Midterm 1 - Module 2 (1-113) Flashcards
2
Q
Which of the following is a conceptual difference between the attestation standards and genrally accepted auditing standards?
A
The attenstation standards do not apply t audits of historical financial statemtns, while the genrally accepted autiing standards do.
3
Q
Which of the following is not an attestation standard?
A
A sufficient understanding of internal control shall be aobtained to plan the engagement.
4
Q
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
Independence
5
Q
The PCAOB third genral standard states that due care is to be excercised in the performance of an audit. This standard is ordinarily interpreted to require…
A
Critical review of the judgment exevised at every level of supervision.
6
Q
After fieldwork audit proceures are completed, a partner of the CPA firm who has not been involved in the aduit performs a second or wrap-up working paper review. This second review usually focuses on
A
The fair presentation of the financial statemtns in conformity with GAAP
7
Q
Financial statement assertions are established for account balances,
A
Yes, Yes.
8
Q
Which of the following is NOT a financial statement assertion relating to account balances?
A
Valuation and competence.
9
Q
As the acceptable level of detection risk decreases, an auditor may…
A
Postpone the planned timing of substantive tests form interim dates to the year-end.
10
Q
The risk that an auditor will conclude, based on substantive tests, that a material misstatement does NOT exist in an account balance when, in fact, such misstatement does exist referred to as…
A
Detection risk.
11
Q
As the acceptable level of detection risk decreases, the assurance directly provided from…
A
Substantive tests should increase.
12
Q
Which of the following audit risk comoponents may be assessed in nonquantitative terms?
A
Yes, Yes, Yes.
13
Q
Inherent risk and control risk differ from retection risk in that they…
A
Exist independentaly of the financial statemnt audit.
14
Q
On the basis of the audit evidence gathered and aevaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would…
A
Decrease detection risk.
15
Q
Relationship between control risk and detection risk is ordinarily…
A
Inverse
16
Q
Which of the following would an auditor most likely use in terminign the adutor’s preliminary judgment about materiality?
A
The entit’s annualized interim financial statements.
17
Q
Which of the following statements in NOT correct about materiality?
A
As auditor considers materiality for planning purposes in terms of the largest aggregate level of misttatements that could be material to any one of the financnial statements.
18
Q
Which of the following is a function of the rsiks of material misstatement and detection risk?
A
Audit risk.
19
Q
In considering materiality for planning purposes, an auditor believes that misstatements aaggregating $10,000 would have a material effect on an entity’s income statement, ut that misttatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures taht would be xpencted to detect misstatements that aggregate
A
$10,000.00
20
Q
Which of the following would an auditor most likely use in determining the audtor’s preliminary judgmnet about materiality?
A
The entity’s financial statemtns of the prior year.
21
Q
Holding other planning considerations equal, a decrease in the amount of misstatement in a class of transactions that an auditor could telrate most likely would cause the auditor to…
A
Perform the planned auditing procedures closer to the balance sheet date.
22
Q
When issuing an unmodified opinion, the adutor who evaluates the audit findings should be satisified that the…
A
Estimate of the total likely misstatement I less than a material amount.
23
Q
An attitude that includes a questioning mind and a crtical assessment of audit evidence os referred to as…
A
Professional skepticism
24
Q
Professional skepticism requires that an auditor assume that mangement is…
A
Neitehr honest nor dishonest.
25
Q
Which of the following is an example of fraudulent financial reporting?
A
Company management changes inventory count tags and overstates ending inventory, while understanting cost of goods sold.
26
Which of the following best describes what is meant by the term "fraud risk factor?"
Factors whose presence oftern have been observed in circumstances where faruds have occurred.
27
Which of the following is correct concerning requirements about auditor comunications about fraud?
Fraud that involves senior management should be reported directly to the audit committee REGARDLESS of the amount invlved.
28
When performing a financial satement audit, auditors are required to explicitly assess the risk of material misstatement due to
Fraud.
29
Audits of financial statements are designed to botain assurance of detecting misstatement due to…
Yes, Yes, Yes.
30
An auditor is unable to obtain absolute assurance that misstatements due to fraud will be detected for all of the following EXCEPT
Professional skepticism
31
The most difficult type of misstatement to detect is fraud based on
The nonrecording of transactions
32
When considering fraud risk factors relating to management's characteristics, which of the following is LEAST LIKELEY to indicate a risk of possible misstatement due to fraud?
Use of unusually conservative accounting practices
33
Which of the following conditions identified during fieldwork of an audit is most likely to affect the auditor's assessment of the risk of misstatement due to fraud?
Missing documents
34
Which of the following is most likely to be a response to the auditor's assessment that the risk of material misstatement due to fraud for the existence of inventory is high?
Observe test counts of inventory at certain locations on an unnanouced basis
35
Which of the following is most likely to be an example of fraud?
Defalcations occuring due to invalid electronic approvals
36
Which of the following characteristics most likely would heighten an auditor's concern about the risk of international manipulation of financial statements?
Managements places substantial emphasis on meeting earnings projections
37
Which of the following statements reflects an auditor's responsibility for detecting misstatements due to errors and fraud?
An auditor should design the audit to provide reasonable assurance of detecting misstatements due to errors and fraud that are material to the financial statements
38
Disclosure of fraud to parties other than a client's senior management and its audit committee or board of directors ordinarily is not part of an auditor's responsibility. However, to which of the following outside parties may a duty to diclosure fraud exist?
Yes Yes Yes
39
Under Statements on Auditing Standards, which of the following would be classified as an error?
Misinterpretation by management of facts that existed when the financial statements were prepared
40
What assurance does the auditor provide that misstatements due to errors, fraud, and direct effect illegal acts that are material to the financial statements will be detected?
Reasonable Reasonable Reasonable
41
Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an atitude of
Professional skepticism
42
Which of the following most accurately summmarizes what is meant by the term "material misstatement"
Material error, material fraud, and certain illegal acts
43
Which of the following statements dbest describes the adutiro's responsibility to detect conditions relating to financial stress of employees or adverse relationships between a company and its employees?
The auditor is not required to plan the audit to discover these conditions, but should ocnsider them if he or she becomes aware of themd uring the audit
44
When the auditor believes a misstatement is or may be the result of fraud but that the effect of the misstatement is not material to the financial statements, which of the follwing steps is required?
Consider the implications for other aspects of the audit
45
Which of the following statements is correct relating to the auditor's consideration of fraud?
The auditor's interest in fraud consideration relates to fraudulent acts that cause a material misstatement of financial statements
46
Which of the following factors or conditions is an auditor least likely to plan an audit to discover?
Financial pressures affecting employees
47
At which stages of the audit may fraud risk factors be identified?
Yes Yes Yes
48
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when
Management is dominated by one individual who is also a shareholder
49
Which of the following is LEAST likely to be required on an audit?
Make a legal determination of whether fraud has occurred
50
Which of the following is most likely to be an overall response to fraud risks identified in the audit?
Use less predictable audit procedures
51
Which of the following is LEAST likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?
Are financial reporting operations controlled by and limited to one location?
52
Individuals who commit fraud are ordinarily able to reationalize the act and also have an
Yes Yes
53
What is an auditor's responsibility who discovers management involved in what is financial immaterial fraud?
Report the fraud to the audit committee
54
Which of the following is most likely to be considered a risk factor relating to fraudulent financial reporting
Negative cash flows from operations
55
Which of the following is most likely to be presumed to represent fraud risk on an audit?
Improper revenue recognition
56
An auditor who discovers that a clien'ts employees paid small bribes to municipal officials most likely would withdraw from the engagement if
Management fails to take the appropriate remedial action
57
Which of the following factors most likely would cause a CPA to NOT accept a new audit engagment?
The prosepctive client is unwilling to make all financial records avaialable to the CPA
58
Which of the following facotrs would most likely heighten an auditor's concern about the risk of fraudulent financial reporting?
An overly complex organizational structure invovling unusual ines of authority.
59
An auditor who discovers that a client's employees have paid small bribes to public officials most likely would wihtrdraw from the engagement if the
Employee's actions affect the adutor's ability to rely on management's represetnations.
60
Which of the following illegal acts should an audit be designed to btain resonable assurance of detecting?
Accrual and billing of an improper amount of revenue under government contracts.
61
Which of the following relatively small misstatements most likely could have a material effect on an entity's financial statements?
An illegal payment to a foreign official that was NOT recorded.
62
During the annual audit of Ajax Corp., a publicly held company, Jones, CPA, a continuing auditor, determined that illegal political contributions had been made during each of the past seven years, including the year under audit. Jones notified the board of directors about the illegal contributions, but they refused to take any action because the amounts involved were immaterial to the financial statements. Jones should reconsider the intended degree of reliance to be placed on the...
Management representation letter.
63
The most likely explanation why the auditor's examination CANNOT reasonably be expected to bring noncompliance with a ll laws by the client to the auditor's attention is that…
Illegal acts by clients often relate to operating aspects rather than accounting aspects.
64
If specific information comes to an audtor's attention that implies noncompliance with laws that could result in a material, but indirect effect on the financial statements, the audotr should next…
Apply audit precudures specifically directed to ascertaining wether noncompliance has occurred.
65
An auditor who discovers that client employees have committed an illegal act that has a material effect on the client's financial statements most likely would withdraw from the engagement if…
The client does not take the remedial action that the audotr considers necessary.
66
Under the Private Securities Litigation eform Act of 1995, Baker, CPA, reported certain uncorrected illegal acts to Supermart's board of directors. Baker believed that failure to take remedial action would warrant a qualified audit opinion because the illegal acts had a material effect on Supermart's financial statements. Supermat failed to take appropriate remedial action adn the board of directors refused to inform the SEC that it had received such notification from Baker. Under these circumstances, Baker is required to...
Deliver a report concerning the illegal acts to the SEC within one business day.
67
Which of the following would be LEAST likely to be considered an audit planning procedure?
Peform risk assessment
68
Which of the following factors would most likely cuase a CPA to decide not to accept a new audit engagement?
Managemetn's disregard of its reponsibility to maintain an adequate internal control environment.
69
Before accepting an engagement to audit a new client, a CPA is required to obtain…
The prospective client's consent to make inquiries of the predecssor auditor, if any.
70
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding…
Deisagreements the predecessor had with the client concerning auditing procedures and accounting principles.
71
Before accepting an audit engagmeent, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's
Understanding as to the reasons for the change of auditors
72
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding genrally includes…
The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor's attention.
73
Which of the following matters is generally included in an auditor's engagement letter?
Management's responsibility for the entity's compliance with laws and regulations
74
During the initial planning phase of an audit, a CPA most likely would…
Discuss the timing of the audit proecudres with the client's management.
75
Which of the following statements would LEAST likely appear in an auditor's enagement letter?
After performing our preliminary analytical precudures we will discuss with you the other procedures we consider necessary to complete the engagement.
76
Which of the followign documentation is NOT required for an audit in accordance with generally accpeted auditing standards?
A client engagment letter that summariezes the timing and details of the adutor's planned field-work
77
An engagement letter should ordinarily include information on the objectives of the engagement and…
Yes, Yes, Yes.
78
Arrangements concerning which of the following are LEAST likely to be included in engagemnet letter?
CPA investment in client securities.
79
The auditor should document the understanding established with a client through a
Written communication with the client.
80
Which of the following facotrs most likely would influence an auditor's determination of the auditability of an entity's financial statements?
The adequacy of the accounting records.
81
Which of the following is most likely to require special planning considerations related to asset valuation?
Inventory is comprised of diamond rings.
82
A CPA wishes to determine how various publicly held companies have complied with the disclosure requirements of a new financial accounting standard. Which of the following information sources would the CPA omst likely consult for information?
AICPA Accounting Trends and Techniques.
83
The auditor should design the written audit program so that
The audit procedures selected will achieve specific audit objectives
84
The audit program usally CANNOT be finalized until the
Consideration of the entityt's internal control has been completed
85
Audit programs should be designed so that
The audit evidence gathered supports the auditor's conclusions
86
In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the
Financial statement assertions
87
With respect to planning an audit, which of the following statements is always true?
It is acceptable to perform a portion of the audit of a continuing audit client at interim dates
88
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
89
To obtain an understanding of a continuing client's business, an auditor most likely would
Review prior year working papers and the permanent file for the client
90
On an audit engagement performed by a CPA firm with one office, at the minimum, knowledge of the relevant professional accounting and auditing standards should be held by
The auditor with the final responsibility for the audit
91
An auditor obtains knowledge about a new client's business and its industry to
Understand the events and transactions that may have an effect on the client's financial statements
92
Which of the following procedures would an auditor LEAST likely perform while obtaining an understanding of a client in a financial statement audit?
Selecting a sample of vendors' invoices for comparison to receiving reports
93
Ordinarily the predecessor auditor permits the successor auditor to review the predecessor's working paper analyes relating to
Yes Yes
94
In auditing the financial statements of Star Corp, Land discovered information leading Land to believe that Star's prior year's financial statements, which were audited by Tell, require substanatial revisions. Under these circumstances, Land should
Request Star to arrange a meeting among the three parties to resolve the matter
95
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's
No Yes
96
Which of the following procedures would an auditor most likely perform in planning a financial statement audit?
Comparing the financial statements to anticipated results
97
Analytical procedures used during risk assessment in an audit should focus on
Enhancing the auditor's understanding of the client's business
98
A primary purpose of performing analytical procedures as risk assessment procuedres is to identify the existence of
Unusual transactions
99
Which of the following nonfinancial information wouldn an auditor most likely consider in performing analytical prcedures during risk assessment
Square footage of selling space
100
The in-charge auditor most likely would have a supervisory responsibility to explain to the staff assistants
How the results of various auditing procedures performed by the assistants should be evaluated
101
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
102
While assessing the risks of material misstatement auditors identify risks, relate risk to what could go wrong, consider the magnitude of risks and
Consider the likelihood that the risks could result in material misstatements
103
Which of the following are considered further audit procedures that may be designed after assessing the risks of material misstatement
Yes No
104
Which of the following is LEAST likely to be considered a risk assessment procuedre
Confirmation of ending accounts receivable
105
In an audit of nonissuer (nonpublic) company, the auditors identify significant risks. These risks often
Involve judgemental matters
106
The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to
Document the details of the disagreement with the conclusion reached
107
An examination of financial forecast is a professional service that involves
Evaluating the preparation of a financial forecast and support underlying managements' assumptions
108
The nature and extent of a CPA firm's quality control policies and procedures depend on
Yes Yes Yes
109
A CPA firm may communicate its quality control policies and procedures to its personnel in which manner?
Yes Yes
110
Which of the following is not an element of quality control?
Internal control
111
Quality control for a CPA firm, as referred to in Statements on Quality Control Standards, applies to
Auditing and accounting and review servies
112
One of a CPA firm's basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through
A system of quality control
113
Which of the following is correct concerning PCAOBguidance that uses the term "should"
The auditor must comply with requirements unless s/he demonstrates that alternative actions were sufficient to achieve the objectvites of the standard
114
Which of the following sets of standards does the Public Company Accounting Oversight Board not have the authority to establish for audits of public companies
Accounting standards
