor most likely to include in the planning phase of a financial statement audit? A. Perform cutoff tests of the entity’s sales and purchases. B. Evaluate the reasonableness of the entity’s accounting estimates. C. Obtain an understanding of the entity’s risk assessment process. D. Identify specific controls designed to prevent fraud.

The control environment may decrease the effectiveness of control activities when A. The board of directors is independent of management. B. The audit committee actively oversees the financial reporting process. C. The internal auditor reports directly to the audit committee. D. Management has substantial incentives for meeting earnings projections.

Proper segregation of functional responsibilities to achieve effective internal control calls for separation of the functions of A. Authorization, recording, and custody. B. Authorization, execution, and payment. C. Authorization, payment, and recording. D. Custody, execution, and reporting.

Which of the following components of internal control would be considered the foundation for the other components? A. Control activities. B. Information and communication. C. Risk assessment. D. Control environment.

Which of the following best describe the interrelated components of internal control? A. Assignment of authority and responsibility, management philosophy, and organizational structure. B. Risk assessment process, backup facilities, responsibility accounting, and natural laws. C. Control environment; risk assessment process; control activities; the information system, including related business processes; and monitoring of controls. D. Organizational structure, management philosophy, and planning.

Which of the following is a component of internal control? A. Risk Assessment B. Organizational structure. C. Operating effectiveness. D. Financial reporting.

An auditor of a nonissuer should design tests of details to ensure that sufficient audit evidence supports which of the following? A. The effectiveness of internal controls. B. Management’s assertions that internal controls exist and are operating efficiently. C. The planned level of control risk. D. The planned level of assurance at the relevant assertion level.

Which of the following is least likely to indicate the need to increase the assurance provided by substantive testing? A. A lower acceptable audit risk. B. A lower acceptable level of detection risk. C. An increase in the assessed control risk. D. A decrease in the assessed inherent risk.

Which of the following procedures is considered a test of controls? A. An auditor reviews the audit working papers to ensure proper sign-off. B. An auditor evaluates whether a general journal entry was recorded at the proper amount. C. An auditor reviews the entity’s check register for unrecorded liabilities. D. An auditor interviews and observes appropriate personnel to determine segregation of duties.

For certain controls, such as assignment of authority and responsibility, documentary evidence may not exist. An auditor would most likely test the controls by A. Inspection and vouching. B. Confirmation and recomputation. C. Computer-assisted methods and corroboration. D. Observation and inquiry.

The risks of material misstatement (RMMs) should be assessed in terms of A. Types of potential fraud. B. Specific controls. C. Financial statement assertions D. Control environment factors.

Which of the following is a step in an auditor’s decision to rely on internal controls? A. Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B. Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing. C. Identify specific controls that are likely to prevent, or detect and correct, material misstatements and perform tests of controls. D. Perform tests of details of transactions and account balances to identify potential fraud and error.

To test the effectiveness of controls, an auditor ordinarily selects from a variety of techniques, including A. Inspection and verification. B. Comparison and confirmation. C. Inquiry and analytical procedures. D. Reperformance and observation.

Which of the following audit procedures, if used, should be combined with other audit procedures when testing the operating effectiveness of controls? A. Reperformance. B. Observation. C. Inspection. D. Inquiry.

When assessing the risks of material misstatement at a low level, an auditor is required to document the auditor’s Understanding of the Entity’s Control Environment Overall Responses to Assessed Risks Answer yes or no

both yes

When the operating effectiveness of a control is not evidenced by written documentation, an auditor should obtain evidence about the control’s effectiveness by A. Analytical procedures. B. Recalculating the balance in related accounts. C. Mailing confirmations. D. Inquiry and other procedures such as observation

Tests of controls are concerned primarily with each of the following questions except A. How were the controls applied? B. Were the necessary controls consistently performed? C. By whom were the controls applied? D. Were the controls approved by the board of directors?

For which of the following assertions related to accounts receivable would an auditor’s initial assessment of risk of material misstatement of a nonissuer be increased if the auditor discovers that client management does not regularly review the collectibility of accounts receivable balances? A. Existence. B. Valuation. C. Completeness D. Rights and obligation

Which of the following procedures concerning accounts receivable is an auditor most likely to perform to obtain evidence in support of the effectiveness of controls? A. Comparing an entity’s uncollectible accounts expense with actual uncollectible accounts receivable. B. Inspecting an entity’s analysis of accounts receivable for unusual balances. C. Observing an entity’s employee prepare the schedule of past due accounts receivable. D. Sending confirmation requests to an entity’s principal customers to verify the existence of accounts receivable.

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable? A. Trace transactions from the subsidiary ledger to the general ledger. B. Trace a sample of invoices to recording in the general ledger. C. Send confirmations to customers. D. Determine that all shipments before year end are recorded as sales

The most effective audit procedure for determining the collectibility of an account receivable is the A. Review of authorization of credit sales to the customer and the previous history of collections. B. Examination of the related sales invoice(s). C. Review of the subsequent cash collections. D. Confirmation of the account.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of A. Valuation and allocation. B. Completeness. C. Rights and obligations. D. Existence.

An entity’s financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by A. Tracing a sample of journal entries to the general ledger. B. Scanning the general journal for unusual entries. C. Performing a revenue cutoff test at year end. D. Examining documentary evidence of sales returns and allowances recorded after year end.

Which of the following might be detected by an auditor’s review of the client’s sales cutoff? A. Excessive goods returned for credit. B. Lapping of year-end accounts receivable. C. Inflated sales for the year. D. Unrecorded sales discounts.

An auditor is required to confirm accounts receivable if the accounts receivable balances are A. Smaller than expected. B. Material to the financial statements. C. Subject to valuation estimates. D. Older than the prior year.

An auditor’s purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about A. Rights and obligations. B. Existence. C. Valuation and allocation. D. Classification and understandability

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate alternative audit procedure? A. Intensify tests of the client’s controls with respect to receivables. B. Increase the balance in the accounts receivable allowance (contra) account. C. Review collections during the year being audited. D. Examine shipping documents.

The negative request form of accounts receivable confirmation may be used when the

It's the first option Low, Many, Liekely

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year end if A. Most of the returned negative confirmation requests indicate that the debtor owes a larger balance than the amount being confirmed. B. Negative confirmation requests sent to debtors are not returned. C. Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed. D. Positive confirmation requests sent to debtors are not returned

Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable? A. Vouching amounts in the subsidiary ledger to details on shipping documents. B. Comparing receivable turnover ratios with industry statistics for reasonableness. C. Inquiring about receivables pledged under loan agreements. D. Assessing the allowance for uncollectible accounts for reasonableness.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would A. Send the customer a second confirmation request B. Increase the assessed risks of material misstatement for the revenue cycle. C. Inspect the allowance account to verify whether the accounts were subsequently written off. D. Increase the assessed risks of material misstatement for the valuation and completeness assertions.

In searching for unrecorded liabilities, an auditor most likely would examine the A. Files of purchase requisitions for items ordered just before the year end. B. Details of accounts receivable confirmations that are classified as “exceptions.” C. Cutoff bank statement for deposits recorded in the books, but not by the bank. D. Receiving reports for items received before year-end, but not yet recorded.

An auditor most likely would analyze inventory turnover rates to obtain evidence concerning relevant assertions about A. Classification and understandability. B. Existence. C. Rights and obligations. D. Valuation and allocation.

Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of A. Existence. B. Completeness. C. Cutoff. D. Valuation.

Purchase cutoff procedures should be designed to test that merchandise is included in the inventory of the client company if the company A. Has physical possession of the merchandise. B. Has paid for the merchandise. C. Holds legal title to the merchandise. D. Holds the shipping documents for the merchandise issued in the company’s name.

Which of the following procedures would an auditor generally perform regarding subsequent events? A. Inspect inventory items that were ordered before the year end but arrived after the year end. B. Review the client’s cutoff bank statements for several months after the year end. C. Compare the latest available interim financial statements with the statements being audited. D. Test internal control activities that were previously reported to management as inadequate.

The most reliable procedure for an auditor to use to test the existence of a client’s inventory at an outside location would be to A. Analytically compare the current-year inventory balance to the prior-year balance. B. Observe physical counts of the inventory items. C. Trace the total on the inventory listing to the general ledger inventory account. D. Obtain a confirmation from the client indicating inventory ownership.

An auditor traced a sample of purchase orders and the related receiving reports to the purchases journal and the cash disbursements journal. The purpose of this substantive audit procedure most likely was to A. Test whether payments were for goods actually ordered. B. Verify that cash disbursements were for goods actually received. C. Identify unusually large purchases that should be investigated further. D. Determine that purchases were properly recorded.

When auditing inventories, an auditor would least likely verify that A. The client has used proper inventory pricing. B. All inventory owned by the client is on hand at the time of the count C. Damaged goods and obsolete items have been properly accounted for. D. The financial statement presentation of inventories is appropriate

Which of the following auditing procedures is ordinarily performed last? A. Testing of the purchasing function. B. Reading of the minutes of the directors’ meetings. C. Obtaining a management representation letter. D. Confirming accounts payable.

Unrecorded liabilities are most likely to be found during the review of which of the following documents? A. Unmatched sales invoices. B. Bills of lading. C. Unpaid bills. D. Shipping records

To gain assurance that all inventory items in a client’s inventory listing schedule are valid, an auditor most likely would vouch A. Inventory tags noted during the auditor’s observation to items listed in receiving reports and vendors’ invoices. B. Inventory tags noted during the auditor’s observation to items listed in the inventory listing schedule. C. Items listed in receiving reports and vendors’ invoices to the inventory listing schedule. D. Items listed in the inventory listing schedule to inventory tags and the auditor’s recorded count sheets.

Which of the following audit procedures is best for identifying unrecorded trade accounts payable? A. Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports. B. Examining unusual relationships between monthly accounts payable balances and recorded cash payments. C. Reconciling vendors’ statements to the file of receiving reports to identify items received just prior to the balance sheet date. D. Reviewing cash disbursements recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period.

Subsequent events are defined as events that occur subsequent to the A. Release of the financial statements. B. Date of the auditor’s report and concern contingencies that are not reflected in the financial statements. C. Date of the auditor’s report. D. Balance sheet date but prior to the auditor’s report date.

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? A. Vouch a sample of cash disbursements recorded just after year end to receiving reports and vendor invoices. B. Compare a sample of purchase orders issued just after year end with the year-end accounts payable trial balance. C. Trace a sample of accounts payable entries recorded just before year end to the unmatched receiving report file. D. Scan the cash disbursements entries recorded just before year end for indications of unusual transactions.

An auditor has substantial doubt about the entity’s ability to continue as a going concern for a reasonable period of time because of negative cash flows and working capital deficiencies. Under these circumstances, the auditor would be most concerned about the A. Possible effects on the entity’s financial statements. B. Effectiveness of the entity’s internal control activities. C. Control environment factors that affect the organizational structure. D. Correlation of detection risk and inherent risk.

An auditor should be aware of subsequent events that provide evidence concerning conditions that did not exist at year end but arose after year end. These events may be important to the auditor because they may A. Have been recorded based on year-end tests for asset obsolescence. B. Have been recorded based on preliminary accounting estimates. C. Require adjustments to the financial statements as of the year end. D. Require disclosure to keep the financial statements from being misleading.

Which of the following statements ordinarily is included among the written management representations obtained by the auditor in an audit of a nonissuer? A. Instances of fraud involving management that exceeded the materiality limits have been acknowledged. B. Management acknowledges that internal control has no material weaknesses. C. All transactions have been recorded in the accounting records. D. Sufficient appropriate evidence has been made available to permit the expression of an unmodified opinion.

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments? A. Obtain a list from management that discloses all unasserted claims that it considers to be probable of assertion. B. Inspect legal documents in the possession of the client’s legal counsel that are relevant to pending litigation and unasserted claims and assessments. C. Confirm directly with the client’s legal counsel that all litigation, claims, and assessments have been properly recorded in the financial statements. D. Discuss with the client’s legal counsel its philosophy of defending litigation, claims, and assessments that have a high probability of being resolved unfavorably.

Which of the following are considered control environment elements? Detection Risk Commitment to Compentence A. No Yes B. Yes No C. No No D. Yes Yes

Which of the following procedures should an auditor perform concerning litigation, claims, and assessments? A. Provides adequate safeguards over access to assets. B. Relates to operational objectives C. Reflects management’s philosophy and operating style. D. Affects management’s financial statement assertions.

When an auditor concludes there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to A. Reissue the prior year’s auditor’s report and add a separate paragraph that specifically refers to “substantial doubt” and “going concern.” B. Consider the adequacy of disclosure about the client’s possible inability to continue as a going concern. C. Report to the client’s audit committee that management’s accounting estimates may need to be adjusted. D. Express a qualified or adverse opinion, depending upon materiality, due to the possible effects on the financial statements

Determining that controls are operating effectively most likely involves A. Identifying specific controls relevant to specific assertions. B. Performing more extensive substantive tests with larger sample sizes than originally planned. C. Reducing inherent risk for most of the assertions relevant to significant account balances. D. Changing the timing of substantive procedures by omitting interim-date testing and performing the tests at year-end.

Samples to test controls are intended to provide a basis for an auditor to conclude whether A. The financial statements are materially misstated. B. The risk of incorrect acceptance is too high. C. Materiality for planning purposes is at a sufficiently low level. D. The controls are operating effectively.

An auditor is concerned with completing various phases of the audit after the balance sheet date. This subsequent period extends to the date of the A. Final review of the audit working papers. B. Public issuance of the financial statements. C. Delivery of the auditor’s report to the client. D. Auditor’s report.

A client is a defendant in a patent infringement lawsuit against a major competitor. Which of the following items would least likely be included in legal counsel’s response to the auditor’s letter of inquiry? A. An evaluation of the ability of the client to continue as a going concern if the verdict is unfavorable and maximum damages are awarded. B. An evaluation of the probability of loss and a statement of the amount or range of loss if an unfavorable outcome is reasonably possible. C. A discussion of case progress and the strategy currently in place by client management to resolve the lawsuit. D. A description of potential litigation in other matters unrelated to the patent infringement lawsuit.

The refusal of a client’s legal counsel to provide information requested in an inquiry letter generally is considered A. Reason to withdraw from the engagement. B. Grounds for an adverse opinion. C. A limitation on the scope of the audit. D. A significant deficiency in internal control.

Which of the following procedures would an auditor generally perform regarding subsequent events? A. Compare the latest available interim financial statements with the statements being audited. B. Review the client’s cutoff bank statements for several months after the year end. C. Inspect inventory items that were ordered before the year end but arrived after the year end. D. Test internal control activities that were previously reported to management as inadequate.

Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement? A. Use smaller, rather than larger, sample sizes. B. Increase of tests of controls. C. Select more effective substantive procedures. D. Perform substantive tests as of an interim date.

An auditor finds several misstatements in the financial statements that the client prefers not to correct. The auditor determines that the misstatements are not material in the aggregate. Which of the following actions by the auditor is most appropriate? A. Accumulate the uncorrected misstatements in the working papers, but do not document whether they cause the financial statements to be misstated. B. Document the conclusion that the misstatements do not cause the financial statements to be misstated, but do not accumulate uncorrected misstatements in the audit documentation. C. Document all misstatements accumulated during the audit and the conclusion about whether uncorrected misstatements are material. D. Do not accumulate the uncorrected misstatements in the audit documentation, and do not document a conclusion about whether the uncorrected misstatements cause the financial statements to be misstated.

An auditor concludes that a client’s noncompliance with laws and regulations, which has a material effect on the financial statements, has not been properly accounted for or disclosed. Depending on how pervasive the effect is on the financial statements, the auditor should express either a(n) A. Unmodified opinion with a separate emphasis-of-matter paragraph or a qualified opinion. B. Adverse opinion or a disclaimer of opinion. C. Disclaimer of opinion or an unmodified opinion with a separate explanatory paragraph. D. Qualified opinion or an adverse opinion.

A client using U.S. GAAP has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the effects on the financial statements are material and pervasive? A. Disclaimer of opinion. B.Qualified opinion. C. Unmodified opinion. D. Adverse opinion.

When the financial statements of a nonissuer contain a misstatement, the effect of which is material but not pervasive, the auditor should A. Disclaim an opinion and describe the misstatement within the opinion paragraph. B. Disclaim an opinion and explain the effect of the misstatement in a disclaimer of opinion paragraph. C. Qualify the opinion and include a basis for qualified opinion paragraph that describes the matter resulting in the qualification D. Qualify the opinion and describe the misstatement within the opinion paragraph.

The ultimate purpose of understanding the entity and its environment and assessing the risks of material misstatement is to contribute to the auditor’s assessment of the risk that A. Specified controls requiring segregation of duties may be circumvented by collusion. B. Material misstatements may exist in the financial statements. C. Entity policies may be inappropriately overridden by senior management. D. Tests of controls may fail to identify procedures relevant to assertions.

If an entity’s financial statements are “presented fairly,” they A. Are free from material misstatement. B. Are presented following industry standards. C. Contain a footnote describing any potential material misstatements they may contain. D. Are free of any presentation tactics used to make the company look better.

Before expressing an audit opinion on financial statements, an auditor should obtain what level of assurance about fair presentation? A. Reasonable assurance. B. Absolute assurance. C. Negative assurance. D. Limited assurance.

After obtaining an understanding of internal control for the audit of a nonissuer’s financial statements, an auditor decided not to perform tests of controls. The auditor most likely decided that A. Performing only substantive procedures would effectively reduce audit risk to an acceptably low level. B. The assessed inherent risk exceeded the assessed control risk. C. A reduction in the assessed risks of material misstatement is justified for certain financial statement assertions. D. The available evidence obtained through tests of controls would not support higher assessed risks of material misstatement.

In which of the following circumstances would an auditor be most likely to express an adverse opinion? A. Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern. B. Tests of controls show that the entity’s internal control is so poor that it cannot be relied upon. C. The financial statements are not in conformity with the FASB Codification’s guidance regarding the capitalization of leases. D. The chief executive officer refuses the auditor access to minutes of board of directors’ meetings.

To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all A. Receiving reports. B. Payment vouchers. C. Purchase requisitions. D. Vendors’ invoices.

The auditor’s report in an audit of an issuer may be addressed to A. The chief operating officer. B. The chief financial officer. C. The board of directors and shareholders. D. Whom it may concern.

The auditor’s judgment concerning the overall fairness of the presentation of financial position, results of operations, and cash flows is applied within the framework of A. Generally accepted accounting principles. B. Quality control. C. Generally accepted auditing standards, which include the concept of materiality. D. The auditor’s assessment of the risk of material misstatement.

In an audit of financial statements, an auditor’s primary consideration regarding an internal control is whether the control A. Provides adequate safeguards over access to assets. B. Reflects management’s philosophy and operating style. C. Relates to operational objectives. D. Affects management’s financial statement assertions.

How are management’s responsibility and the auditor’s responsibility represented in the auditor’s report?

The first option, both explicitly

A client using U.S. GAAP has capitalizable leases but refuses to capitalize them in the financial statements. Which of the following reporting options does an auditor have if the effects on the financial statements are material and pervasive? A. Disclaimer of opinion. B. Adverse opinion. C. Unmodified opinion. D. Qualified opinion.

On February 13, Year 2, Fox, CPA, met with the audit committee of the Gem Corporation to review the draft of Fox’s report on the company’s financial statements as of and for the year ended December 31, Year 1. On February 16, Year 2, Fox completed all remaining field work and obtained sufficient appropriate evidence to support the opinion on the financial statements. On February 28, Year 2, the final report was mailed to Gem’s audit committee. What date most likely would be used on Fox’s report? A. December 31, Year 1. B. February 16, Year 2. C. February 13, Year 2. D. February 28, Year 2.

FINAL Flashcards

(115 cards)