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Flashcards in NINJA MCQ 4 Deck (42):
1

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

A.
extend the due dates of existing loans.

B.
operate at increased levels of production.

C.
accelerate expenditures for research and development projects.

D.
issue stock options to key executives.

The correct answer is A.

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

If, while performing audit procedures, the auditor discovers a situation that instills doubt about the entity's ability to continue as a going concern, the auditor should discuss these concerns with management. Management's plans to deal with the current situation could mitigate the adverse effects. Examples of these plans would be:

plans to dispose of assets,
plans to borrow money or restructure debt,
plans to reduce or delay expenditures, or
plans to increase ownership equity.
Management should be looking to take action that will decrease immediate and near-term cash outlay so that the entity has an opportunity to recover. Extending the due date of existing loans is the only answer choice that supports a position that would help mitigate the current business crisis. The other answer choices would make the situation worse by increasing spending.

2

The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent's country and are for use only in that country. How may KCP America's auditor report on these financial statements?

I. A U.S.-style report (unmodified)
II. A U.S.-style report modified to report on the accounting principles of the parent's country
III.The report form of the parent's country

A.
I only

B.
II only

C.
Both I and III

D.
Both II and III

The correct answer is D.

If financial statements prepared in conformity with accounting principles generally accepted in another country are prepared for use only outside the United States, the auditor may report using either a U.S.-style report modified to report on accounting principles of another country or, if appropriate, the report form of the other country.

3

When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:

A.
explains the difference between a compilation and a review.

B.
documents the assessment of the risk of material misstatement due to fraud.

C.
expresses limited assurance that the actual results may be within the projected range.

D.
describes the limitations on the projection's usefulness.

The correct answer is D.

The key to this question is the word “compile.” A compilation differs from a review or an audit, as it does not involve any inquiry, analytical procedures, obtaining an understanding of internal control, assessing fraud risk, or testing accounting records. A compilation offers no assurance on the financial statements being compiled. The compilation is merely presenting financial information that is the representation of management. The compilation report does not explain the difference between a compilation and a review.

Projected, or prospective, financial statements are either financial forecasts or financial projections that include the summaries of significant assumptions and accounting policies. The accountant is required to include a separate paragraph in the compilation report stating the limitations of the financial information. The paragraph would state: “Furthermore…there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.”

4

Digit Co. uses the FIFO method of costing for its international subsidiary's inventory and LIFO for its domestic inventory. Under these circumstances, the auditor's report on Digit's financial statements should express an:

A.
unmodified opinion.

B.
opinion qualified because of a lack of consistency.

C.
opinion qualified because of a departure from GAAP.

D.
adverse opinion.

ct, the answer is A.

The use of the FIFO method of costing for international subsidiaries' inventories while using LIFO for domestic inventories is consistent with GAAP. Therefore, given no other issues, the auditor may express an unmodified opinion.

5

An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:

A.
repurchase the entity's stock at a price below its book value.

B.
issue stock options to key executives.

C.
lease rather than purchase operating facilities.

D.
accelerate the due date of an existing mortgage.

, the answer is C.

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

If, while performing audit procedures, the auditor discovers a situation that instills doubt about the entity's ability to continue as a going concern, the auditor should discuss these concerns with management. Management's plans to deal with the current situation could mitigate the adverse effects. Examples of these plans would be:

plans to dispose of assets,
plans to borrow money or restructure debt,
plans to reduce or delay expenditures, or
plans to increase ownership equity.
If management planned to lease operating facilities rather than purchase them, they would be holding off on acquiring debt to purchase a capital asset. This situation may alleviate some of the financial pressure.

Repurchasing the company's stock at a price below its book value would decrease ownership equity and involve an outlay of cash. Issuing stock options to key executives would increase ownership equity, but stock options involve a right to purchase stock at a certain price in the future. These options would cost the company money. Accelerating the due date of an existing mortgage would free the company from debt and reduce interest expense, but it would take a great deal of cash to do so. None of these options would be a positive move for a company with a going concern issue.

6

Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?

A.
The audit committee

B.
An appropriate level of management

C.
The client's legal counsel

D.
The client's internal auditor

the answer is B.

The auditor should first notify an appropriate level of management when an immaterial fraud is discovered. If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor should communicate these matters on a timely basis to the appropriate level of management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. (Ordinarily, the appropriate level of management is at least one level above the persons who appear to be involved with the suspected fraud.)

7

Helpful Co., a nonprofit entity, prepared its financial statements on an accounting basis prescribed by a regulatory agency solely for filing with that agency. Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly pre­sented on the prescribed basis. Green should issue an audit report:

A.
with a qualified opinion.

B.
with an unmodified opinion with reference to footnote disclosure.

C.
with a disclaimer of opinion.

D.
on special-purpose financial statements.

The correct answer is D.

An entity's compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements is specifically listed as a special report in AU-C 800.04 and .07. If Green audited the financial statements in accordance with generally accepted auditing standards and concluded that the financial statements were fairly presented on the prescribed basis, a qualified opinion, an unmodified opinion with reference to footnote disclosure, or a disclaimer of opinion would not be appropriate.

Special-Purpose Financial Statements
close
Special-purpose financial statements are financial reports, such as offering statements, budgets, and reports filed with federal grantor agencies or senior levels of government, issued to satisfy the specific needs of specific users.

These statements are generally used for the following:

To meet specific legal or contractual requirements
To present financial statements using a basis of accounting that differs from GAAP
To present financial information in prescribed formats
To report on specified elements, accounts, or items taken from the general purpose financial statements

8

Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express:

A.
no assurance on the compliance tests.

B.
reasonable assurance on the compliance tests.

C.
a qualified or adverse opinion.

D.
an adverse or disclaimer of opinion.

the answer is C.

The auditor detecting material noncompliance with specific requirements governing a major federal financial assistance program in a compliance audit should issue either a qualified or adverse opinion, including the basis for the opinion.

The auditor would express a disclaimer of opinion only in the event of scope limitations, which is not the case here.

When the audit includes basic compliance requirements which are not applicable to a major federal program, the auditor expresses a positive opinion on the compliance with respect to the items actually tested and negative assurance on those aspects of compliance which were not tested. The auditor never expresses no assurance or reasonable assurance. It is the objective of the audit procedures performed to provide the auditor with reasonable assurance that any material noncompliance with requirements will be detected.

9

An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:

A.
be limited to data derived from the audited financial statements.

B.
be distributed only to senior management and the board of directors.

C.
state that the presentation is a comprehensive basis of accounting other than GAAP.

D.
indicate that the data are not fairly stated in all material respects.

u are correct, the answer is A.

An auditor may report on selected financial data derived from audited financial statements that he or she has audited. Such a report should be limited to the data derived from the audited financial statements.

10

Investment and property schedules are presented for purposes of additional analysis in an auditor-submitted document. The schedules are not required parts of the basic financial statements but accompany the basic financial statements. When reporting on such additional information, the measurement of materiality is the:

A.
same as that used in forming an opinion on the basic financial statements taken as a whole.

B.
lesser of the individual schedule of investments or schedule of property taken by itself.

C.
greater of the individual schedule of investments or schedule of property taken by itself.

D.
combined total of both the individual schedules of investments and property taken as a whole

You are correct, the answer is A.

For information accompanying the basic financial statements, materiality is the same as that used in forming an opinion on the basic financial statements taken as a whole. The opinion is not based solely on the accompanying information but also on the basic financial statements. Materiality is likewise based on the basic financial statements. The fact that two schedules (i.e., using the lesser or greater of either schedule) are presented as accompanying information would not affect how materiality is measured.

11

Which of the following statements regarding the going concern assumption is correct?

A.
Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary.

B.
The going concern concept reflects the entity's inability to meet its obligations.

C.
The auditor is responsible for predicting future conditions or events in assessing the likelihood that the entity will continue as a going concern.

D.
The auditor must apply audit procedures designed solely to identify conditions and events that indicate there could be substantial doubt about the entity's ability to continue as a going concern.

The correct answer is A.

The statement “Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary” is correct (AU-C 570.02).

The auditor makes a decision based on relevant conditions and events that exist at, or have occurred prior to, the auditor's report.

12

An accountant's report on a review of pro forma financial information should include a:

A.
statement that the entity's internal control was not relied on in the review.

B.
disclaimer of opinion on the financial statements from which the pro forma financial information is derived.

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

D.
reference to the financial statements from which the historical financial information is derived.

The correct answer is D.

Per AT 401.13, reference should be made to the financial statements from which the historical financial information is derived in reporting on a review of pro forma financial information. This provides a link to the audited or reviewed financial statements used as a basis for the pro forma financial information. The objective of an accountant's review of pro forma financial information is to provide negative assurance on the presentation of the pro forma effects of a transaction or event on the historical financial statements. Thus, the entity's internal control is not considered, nor that the transaction or event will ever occur. The underlying financial statements must have been audited or reviewed. Therefore, a disclaimer of opinion is not appropriate.

13

An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders containing audited financial statements. If the auditor concludes that the financial statements do not require revision, but the client refuses to revise or eliminate the material inconsistency, the auditor may:

A.
consider the matter closed since the other information is not in the audited financial statements.

B.
issue an “except for” qualified opinion after discussing the matter with those charged with governance.

C.
disclaim an opinion on the financial statements after explaining the material inconsistency in a separate emphasis-of-matter paragraph.

D.
revise the auditor's report to include a separate other-matter paragraph describing the material inconsistency.

the answer is D.

If the client refuses to correct the other information included in documents containing audited financial statements, the auditor will have to revise the audit report, withdraw the audit report, or withdraw from the engagement. In this circumstance, the auditor's best choice is to revise the auditor's report to include a separate other-matter paragraph describing the material inconsistency.

The auditor would not consider the matter closed, as the material inconsistency could be misleading to shareholders, due to the fact that it is in the same report as the audited financial statements. The auditor would not qualify or disclaim an opinion on the financial statements, as the auditor has already determined that they present fairly, in all material respects, the financial position and results of operations and cash flow of the entity.

14

An auditor should consider which of the following when evaluating the ability of a company to continue as a going concern?

A.
Audit fees

B.
Future assurance services

C.
Management's plans for disposal of assets

D.
A lawsuit for which judgment is not anticipated for 18 months

the answer is C.

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited. Once substantial doubt about an entity's ability to continue as a going concern surfaces, the auditor should discuss the matter with management and consider management's plans for dealing with the conditions and events identified. A primary concern of the auditor in assessing management's plans is an evaluation of management's ability to accomplish the plans for alleviating the adverse conditions identified. The auditor's consideration relating to management's plans may include the following:

Plans to dispose of assets
Plans to borrow money or restructure debt
Plans to reduce or delay expenditures
Plans to increase ownership equity
Audit fees, future assurance services, and a lawsuit for which judgment is not anticipated for 18 months are not events that the auditor should consider when evaluating the ability of a company to continue as a going concern.

15

Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit?

A.
Total liabilities ÷ Net sales

B.
Accounts receivable ÷ Inventory

C.
Cost of goods sold ÷ Average inventory

D.
Current assets ÷ Quick assets

The correct answer is C.

Cost of goods sold divided by average inventory is the inventory turnover ratio. This ratio may help with identifying obsolete inventory or pricing problems associated with low turnover.

The other answer choices do not represent ratios that would provide significant insight into unusual or unexpected balances or relationships (they are not commonly used ratios).

16

When applying analytical procedures during an audit, which of the following is the best approach for developing expectations?

A.
Considering unaudited account balances and ratios to calculate what adjusted balances should be

B.
Identifying reasonable explanations for unexpected differences before talking to client management

C.
Considering the pattern of several unusual changes without trying to explain what caused them

D.
Comparing client data with client-determined expected results to reduce detailed tests of account balances

. The correct answer is B.

Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. The auditor develops expectations using financial information, anticipated results, and relationships among financial statement elements, industry information, and relevant nonfinancial information. When the relationships do not match the expectations, the auditor needs to determine the cause and, because management's response to questions must be corroborated, the accountant should determine reasonable expectations before inquiring of management. Data from unaudited account balances, considering unusual changes that have no explanation, and comparing client data involve relying on unaudited data which is less reliable than the analytical procedures.

17

An accountant's compilation report on a financial forecast should include a statement that:

A.
the forecast should be read only in conjunction with the audited historical financial statements.

B.
the accountant expresses only limited assurance on the forecasted statements and their assumptions.

C.
there will usually be differences between the forecasted and actual results.

D.
the hypothetical assumptions used in the forecast are reasonable in the circumstances.

he correct answer is C.

A compilation report on a financial forecast should include the statement that the forecasted results may not be achieved (i.e., that there will usually be differences between the forecasted and actual results).

The compilation report is not intended to express any opinion or provide any assurances on the financial statements (forecasted or actual) or on the assumptions underlying the statements.

Remember that there is a difference between a compilation engagement, in which the accountant prepares or assembles forecasted financial statements, and an examination engagement, in which the accountant examines statements prepared by another party and evaluates the preparation and presentation in conformity with GAAP and the underlying assumptions.

A financial forecast does not require accompanying audited historical financial statements.

18

Financial statements are considered special-purpose financial statements when:

A.
prepared in accordance with a conceptual basis.

B.
restricted as to use.

C.
prepared in accordance with either a contractual or an other comprehensive basis of accounting.

D.
prepared on a pro forma basis designed to demonstrate the effects of hypothetical transactions.

the answer is C.

"Prepared in accordance with either a contractual or an other comprehensive basis of accounting" is the correct answer. AU-C 800.07 explains that financial statements reported on a framework other than GAAP are considered special-purpose financial statements. The financial statements are reported using a special-purpose framework. The following bases of accounting are considered special-purpose:

Cash basis
Tax basis
Regulatory basis
Contractual basis
Other basis
"Prepared in accordance with a conceptual basis" is incorrect because there is no conceptual basis, only a conceptual framework, which provides guidance for setting accounting standards.

"Restricted as to use" and "prepared on a pro forma basis designed to demonstrate the effects of hypothetical transactions" are not restricted only to special-purpose financials.

19

An auditor may not issue a qualified opinion when:

A.
an accounting principle at variance with GAAP is used.

B.
the auditor lacks independence with respect to the audited entity.

C.
a scope limitation prevents the auditor from completing an important audit procedure.

D.
the auditor's report refers to the work of a specialist.

he correct answer is B.

For public companies, when the auditor is not independent, he or she should disclaim an opinion indicating that he or she is not independent, but the auditor should not give the reasons for lack of independence or list any procedures performed. For nonpublic companies, if the auditor lacks independence, the auditor may issue only a compilation report. Therefore, an auditor may not issue a qualified opinion when the auditor lacks independence with respect to the audited entity.

20

Under the Statements on Auditing Standards (SASs), the auditor should complete the assembly of the final audit file on a timely basis, but within how many days following the report release date?

A.
30 days

B.
45 days

C.
60 days

D.
90 days

The correct answer is C.

AU-C 230.16 states that the auditor should complete the assembly of the final audit file on a timely basis, but within 60 days following the report release date (documentation completion date).

21

Under the Statements on Auditing Standards (SASs), the auditor should adopt reasonable procedures to retain and access audit documentation for a period of time sufficient to meet the needs of his or her practice and to satisfy any applicable legal or regulatory requirements for records retention. Such retention period, however, should not be fewer than how many years following the report release date?

A.
One year

B.
Three years

C.
Five years

D.
Seven years

The correct answer is C.

AU-C 230.17 states that the retention period “should not be shorter than five years from the report release date.”

22

When an independent accountant’s report based on a review of interim financial information is presented in a registration statement, a prospectus should include a statement about the accountant’s involvement. This statement should clarify that the:

A.
accountant is not an “expert” within the meaning of the Securities Act of 1933.

B.
accountant’s review report is not a “part” of the registration statement within the meaning of the Securities Act of 1933.

C.
accountant performed only limited auditing procedures on the interim financial statements.

D.
accountant’s review was performed in accordance with standards established by the American Institute of CPAs.

The correct answer is B.

Firms offering securities for public sale, except those specifically exempted, must file a registration statement with the SEC and provide the investor with a prospectus. Registration forms require:

a description of the company’s properties and business,
a description of the security to be offered for sale,
information about the management of the company, and
financial statements audited by independent CPAs following GAAS and PCAOB Auditing Standards.
An accountant's review report is not a "part" of the registration statement within the meaning of the Securities Act of 1933.

23

Which of the following types of engagements is not permitted under the professional standards for reporting on an entity's compliance?

A.
Agreed-upon procedures on compliance with the specified requirements of a law

B.
Agreed-upon procedures on the effectiveness of internal controls over compliance with a law

C.
Review on compliance with specified requirements of a law

D.
Examination on compliance with specified requirements of a law

The correct answer is C.

AT 601.07 states that “a practitioner should not accept an engagement to perform a review of an entity's compliance with specified requirements or about the effectiveness of an entity's internal control over compliance or an assertion thereon.”

24

A practitioner is engaged to express an opinion on management's assertion that the square footage of a warehouse offered for sale is 150,000 square feet. The practitioner should refer to which of the following sources for professional guidance?

A.
Statements on Auditing Standards

B.
Statements on Standards for Attestation Engagements

C.
Statements on Standards for Accounting and Review Services

D.
Statements on Standards for Consulting Services

the answer is B.

The practitioner should follow the standards for attestation engagements in performing and reporting on an agreed-upon procedures engagement. Statements on Standards for Attestation Engagements (SSAEs) are issued by senior technical bodies of the AICPA designated to issue pronouncements on attestation matters. The AICPA Code of Professional Conduct requires an AICPA member who performs an attest engagement to comply with such pronouncements. The practitioner should have sufficient knowledge of the SSAEs to identify those that are applicable to his or her attest engagement and should be prepared to justify departures from the SSAEs.

25

An auditor may report on condensed financial statements that are derived from complete financial statements if the:

A.
condensed financial statements are distributed to stockholders along with the complete financial statements.

B.
auditor describes the additional procedures performed on the condensed financial statements.

C.
auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects in relation to the complete financial statements from which it has been derived.

D.
condensed financial statements are presented in comparative form with the prior year's condensed financial statements.

The correct answer is C.

Condensed financial statements report only selected information from the complete set of financial statements. Users of the condensed information lack access to the information contained in the complete set of financial statements, and they must rely heavily on the auditor's opinion. Therefore, the auditor must state his opinion about whether the condensed information is representative of the full set of financial information.

26

Which of the following statements concerning prospective financial statements is correct?

A.
Only a financial forecast would normally be appropriate for limited use.

B.
Only a financial projection would normally be appropriate for general use.

C.
Any type of prospective financial statement would normally be appropriate for limited use.

D.
Any type of prospective financial statement would normally be appropriate for general use.

t, the answer is C.

AT 301.09–.10 states:



Quote


Prospective financial statements are for either general use or limited use. General use of prospective financial statements refers to the use of the statements by persons with whom the responsible party is not negotiating directly, for example, in an offering statement of an entity's debt or equity interests. Because recipients of prospective financial statements distributed for general use are unable to ask the responsible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party's knowledge and belief, the expected results. Thus, only a financial forecast is appropriate for general use.

Limited use of prospective financial statements refers to the use of prospective financial statements by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. Examples include use in negotiations for a bank loan, submission to a regulatory agency, and use solely within the entity. Third-party recipients of prospective financial statements intended for limited use can ask questions of the responsible party and negotiate terms directly with it. Any type of prospective financial statements that would be useful in the circumstances would normally be appropriate for limited use. Thus, the presentation may be a financial forecast or a financial projection.




Because all prospective financial statements are appropriate for either general use or limited use, and since limited use is more restricted than general use, it is correct to state that any type of prospective financial statement would normally be appropriate for limited use.

27

Which of the following auditing procedures most likely would provide assurance about a manufacturing entity's inventory valuation?

A.
Testing the entity's computation of standard overhead rates

B.
Obtaining confirmation of inventories pledged under loan agreements

C.
Reviewing shipping and receiving cutoff procedures for inventories

D.
Tracing test counts to the entity's inventory listing

The correct answer is A.

The key to this type of question is to match the correct procedure to the assertion specified in the question (since all answer choices could be appropriate procedures). Assurance about the valuation (i.e., the dollar value assigned to each unit) of a manufacturing entity's inventory is provided by testing the entity's computation of standard overhead rates. Valuation is concerned with inventory (an asset) being stated at the proper amount. Acquisition (materials) costs are relatively easy to verify. However, labor and overhead can also be considered inventoried cost, which are added to the materials costs of work-in-progress and finished goods. Thus, application of the correct amount of overhead is crucial to the valuation of manufactured inventory.

Confirmation of inventories pledged under loan agreements provides assurance about presentation and disclosure. (Note that this is a very specific type of confirmation. Confirmation of inventories at locations outside the entity provides assurance concerning existence, completeness, and rights or ownership.)

Review of shipping and receiving cutoff procedures for inventories pertains to the completeness and rights/obligations assertions. Tracing test counts to the entity's inventory listing is directed to the existence assertion.

28

When a practitioner presents the results of applying agreed-upon procedures to specific subject matter in an attestation engagement, they should be presented:

A.
using negative or limited assurance.

B.
using positive assurance, but with a scope limitation for the limited procedures performed.

C.
in the form of findings related to each procedure performed.

D.
with a disclaimer of opinion due to the limited scope of the engagement.

You are correct, the answer is C.

A practitioner should present the results of applying agreed-upon procedures to specified subject matter in the form of findings (AT 201.24).

29

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

A.
Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test

B.
Reevaluate the risk of fraud, and design alternate tests for the related transactions

C.
Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices

D.
Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

A.
Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test

Correct B.
Reevaluate the risk of fraud, and design alternate tests for the related transactions

C.
Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices

D.
Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors

30

When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?

A.
Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test

B.
Reevaluate the risk of fraud, and design alternate tests for the related transactions

C.
Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices

D.
Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors

The correct answer is D.

AU-C 520.04 states that the primary objective includes:



Quote


Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

31

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

A.
calculated in relation to the financial statements taken as a whole.

B.
determined separately for each major federal financial assistance program.

C.
decided in conjunction with the auditor’s risk assessment.

D.
ignored, because all account balances, regardless of size, are fully tested.

You are correct, the answer is B.

The Single Audit Act requires the auditor to determine two levels of materiality for the purposes of performing the single audit fieldwork and for reporting material noncompliance on the auditor's schedule of findings and questioned costs. Materiality is determined separately for each major federal financial assistance program.

32

Analytical procedures used in the overall review stage of an audit generally include:

A.
gathering evidence concerning account balances that have not changed from the prior year.

B.
retesting control procedures that appeared to be ineffective during the assessment of control risk.

C.
considering unusual or unexpected account balances that were not previously identified.

D.
performing tests of transactions to corroborate management's financial statement assertion

The correct answer is C.

In the overall review stage, analytical procedures evaluate significant ratios, operating statistics, and trends in financial data. If unusual or large differences are discovered, further explanation is sought. The abnormal or unexpected is investigated. If they were previously identified, they would not be unexpected. Therefore, analytical procedures used in the overall review stage of an audit generally include considering unusual or unexpected account balances that were not previously identified.

33

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

A.
Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated.

B.
Document the conclusion that the errors do not cause the financial statements to be misstated, but do not summarize uncorrected errors in the working papers.

C.
Summarize the uncorrected errors in the working papers, but do not document whether the errors cause the financial statements to be misstated.

D.
Do not summarize the uncorrected errors in the working papers, and do not document a conclusion about whether the uncorrected errors cause the financial statements to be misstated.

The correct answer is A.

The auditor should prepare audit documentation that enables an experienced auditor having no previous connection to the audit, to understand the results of the audit procedures performed, the audit evidence obtained, and the conclusions reached on significant matters. On all audits, the risk of the auditor issuing an incorrect decision exists. Documenting the uncorrected errors and how the auditor concluded that the financial statements are not misstated is a significant conclusion.

34

Which of the following prospective financial statements is appropriate for general use?

I.Financial forecast
II.Financial projection

A.
Both I and II

B.
I only

C.
II only

D.
Neither I nor II

You are correct, the answer is B.

Financial forecasts are prospective financial statements that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows. A financial forecast is based on the responsible party's assumptions reflecting the conditions it expects to exist and the course of action it expects to take.

Financial projections are prospective financial statements that present, to the best of the responsible party's knowledge and belief, given one or more hypothetical assumptions, an entity's expected financial position, results of operations, and cash flows. A hypothetical assumption is one that is not necessarily expected to occur but that is consistent with the purpose of the projection. A financial projection can be prepared in response to the question, “What would happen if…?”

Only a financial forecast is appropriate for general use; it can be used by a third party with whom the responsible party is not negotiating directly. Because the recipients of prospective financial statements distributed for general use are unable to ask the responsible party directly about the presentation, the presentation most useful to them is one that portrays, to the best of the responsible party's knowledge and belief, the expected results (not a hypothetical situation).

Either financial forecasts or financial projections are appropriate for limited use by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly.

35

After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:

A.
increase current dividend distributions.

B.
reduce existing lines of credit.

C.
increase ownership equity.

D.
purchase assets formerly leased.

The correct answer is C.

Management may try to improve the company's financial position by increasing the ownership equity of the company. This would increase the assets of the company without increasing the liabilities.

The auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time.

Information about conditions or events that raise a question about an entity's ability to continue as a going concern is obtained from the application of auditing procedures planned and performed to achieve objectives in the financial statements being audited.

Once substantial doubt about an entity's ability to continue as a going concern surfaces, the auditor should discuss the matter with management and consider management's plans for dealing with the conditions and events identified. A primary concern of the auditor in assessing management's plans is an evaluation of management's ability to accomplish the plans for alleviating the adverse conditions identified.

The auditor's consideration relating to management's plans may include the following:

Plans to dispose of assets
Plans to borrow money or restructure debt
Plans to reduce or delay expenditures
Plans to increase ownership equity

36

Which of the following presumptions is correct about the reliability of audit evidence?

A.
Information obtained indirectly from outside sources is the most reliable audit evidence.

B.
To be reliable, audit evidence should be convincing rather than persuasive.

C.
Reliability of audit evidence refers to the amount of corroborative evidence obtained.

D.
Effective internal control provides more assurance about the reliability of audit evidence.

The correct answer is D.

Effective internal control provides more assurance about the reliability of audit evidence, specifically, more about the reliability of the accounting data and financial statements. In addition, more assurance about the reliability of audit evidence is also provided when information is obtained directly, not indirectly, by the auditor or from outside, independent sources.

Audit evidence is usually persuasive (that is, influencing or causing a person to believe by appealing to understanding), rather than convincing (a concept of criminal law: “beyond a reasonable doubt”). Thus professional judgment is required in the evaluation of the reliability and sufficiency of audit evidence.

It is the quality, not the quantity, of corroborative evidence that is important to the reliability of evidence. Frequently, corroborative evidence is internal (e.g., checks and invoices). Thus, a small amount of highly reliable (i.e., external) evidence is more reliable than a large about of internal corroborating evidence.

37

If an auditor is unable to obtain sufficient appropriate audit evidence to support management's assertions about the nature of a matter involving an uncertainty and its presentation or disclosure in the financial statements, the auditor should:

A.
consider the need to express a qualified opinion or to disclaim an opinion because of a scope limitation.

B.
consider the need to express a qualified opinion or an adverse opinion due to a departure from GAAP.

C.
withdraw from the engagement.

D.
include an emphasis-of-matter paragraph in his or her opinion indicating the questionable nature of the outcome of the uncertainty.

The correct answer is A.

When an auditor is unable to obtain sufficient appropriate audit evidence about a significant item in the financial statements, he has a scope limitation. Scope limitations result in the issuance of a qualified opinion or a disclaimer of opinion.

38

When a CPA examines a client's projected financial statements, the CPA's report should:

A.
explain the principal differences between historical and projected financial statements.

B.
state that the CPA performed procedures to evaluate management's assumptions.

C.
refer to the CPA's auditor's report on the historical financial statements.

D.
include the CPA's opinion on the client's ability to continue as a going concern.

The correct answer is B.

Financial statements can be projected into future years if certain assumptions are made. These assumptions include percent increases in sales, staffing, etc., and are made by management. The CPA needs to perform procedures to evaluate these assumptions. The CPA does not, however, need to explain the differences between historical and projected financial statements. Also, because projected financial statements are not historical, the CPA does not need to refer to the auditor's report or include an opinion on the entity's ability to continue as a going concern.

39

he auditor's responsibility regarding the entity's ability to continue as a going concern consists of:

A.
performing specific procedures to indicate substantial doubt.

B.
providing assurance about the entity's ability to continue.

C.
evaluating whether there is substantial doubt.

D.
predicting future events or conditions that will affect this ability.

The correct answer is C.

The auditor's responsibility regarding the going concern assumption consists of evaluating whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, not to exceed one year beyond the date of the financial statements being audited.

40

Which of the following would be an appropriate title for a statement of revenue and expenses prepared using a special-purpose framework?

A.
Statement of operations

B.
Statement of income—regulatory basis

C.
Income statement

D.
Statement of activities

The correct answer is B.

The title of the financial statement should be self-explanatory and, if applicable, illustrate its compliance with a regulatory agency. The title should not be easily confused with GAAP prepared financial statements. Using the title “Statement of Operations or Income Statement” may cause the reader to assume the financial statements were prepared in accordance with GAAP. Using the title “Statement of activities” is broad and implies the entire organization instead of only the revenue and expenses.

41

Tell, CPA, is auditing the financial statements of Youth Services Co. (YSC), a not-for-profit organization, in accordance with Government Auditing Standards. Tell’s report on YSC’s compliance with laws and reg­ulations is required to contain statements of:

A.
both positive and negative assurance.

B.
only positive assurance.

C.
only negative assurance.

D.
neither positive nor negative assurance.

The correct answer is A.

Tell’s report regarding tests of compliance should contain positive and negative assurances. A positive assurance consists of a statement that the tested items were in compliance with applicable laws and regulations. A negative assurance is a statement that nothing came to the auditor’s attention as a result of specified procedures that caused the auditor to believe that the untested items were not in compliance with applicable laws and regulations.

42

Which of the following matters is covered in a typical comfort letter?

A.
Negative assurance concerning whether the entity's internal control procedures operated as designed during the period being audited

B.
An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act Amendments of 2013

C.
Positive assurance concerning whether unaudited condensed financial information complied with generally accepted accounting principles

D.
An opinion as to whether the audited financial statements comply in form with the accounting requirements of the SEC

he correct answer is D.

AU-C 920.04 states:



Quote


The subjects that may be covered in a comfort letter include:

the independence of the auditor.
whether the audited financial statements included in the securities offering comply regarding form, in all material respects, with the applicable accounting requirements of the 1933 Act and the related rules and regulations adopted by the SEC.
unaudited financial statements, condensed interim financial information, capsule financial information, pro forma financial information, financial forecasts, management's discussion and analysis (MD&A), and changes in selected financial statement items during a period subsequent to the date and period of the latest financial statements included in the securities offering.
tables, statistics, and other financial information included in the securities offering.
negative assurance about whether certain nonfinancial statement information included in the securities offering complies regarding form, in all material respects, with Regulation S-K.
(Emphasis added)




However, the comfort letter does not state or repeat an opinion about the fairness of presentation of the statements.

A comfort letter is a letter issued to underwriters concerning the financial information contained in registration statements filed with the SEC in connection with the issuance of securities.