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1

In which of the following circumstances would an auditor expect to find that an entity implemented automated controls to reduce risks of misstatement?

for recurring transactions that do not involve a lot of judgment. Note that automated controls may be developed over all these options, but ordinarily they are easier to develop for high-volume and recurring type transactions.

2

A computer-assisted audit technique that is most likely to be effective in a continuous auditing environment is

Embedded audit modules.

3

The PCAOB has the authority to enforce SOX Title III, Section 303, in which type of proceedings?

The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in CIVIL proceedings.

4

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

A standard review report states that the accountant is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP (or the applicable financial reporting framework). This statement provides limited, not reasonable, assurance that the financial statements are free of material misstatement.A standard compilation report states that the accountant does not express an opinion or any form of assurance on the financial statements.An audit includes examining evidence, on a test basis, supporting the amounts and disclosures in the financial statements. A standard auditor's report states that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement.

5

An accountant should perform analytical procedures during an engagement to:

Analytical and inquiry procedures are performed as part of a review engagement that allows the accountant to provide limited assurance on the reviewed financial statements. A compilation engagement provides no assurance on the compiled financial statements, thus no analytical procedures are performed.

6

In the standard report on condensed financial statements that is derived from an issuer's audited financial statements, a CPA should indicate that the:

The standard report expressing an opinion on condensed financial statements (derived from audited financial statements) includes statements that: Example The CPA has audited (in accordance with GAAS) and expressed an opinion on the complete financial statements, noting the:• audit report date• type of opinionThe information presented in the condensed financial statements is fairly presented in all material respects in relation to the complete financial statements from which it was derived (which are presented in conformity with generally accepted accounting principles). The auditor does not express any assurance, limited or otherwise, concerning the condensed financial statements, except as stated above in relation to the complete financial statements.Just because the financial statements are condensed does not mean they were prepared in conformity with another comprehensive basis of accounting.

7

The members of the audit team, including the auditor with final responsibility for the audit, should discuss:

An engagement team discussion with the audit team is primarily to give guidance to the staff regarding the susceptibility of the entity's financial statements to material misstatement. This conference is the first step in the supervision of the audit—instructing and directing assistants in the performance of the fieldwork.Staff suggestions concerning time budgets are discussed, and the need for using the work of specialists and internal auditors is established during the audit planning. Staff disagreements regarding technical issues are discussed, documented, and resolved when such disagreements arise during the course of the fieldwork.AU 314.14

8

Which of the following best describes the reason an auditor performs a walkthrough of transactions from inception through financial statement presentation?I. To ensure that the single transaction type involved in a walkthrough is properly recorded in the general ledgerII. To determine if a necessary control is missing or ineffectiveIII. To determine the different types of significant transactions handled by the process

While an auditor performing a walkthrough of transactions from inception through financial statement presentation could provide the auditor with all of the above, the nature of the walkthrough is meant to help the auditor to understand the full process (item III) and determine the effectiveness of controls (item II).An auditor is not expected to perform a walkthrough of each and every transaction type unless all controls are deemed ineffective (and as such, control risk is high).During a walkthrough, the auditor questions the company's personnel about their understanding of what is required by the company's prescribed procedures and controls. These probing questions, combined with the other walkthrough procedures, allow the auditor to gain a sufficient understanding of the process and to be able to identify important points at which a necessary control is missing or not designed effectively. Additionally, probing questions that go beyond a narrow focus on the single transaction used as the basis for the walkthrough allow the auditor to gain an understanding of the different types of significant transactions handled by the process.PCAOB Auditing Standard 5, paragraph 38

9

Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively?

Establishing budgets and forecasts to identify variances from expectations

The problem asks which management control method could most likely improve management's ability to supervise company activities effectively. This goal requires a control technique that communicates and monitors management's expectations regarding all of the company's activities.Monitoring compliance with internal controls imposed by regulatory bodies could improve the effectiveness in that particular area but it would not enhance management's ability to supervise the company's activities. Limiting direct access to assets would improve control over assets but this also would not improve management's ability to supervise the company's activities. Supporting employees with necessary resources would certainly aid in the accomplishment of company activities but would do nothing to help management's ability to supervise those activities. Of all the answers provided, using budgets and forecasts and monitoring variances from them is the only management control method that could most likely improve management's ability to supervise company activities effectively.

10

Section 408 of SOX Title IV, “Enhanced Review of Periodic Disclosures by Issuers,” dictates that:

Section 408 of the Sarbanes-Oxley Act (SOX) dictates that the SEC will review disclosures made by issuers. Special attention will be paid to the disclosures of issuers:• who have issued material restatements of financial statements,• who experienced significant volatility in their stock price,• have the largest market capitalization,• are emerging companies with disparities in price to earnings ratios, and• with operations that significantly affect any material sector of the economy.

11

Which of the following are examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement?I. Intercompany transactionsII. Large revenue transactions at the end of a periodIII. Large returns in the middle of a period

Intercompany transactions and large revenue transactions at period-end are examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement.

12

Zero Corp. suffered a loss that would have a material effect on its financial statements on an uncollectible trade account receivable due to a customer's bankruptcy. This occurred suddenly due to a natural disaster 10 days after Zero's balance sheet date, but one month before the issuance of the financial statements and the auditor's report. Under these circumstances:I. the financial statements should be adjusted.II. the event requires financial statement disclosure, but no adjustment.III. the auditor's report should be modified for a lack of consistency.

Only financial statement disclosure is required when a material loss occurs after the balance sheet date but before the issuance of the auditor's report. No adjustment is required since the condition (the customer's bankruptcy due to a natural disaster) did not exist at the balance sheet date. Disclosure is required to keep the financial statements from being misleading. Consistency in the application of generally accepted accounting principles is not affected.

13

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

If an accountant who is engaged to review financial statements becomes aware of a departure from GAAP, the accountant should disclose the departure in a separate paragraph of the review report. The effects of the departure on the financial statements (if the effects have been determined by management or are known as the result of the accountant's procedures) should be disclosed as well. The accountant is not required to determine the effects of a departure if management has not done so, provided that the accountant states in the report that such determination has not been made.

14

If an auditor finds illegal acts throughout the audit, which of the following would be an appropriate reaction?

It may be necessary for the auditor to modify the audit opinion based on illegal acts:• The auditor should issue a qualified opinion if the auditor determines that an illegal act has a material effect on the financial statements and the act has not been properly accounted for or disclosed. Depending on materiality, the auditor may decide to issue an adverse opinion on the financial statements as a whole.• The auditor should disclaim an opinion if precluded by the client from obtaining sufficient appropriate audit evidence to evaluate whether an illegal act that could be material to the financial statements has, or is likely to have, occurred.• The auditor should withdraw from the engagement if the client refuses to accept the auditor's report as modified for the circumstances described above. The auditor should indicate the reasons for withdrawal, in writing, to those charged with governance.

15

in regards to review and compliations.

AR 400.03 states that “a successor accountant is not required to communicate with a predecessor accountant in connection with acceptance of a compilation or review engagement, but he or she may believe it is beneficial to obtain information that will assist in determining whether to accept the engagement.”

16

What is the most likely source of the following question?“If a difference of opinion on a practice problem existed between engagement personnel and a specialist or other consultant, was the difference resolved in accordance with firm policy and appropriately documented?”

AU 311.32 requires that “the auditor with final responsibility for the audit and assistants should be aware of the procedures to be followed when differences of opinion concerning accounting and auditing issues exist among firm personnel involved in the audit.” A partner's engagement review program would include a statement concerning a difference of opinion between engagement personnel and specialists or consultants.

17

The auditor determines that there is a low assessed risk of material misstatement concerning litigation, claims, and assessments. As a result, the auditor elects not to send a letter of inquiry to lawyers under which set of standards?I. U.S. PCAOB Auditing StandardsII. U.S. Auditing Standards under the AICPAIII. International Standards on Auditing (ISAs)

Notes: International standards only require an attorney's letter when an auditor assesses a risk of material misstatement. U.S. auditing standards have a presumptive requirement to send a letter of audit inquiry to lawyers.

18

In making risk assessments, the auditor should identify and document the controls that are likely to prevent or detect and correct material misstatements in specific relevant assertions. Controls can either be directly or indirectly related to an assertion in which of the following ways?

In making risk assessments, the auditor should identify and document the controls that are likely to prevent or detect and correct material misstatements in specific relevant assertions. Controls can either be directly or indirectly related to an assertion. The more indirect the relationship, the less effective that control may be in preventing `or detecting and correcting misstatements in that assertion.

19

In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:

“The auditor should perform tests of controls when…substantive procedures alone do not provide sufficient appropriate audit evidence at the relevant assertion level.” (AU 318.23)Increasing the sample size in the substantive procedure (when substantive tests are not appropriate for the assertion), adjusting the materiality level, or applying analytical procedures (which are also substantive procedures) would not assist with lowering the overall audit risk.

20

The fourth standard of reporting requires the auditor's report to contain either an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed. The objective of the fourth standard is to prevent:

Correct Answer: misinterpretations regarding the degree of responsibility the auditor is assuming.

Notes: The fourth standard of reporting requires that the report contain an expression of opinion regarding the financial statements taken as a whole or an assertion to the effect that an opinion cannot be expressed (with reasons why it cannot be expressed). The objective of the fourth standard is to prevent misunderstanding the degree of responsibility the auditor is assuming when the auditor's name is associated with financial statements.

21

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

AU 326.15 states that (1) assertions about existence deal with whether assets (receivables are assets) exist at a particular date and that (2) assertions about rights and obligations deal with whether assets are the rights of the entity at a particular date. Confirmation of receivables verifies both the existence of the receivable and the rights of the entity to be paid the amount owed by the debtor.Confirmations do not provide primary evidence of completeness (whether all assets are included) or valuation (whether the accounts will actually be paid).

22

A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the balance sheet date, the auditor most likely will:

When an auditor is unable to count securities held by a bank on the balance sheet date, the auditor should request that the client have the bank seal the safe-deposit box until the auditor can count the securities at a subsequent date. The objective of a security count is to obtain evidence regarding management's assertion of the existence of the securities. Evidence obtained directly by the auditor through physical examination is more convincing than that obtained indirectly, such as having the bank confirm the contents of the safe-deposit box or that securities were added or removed subsequent to the balance sheet date. Examining supporting evidence for transactions during the year does not verify existence of the securities at the balance sheet date.

23

An auditor is required to reach a conclusion in every audit regarding whether there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. If the auditor decides to mention the going concern problem in his or her report, he or she is precluded from:

Some auditors issue reports in which the auditor's conclusions about the entity's ability to continue as a going concern is unclear because of the use of conditional terminology, such as, “If the company is unable to obtain refinancing, there may be substantial doubt about the company's ability to continue as a going concern.” Such language is precluded by SAS 59 (as amended by SAS 77), The Auditor's Consideration of an Entity's Ability to Continue as a Going Concern.

24

Which of the following phrases would an auditor most likely include in the auditor's report when expressing a qualified opinion because of inadequate disclosure?

Correct Answer: Except for the omission of the information discussed in the preceding paragraph

Notes: When expressing a qualified opinion due to inadequate disclosure, an auditor would most likely begin the opinion paragraph with the following phrase:“In our opinion, except for the omission of the information in the preceding paragraph, the aforementioned financial statements present fairly....”

25

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

Correct Answer: in the form of findings related to each procedure performed.

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

26

When an accountant examines a financial forecast that fails to disclose several significant assumptions used to prepare the forecast, the accountant should describe the assumptions in the accountant's report and issue:

an adverse opinion.

27

In order for a firm to designate itself as “Members of the AICPA”:

Based on Rule 505 of the AICPA's Code of Professional Conduct, a firm may only designate itself as “Members of the AICPA” when all CPA owners are members.

28

In evaluating the reasonableness of an accounting estimate, an auditor most likely would concentrate on key factors and assumptions that are:

In evaluating the reasonableness of an accounting estimate, the auditor focuses on the key factors and assumptions that are deviations from historical patterns. Also of concern to the auditor are key factors and assumptions that are “significant, sensitive to variations, and subjective and susceptible to misstatement and bias” (AU 342.09). Estimates are more likely to be reasonable if they are consistent with prior periods, similar to industry guidelines, and objective and not susceptible to bias.

29

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

Nonrecurring transactions recognized in the accounting records near the balance sheet date should be reviewed by the auditor as possible related party transactions. These types of transactions may indicate related party relationships not previously disclosed to the auditor. The identification of related parties would not be detected by retesting ineffective internal control procedures, confirming accounts receivable, or in unreported contingent liabilities.

30

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

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.

31

An auditor reviews the reconciliation of payroll tax forms that a client is responsible for filing in order to:

The auditor can review the reconciliation of payroll tax forms to determine the taxes due. The auditor can then trace the tax records to the client's records to determine the accuracy of the liability.

32

Which of the following statements describes the auditor's responsibility for other information contained in a client-prepared document that includes the audited financial statements?

Correct Answer:

The auditor must read the other information and consider if it is materially inconsistent with the audited financial statements.

Notes

With respect to the auditor's responsibility for other information contained in a client-prepared document that includes the audited financial statements, the auditor must read the other information and consider if it is materially inconsistent with the audited financial statements. Thus, the auditor is obligated to do something with respect to the other information. However, the auditor is not obligated to apply audit procedures to the other information. Nor must the auditor express an opinion on the other information.

33

Which of the following would not affect the risk of material misstatement?

Correct Answer:

All of the answer choices affect the risk of material misstatement.

Notes

The risk of material misstatement normally varies with the:

• complexity and subjectivity associated with the process,
• availability and reliability of relevant data,
• number and significance of assumptions that are made, and
• degree of uncertainty associated with the assumptions.

34

In determining independence, GAO standards refer to:

Based on the Internet (online) version of Government Auditing Standards, the auditor organization and individuals should be independent in both mind and appearance.

Independence of mind means that the auditor's professional judgment has not been compromised (the auditor is able to act with integrity and exercise objectivity and professional skepticism). Independence in appearance means that a reasonable and informed third party would not conclude that the auditor's independence has been compromised.

35

Registered public accounting firms and associated persons must be independent of their audit clients during:

the engagement period of which the financial statements are being audited.

Rule 3520 of the Public Company Accounting Oversight Board requires that registered public accounting firms and their associated persons must be independent during the professional and audit engagement period. There are currently no requirements to be independent prior to the engagement period.

36

One of the requirements of SOX (Title II) is that the lead audit partner must rotate out every:

Title II of the Sarbanes-Oxley Act (SOX) states that the lead audit partner must rotate out at least every five years for the accounting firm to continue to provide audit service to the client. This rotation is intended to promote independence of the audit firm.

37

Prior to seeking approval of nonaudit services related to internal control from the audit committee, a registered public accounting firm must do all of the following except:

Correct Answer:

document the expected results of the nonaudit services.

Notes

Public Company Accounting Oversight Board (PCAOB) Rule 3525 requires the registered public accounting firms describe in writing the scope of the services, discuss potential effects on independence, and document the substance of the discussion with the audit committee. Firms are not required to document expected results of the services.

38

Based on the assessed risk of material misstatement at the relevant assertion level, the auditor should consider which of the following matters in designing further audit procedures?

Correct Answer:

The characteristics of the class of transactions, account balance, or disclosure involved

Notes

The auditor is required to design and perform further audit procedures that are responsive to the assessed risks of material misstatement at the relevant assertion level. In designing further audit procedures, the auditor should consider such matters as:

• the significance of the risk,
• the likelihood that a material misstatement will occur,
• the characteristics of the class of transactions, account balance, or disclosure involved,
• the nature of the specific controls used by the entity and whether they are manual or automated, and
• whether the auditor expects to obtain audit evidence to determine if the entity's controls are effective in preventing and detecting material misstatements.

39

Section 406 of SOX Title IV, “Code of Ethics for Senior Financial Officers,” dictates that:

each issuer disclose whether or not they have adopted a code of ethics for senior financial officers.

Section 406 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that each issuer disclose whether or not they have adopted a code of ethics for senior financial officers. Any change in or waiver of the code of ethics for senior financial officers requires immediate disclosure.

Section 402 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that it is unlawful for any issuer to extend or maintain credit in the form of a personal loan to or for any director or executive officer of that issuer.

Section 403 requires disclosures from a person who is directly or indirectly a beneficial owner of more than 10% of any class of any security registered pursuant to Section 12 of the Securities Exchange Act of 1934.

Section 404 requires that an internal control report be filed with each annual report. Management must acknowledge responsibility for establishing and maintaining adequate internal control.

40

The auditor shall determine the appropriate person(s) within the entity's governance structure with whom to communicate. The term “those in charge of governance” refers to which of the following?

The auditor is required to communicate certain information to those charged with governance in the engagement letter or in another form of communication. The term “those charged with governance” usually refers to an audit committee or the board of directors. In some cases, those charged with governance and management are the same people.

ISA 260, paragraphs A1–A4

41

inherent risk:

Inherent risk includes the environmental risk in which a client operates. The higher the level of inherent risk, the more likely that a client's overall financial statements are materially misstated. If a client operates in an industry experiencing a decline in customer demand, the results are probably more pervasive and more likely to affect the overall financial statement presentation than the other items.

42

In its annual report to shareholders, Lake Co. (a nonissuer) included a separate management report that contained an assertion about the effectiveness of its internal control over financial reporting. Lake's auditor is expressing an unqualified opinion on Lake's financial statements but has not been engaged to examine and report on this management assertion. What is the auditor's responsibility concerning such report?

Correct Answer:

The auditor should read the management report and consider whether it contains a material misstatement of fact.

Notes

The CPA should read other information presented in conjunction with the audited financial statements and consider if the information is materially inconsistent with the information presented in the financial statements or if the information contains a material misstatement of fact.

If, on reading the other information for the purpose of identifying material inconsistencies, the auditor becomes aware of an apparent material misstatement of fact, the auditor should discuss the matter with management. If management refuses to correct, the auditor should notify those charged with governance of the auditor's concerns regarding the information and take any further appropriate action.

43

Question #3

What is the most likely source of the following statement?

“As discussed in Note 14 to the financial statements, the Company has had numerous dealings with businesses controlled by, and people who are related to, the officers of the Company.”

Correct Answer:

Auditor's report

Notes

An auditor's report would contain explanatory language concerning related party transactions if the auditor thought it was appropriate.

44

Auditors performing work under GAGAS, in addition to having competence, technical knowledge, skills, and experience to perform the audit, must:

In addition to having competence, technical knowledge, skills, and experience to perform the audit professionally, auditors must complete at least 24 hours of CPE relating to governmental auditing every two years. Individuals who work on GAGAS audits for 20% or more of their time must complete at least 80 hours of CPE relating to governmental auditing every two years.

45

In performing an audit of internal controls over financial reporting, the auditor uses:

PCAOB Auditing Standard 5, paragraph 4, states, “The general standards are applicable to an audit of internal control over financial reporting. Those standards require technical training and proficiency as an auditor, independence, and the exercise of due professional care, including professional skepticism. This standard establishes the fieldwork and reporting standards applicable to an audit of internal control over financial reporting.”

46

In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:

not refer to consistency in the auditor's report.

47

statistical sampling:

The auditor must use professional judgment to determine the sample size, whether the auditor is using statistical or nonstatistical sampling. In statistical sampling, the auditor will quantify the relevant factors. The nature (or characteristics) of the population affects the sample size. As the variation within the population increases, the sample size must increase. Also, to reduce the level of risk of incorrect acceptance (the risk that the sample supports the conclusion that the recorded account balance is not materially misstated when it is materially misstated), it is necessary to increase the size of the sample.

48

Application controls pertain to:

processing of individual applications in an IT environment.

49

Which of the following need not be documented in relation to the auditor’s consideration of fraud?

The assessed level of the risk of management override of controls.

50

In auditing a client's retained earnings account, an auditor should determine whether there are any restrictions on retained earnings that result from loans, agreements, or state law. This procedure is designed to corroborate management's financial statement assertion of:

Assertions about presentation and disclosure deal with whether particular components of the financial statements are properly classified, described, and disclosed (AU 326.15). The auditor should determine that the retained earnings have been properly appropriated in accordance with the restrictions and that such restrictions have been disclosed.

51

The IESBA Code of Ethics for Professional Accountants establishes ethical requirements for professional accountants through which of the following?

Conceptual Framework

Notes

The International Ethics Standards Board for Accountants (IESBA) Code of Ethics for Professional Accountants only establishes a conceptual framework. They have not issued Rules or Interpretations (or Rulings). The conceptual framework promotes compliance with five fundamental principles of professional ethics: integrity, objectivity, professional competence and due care, confidentiality, and professional behavior.

52

While performing an audit, the auditor should allow for some misstatements of lesser value than the assessed materiality level so that in total the misstatements might not result in a material misstatement to the financial statements. In order to do so, the auditor sets which of the following lower than the materiality level(s)?

Correct Answer:

Tolerable misstatement

Notes

AU 312.35 states, “When assessing the risks of material misstatements and designing and performing further audit procedures to respond to the assessed risks, the auditor should allow for the possibility that some misstatements of lesser amounts than the materiality levels could, in the aggregate, result in a material misstatement of the financial statements. To do so, the auditor should determine one or more levels of tolerable misstatement. Such levels of tolerable misstatement are normally lower than the materiality levels.”

Test of controls may or may not determine any misstatements. The tolerable misstatement level is often used in analytical procedures to investigate significant differences in current year and prior year comparison information. Tolerable misstatement is often used in determining the sampling unit.

53

Prior to or in conjunction with the information-gathering procedures performed during an audit, members of the audit engagement team are required to discuss the potential for material misstatement due to fraud. The discussion should include which of the following?

AU 316.14 states that the discussion should include an exchange of ideas among team members and an emphasis on the importance of maintaining the proper state of mind throughout the audit.

54

what

AU 623.01 identifies five different circumstances under which the auditor's report would be designated a special report:

1. Financial statements that are prepared in conformity with a comprehensive basis of accounting other than generally accepted accounting principles
2. Specified elements, accounts, or items of a financial statement
3. Compliance with aspects of contractual agreements or regulatory requirements related to audited financial statements
4. Financial representations to comply with contractual agreements or regulatory provisions
5. Financial information presented in prescribed forms or schedules that require a prescribed form of auditor's report

55

The auditor is precluded from including which of the following statements in his or her communication of internal control related matters identified in an audit?

No significant deficiencies were identified during the audit.

Notes

While the auditor may communicate there were no material weaknesses identified during the audit, AU 325.25 precludes “a written communication stating that no significant deficiencies were identified during the audit.”

56

analytical procedures:

Notes

Analytical procedures performed as part of the planning phase of the audit usually use data aggregated at a high level. For example, the auditor may be comparing the receivables balance at the end of the current year to the receivables balance at the end of last year. These comparisons are intended to provide a broad indication about the extent to which the accounts or transactions may require additional audit procedures (if the results were not as expected).

Analytical procedures can be used as substantive tests, but not as tests of controls. Analytical procedures involve comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Analytical procedures assist the auditor in planning the nature, timing, and extent of other auditing procedures, but do not assist with the preliminary judgment about materiality.

57

An internal auditor's work may affect the nature, timing, and extent of an independent auditor. In making judgments about the extent of the affect of the internal auditor's work on the auditor's procedures, the auditor considers:

• the materiality of the financial statement amounts, that is, account balances or classes of transaction,
• the risk (consisting of inherent risk and control risk) of material misstatements of the assertions related to these financial statement amounts, and
• the degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions.

Of the responses listed, fixed assets represent a class of assets and transactions that would have the least degree of subjectivity involved in the evaluation of the audit evidence gathered in support of the assertions.

58

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?

AU 339.27 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).

59

report

AR 80.49 (compilation) and 90.56 (review) state:
When the accountant has concluded…that action should be taken to prevent further use of the accountant's report or the financial statements, the accountant should advise his or her client to make appropriate disclosure of the newly discovered facts and their impact on the financial statements to persons who are known to be currently using or who are likely to use the financial statements. When the client undertakes to make appropriate disclosure, the method used and the disclosure made will depend on the circumstances…

a. If the effect of the subsequently discovered information on the accountant's report or the financial statements can promptly be determined, disclosure should consist of issuing, as soon as practicable, revised financial statements and, when applicable, the accountant's report. The reasons for the revision usually should be described in a note to the financial statements and, when applicable, referred to in the accountant's report.
b. When issuance of financial statements for a subsequent period is imminent, so that disclosure is not delayed, appropriate disclosure of the revision can be made in such statements instead of reissuing the earlier statements…
c. When the effect on the financial statements of the subsequently discovered information cannot be promptly determined, the issuance of revised financial statements would necessarily be delayed. In this circumstance, when it appears that the information will require a revision of the statements, appropriate disclosure would consist of notification…that the financial statements should not be used; that revised financial statements will be issued; and, when applicable, that the accountant's report will be issued as soon as practicable.

60

An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the:

relative effectiveness and efficiency of the tests.

Notes

In discussing analytical procedures, AU 329.09 notes that the choice of analytical procedures as a substantive test, when compared to the use of the tests of details of transactions and amount balances, depends “on the auditor's judgment on the expected effectiveness and efficiency of the available procedures.”

61

A lawyer's response to an auditor's inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client's financial statements. Which parties should reach an understanding on the limits of materiality for this purpose?

The lawyer and the auditor

Notes

A lawyer's response may be limited to matters that are considered individually or collectively material to the financial statements, provided the lawyer and auditor have reached an understanding on the meaning and limits of materiality for purposes of this letter.

AU 337.12

62

PCAOB Rule 3522 regarding tax transactions prevent which of the following nonaudit tax services?

Services related to marketing, planning, or opining in favor of the tax treatment of a transaction

Notes

Rule 3522 of the Public Company Accounting Oversight Board prevents registered public accounting firms from marketing, planning, or opining in favor of tax treatment of a transaction. Should public accounting firms violate this rule, they will no longer be considered independent.

63

Question #20

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

Correct Answer:

Review on compliance with specified requirements of a law

Notes

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.”

64

When unaudited financial statements of a nonissuer are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and:

I. the report on the unaudited financial statements should be reissued.
II. the report on the audited financial statements should include a separate paragraph describing the responsibility assumed for the unaudited financial statements.

Either I or II

Notes

Unaudited financial statements presented comparatively with audited financial statements should be clearly marked as unaudited. The accountant is associated with the unaudited statements since they are presented in comparison to the audited statements. To clearly define the responsibility the auditor is assuming, a separate paragraph is included in the audit report, or the report on the unaudited financial statements is reissued.

65

Which of the following is the primary reason that many auditors hesitate to use embedded audit modules?

Auditors are required to be involved in the system design of the application to be monitored.

Notes

An embedded audit module is a section of program code that is included in the client's application program in order to collect audit data for the auditor. For example, at the auditor's direction, an electronic file may be created of all sales transactions that are for more than $100. This monitors the client's computer/software system as transactions are actually being processed.

It can be hard to install an embedded audit module after an application program is operational and already in use. It is usually easier and more efficient to install the embedded audit module during system design.

Since auditors are required to be involved in the system design of the application to be monitored, it is difficult to monitor exceptions. There are other approaches the auditor may use to audit the system.

66

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

Correct Answer:

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

Notes

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.

67

A CPA is engaged to examine management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of:

Statements on Standards for Attestation Engagements (SSAE) are issued by senior technical bodies of the AICPA. They apply to practitioners engaged to perform an examination or a review; or issue an agreed-upon procedure report on subject matter, or an assertion about the subject matter that is the responsibility of another party (these are called “attest engagements”). Examining and reporting on management's assertion that the entity's schedule of investment returns is presented in accordance with specific criteria would fall under these standards. SSAEs can be found in the back of the Codification of Statements on Auditing Standards publication, and they are referenced as “AT.”

Statements on Standards for Accounting and Review Services (SSARS) are issued by the Accounting and Review Services Committee of the AICPA. They describe the professional requirements imposed on accountants performing a compilation or review. They can be found in the codification of these standards, and they are referenced as “AR.”

Statements on Auditing Standards (SAS) are issued by the Auditing Standards Board of the AICPA. They contain the generally accepted auditing standards with which an auditor is expected to comply. SASs are arranged in a codification published by the AICPA, which groups and references them as “AU” sections.

Statements on Standards for Consulting Services (SSCS), issued by the AICPA, supersede the Statements on Standards for Management Advisory Services (SSMAS). They provide standards of practice for practitioners performing consulting services (defined broadly as consultation, advisory, implementation, transaction, support, and product services). The standards are contained in Rules 201, 202, and 102 of the AICPA Code of Professional Conduct.

68

Question #14

A portion of a client's inventory is in public warehouses. Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?

Confirmation

Notes

Confirmation is the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting the financial statements. A confirmation for a third party would be the most efficient process, since the inventory is being held by the third party (public warehouse).

While observation or inspection could provide evidence as to the existence, it would not be the most efficient method available.

69

The procedure, “The accountant should obtain a management representation letter from the entity,” is:

required for a review only.

Notes

The accountant is only required to obtain a management representation letter when performing a review of the financial statements of a nonissuer. This procedure is not required for a compilation, due to the fact that the accountant does not express any assurance in a compilation.

70

Based on Rule 3521 of the PCAOB, in order for registered public accounting firms to maintain independence, they can only accept contingent fees or commission:

Contingent fees and commissions are currently not allowed.

Notes

Based on Rule 3521 of the Public Company Accounting Oversight Board, contingent fees and commission will result in a lack of independence for the registered public accounting firm.