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Flashcards in section 1 Deck (31):

An auditor has performed certain bookkeeping and other nonattest services that are not prohibited by interpretations to Rule 101 of the AICPA Code of Professional Conduct for a potential audit client. The auditor has established and documented an understanding with the client and the client has agreed to assume all management responsibility, to oversee the services and designate an individual within the organization to do so, to evaluate the adequacy of the services, and accept responsibility for the results. Which of the following is correct?

The auditor may conduct the audit under GAAS without meeting any additional requirements.


A CPA firm would best provide itself reasonable assurance of meeting its responsibility to offer professional services that conform with professional standards by

Maintaining a comprehensive system of quality control that is suitably designed in relation to its organizational structure.


Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance (illegal acts) by clients?

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


In assessing control risk, an auditor ordinarily selects from a variety of techniques, including

Reperformance and observation.


Which of the following factors does not influence a CPA firm’s quality control policies and procedures?

The Sarbanes-Oxley Act.


To exercise due professional care an auditor should

Critically review the judgment exercised by those assisting in the audit.


Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year end?



Which of the following describes the relationship between an increase or decrease in one of the following and how the auditor will assess the level of materiality to be used in an audit:



An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take?

Document the errors and the conclusion that the financial statements are free from material misstatement.


An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes

Control policies and procedures are unlikely to pertain to the assertions.


Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting?

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


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

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


Which of the following statements regarding fraud is not true?

Criminal intent is what distinguishes fraud from error.


Which of the following statements is correct concerning an auditor's responsibility to report fraud?

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


In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client's entire board of directors. Which of the following considerations will be least relevant to this decision?

Management's preference.


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

Exist independently of the financial statement audit.


When an auditor assesses control risk at the maximum level, the auditor is required to document the auditor’s

I. Understanding of the entity's accounting system

II. Basis for concluding that control risk is at the maximum level

2 only


Under the clarity standards, the application and other explanatory material in a standard is:

Provided to give guidance, further explanations, and suggestions as to how standards may be complied with.


An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes

Evaluating the effectiveness of policies and procedures is inefficient.


Which of the following professional services would be considered an attestation engagement?

Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions.


Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements?

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


Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?

Management’s disregard of its responsibility to maintain an adequate internal control environment.


An audit client is deciding whether to prepare its financial statements in accordance with a general purpose framework or a special purpose framework. Which of the following is a special purpose framework?

A framework derived from statements issued by an authorized state regulatory agency.


Which of the following are components of the risk of material misstatement (RMM) and can be expressed in both quantitative and qualitative terms?



Which of the following statements correctly defines the term reasonable assurance?

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.


Choose the correct statement(s), if any, regarding fraud risk factor(s) from the following:

I. The fact that valuable inventory is left unattended provides a rationale for fraud.

II. Personal greed provides an opportunity for fraud.

III. Perceived mistreatment by management provides an opportunity for fraud



Which of the following is an element of a CPA firm's quality control policies and procedures applicable to the firm's accounting and auditing practice?

Engagement performance.


Which of the following disagreements between the auditor and management do not have to be communicated by the auditor to those charged with governance?

Disagreements of the amount of the LIFO inventory layer based on preliminary information.


Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatement arising from fraudulent financial reporting?

Management had frequent disputes with the auditor on accounting matters.


From the following, choose the statement(s) which describe an inherent risk in an audit:

I. The financial statements include assets which are highly susceptible to theft.

II. The financial statements include items which are complex or involve very high volumes of transactions.

III. The financial statements include assets which require significant estimates requiring high levels of judgement to determine their carrying values.



Which of the following procedures would a CPA most likely perform in the planning of a financial statement audit?

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