short Flashcards

Question

when auditing related party transactions, an auditor places primary emphasis on:

Answer 1

evaluating the disclosure of the related party transactions

Answer 2

standard financial institution confirmation request would contain a statement addressed to the auditor concerning the results of a search for the existence of deposit or loan accounts.

Answer 3

that misstatements are material and pervasive to the financial statements. ; auditor must include the reason for the adverse opinion

Answer 4

prohibit from providing internal audit outsourcing service during an audit, prohibit actuarial service related to the audit contemporaneously with the audit prohibit advice on system design during an audit tax services are allowed but must be preapproved by audit committee

Answer 5

the comfort letter provide "negative assurance" to the underwriter that "nothing come to our attention that would indicate the information does not meet the specified standard.

Answer 6

on whether “any material modifications should be made to the unaudited interim financial information for it to be in accordance with the applicable financial reporting framework” and whether “the unaudited interim financial information complies as to form in all material respects with the applicable accounting requirements of the [Securities Act of 1933] and the related rules and regulations adopted by the SEC.”

Answer 7

tolerable rate the likely rate of deviation , allowable risk of assessing control risk too low

Answer 8

bill of lading are generated by the carrier for goods being shipped to the entity

Answer 9

the entity has complied with contractual agreement | ; management has made available all financial record and related data

Answer 10

a peer review by state CPA society | ; a subpoena or court summon

Answer 11

an allowance for sampling risak is the difference between the upper precision limit and the sample deviation rate

Answer 12

to assist auditor in assessing the conclusion reach and the overall financial statemetn

Answer 13

The treasurer’s department should not approve vendor’s invoices for payment as it would put the treasurer’s department in control of both authorization and information processing. This would not be a proper segregation of duties

Answer 14

The client's lawyer is only asked to respond by providing information about pending or threatened litigation, claims and assessments (or unasserted claims that are probable of assertion and that would have a reasonable possibility of a negative outcome

Answer 15

The test data approach (sometimes called the test deck approach) is a way to audit “through the computer.” Test data is introduced into the client's computer system using the same program to operate the application being tested. The output is compared to the auditor's predetermined results. The test data approach does not involve a separate program.

Answer 16

An integrated test facility introduces a fictitious entity (such as a dummy subsidiary) with real entries in the master files of the client's computer system. The auditor then compares the processing of data through the fictitious entity with what should be there in order to test that the data processing is reliable. Like the test data (or test deck) approach, an integrated test facility uses the client's system.

Answer 17

the audit risk, materiality, and statisticala sampling

Answer 18

``` leadership responsibilities ethical continuance of client relationship human resources engagement performance and monitoring ```

Answer 19

identify the entity ; state that FS have been audited ;identify the title of FS ;date or period covered

Answer 20

assess the difficulty in controlling the incremental audit risk (i.e., extending the audit conclusion over the remaining period from the interim date to the balance sheet date).

Answer 21

scope limitation that prevent auditor to form an opinion

Answer 22

clean opinion, present fairly in all material respect

Answer 23

has an "except for" paragraph that highlight any material scope limitation or departure from GAAP. These are material but not sufficient enough material to require a disclaimer or adverse opinion

Answer 24

auditor over reliance on control. ; auditor fails to perform additional work ; varies inversely with sample size (sample size go up, risk of assessing control risk too low decrease)

Answer 25

dispose asset borrow money or restructure debt reduce or delay expenditure ; increase ownership equity

Answer 26

the opinion paragraph should focus on the possible effect on the FS and NOT the scope limitation itself

Answer 27

not make any reference to the original engagement; | not why the engagement changed

Answer 28

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. A comfort letter is sent (and signed) by the independent auditor to the underwriter.

Answer 29

no, the confirmation is not the most efficient method available

Answer 30

high risk of material misstatement = lower detection risk

Answer 31

increase substantive testing

Answer 32

main auditor not require to review the working paper and audit program of other CPA. All you need to do is inquiry about professional reputation and independence of other auditor

Answer 33

objectivity

Answer 34

when inherent and control risk is low | when there are large number of small balances involved and auditor expect a small number of error

Answer 35

test the operating effectiveness of such control in the current audit

Answer 36

use the guarantee Review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.

Answer 37

to specified subject matter

Answer 38

to provide limited assurance on the reviewed financial statement

Answer 39

in the note of financial statement

Answer 40

auditor can date the report to the later date. auditor is only limited to a specific event

Answer 41

annual report filed with SEC contain an internal control report; also contain assessment of effectiveness of internal control structure

Answer 42

unlawful for issuer to have a personal loan to the director or officer of that issuer

Answer 43

disclosure from a person who is directly or indirectly a beneficial owner of more than 10%

Answer 44

disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers

Answer 45

``` significant class of transactions manual and automated procedure accounting record financial reporting process control surrounding journal entries ```

Answer 46

no opinion

Answer 47

a financial forecast

Answer 48

the objective no opinion or assurance Acknowledgment of management's representation agreement that the financial statements are not to be used by third parties

Answer 49

comparable information for prior period relationship among element of financial information budgets or forecast ratios, stats, trends, projecting error rate

Answer 50

ineffective general control do not cause misstatement, but it allow misstatement to occur

Answer 51

substantive analytical procedure is better for large volume of transactions that are predictable over time

Answer 52

test of details are used to obtain audit evidence about account balance, including existence and valuation

Answer 53

PCAOB enforce compliance and levies civil monetary penalties while the SEC oversee the PCAOB operation

Answer 54

Procedures manuals and organizational flowcharts would be only two out of many possible sources of information about the entity and its environment used to assess the risk of material misstatement. The lack of one specific source to obtain the understanding would not constitute a scope limitation, nor would the auditor be limited to assessing control risk at the maximum level.

Answer 55

when the controls are strong, assessed risk of material misstatement is low

Answer 56

require that the audit report report on the internal control assessment made by the management. this internal control assessment will not be the subject of any other separate engagement

Answer 57

when the calculated audit amounts are approximately proportional to the client's book amounts

Answer 58

they may not prepare or issue any audit report with respect to that issuer.

Answer 59

practitioner should not perform a review of an entity's compliance with requirements of specified laws, regulations, rules, contracts, or grants.

Answer 60

A deficiency exists when the design or operation of one or more of the internal control components does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A significant deficiency is a deficiency in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. A material weakness is a deficiency, or a combination of deficiencies, such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. All material weaknesses are significant deficiencies; they merit attention by those charged with governance due to their severity and their potential effect on the financial statements. An auditor is required to report material weaknesses and significant deficiencies to those charged with governance. “Although the auditor is required…to make the communications…no later than 60 days following the report release date, the communication is best made by the report release date because receipt of such communication may be an important factor in enabling those charged with governance to discharge their oversight responsibilities” (AU-C 265.A16). The two types of deficiencies do not have to be reported separately.

Answer 61

discuss with management about the policies and procedures reading the file of correspondence from taxing authorities. In this file, the auditor may discover delinquent tax notices and substantial unpaid interest and penalties.

Answer 62

limited to performing analytical procedures ; making inquiries of company personnel and management, and other procedures that address significant accounting and disclosure matters relating to the financial statements to be reported

Answer 63

basis for reporting whether material modifications should be made to the interim information to comply with the applicable financial reporting framework.

Answer 64

Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance.

Answer 65

reviewing a proposed transaction and informing the client of the tax consequences

Answer 66

the first paragraph of the accountant's compilation report should include a sentence that states, “The financial statements have been prepared on the [describe appropriate basis of accounting], which is a comprehensive basis of accounting other than generally accepted accounting principles.

Answer 67

should consider additional audit effort reason management for change cost to complete the audit

Answer 68

make a preliminary judgement about materiality

Answer 69

during the fieldwork stage of an audit, the auditor would confirm a sample of the entity account payable with known creditors; obtain written representation from management that there are no unrecorded transactions

Answer 70

communicate management 's initial selection of accounting policies to the audit committee

Answer 71

The accountant would not need to limit the distribution of the accountant's report.

Answer 72

When using test data, the auditor is looking for controls that are built into the system, not controls that operate outside of the computer. Thus, the auditor would not be testing controls concerning control over and distribution of unclaimed paychecks.

Answer 73

issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations

Answer 74

a qualified opinion

Answer 75

examining material requisitions and then re-performing client controls designed to process and record issuance is the best method to test controls , because material requisition are received by the store department for the purpose of issuing such material to production

Answer 76

An audit trail in a computer system, as in a manual system, assists in discovering fraud and therefore acts as a deterrent to perpetration of such acts Analytical purposes are not a major factor for maintaining an audit trail in a computer system. Analytical review can be performed by retrieving recorded data stored in the computer system or on hard copy.

Answer 77

single digit at the end of an identification

Answer 78

``` Self-interest Self-review Bias Familiarity Undue influence Management participation Structural threats ```

Answer 79

should include weaknesses in internal control ; significant deficiencies; any indication of fraud, abuse, or noncompliance with laws and regulations; and significant violations of contracts or grant agreements.

Answer 80

Advisory services, implementation services | subject to the Statements of Standards for Consulting Services

Answer 81

the lower the assessed level of control risk, the fewer substantive test Therefore, an auditor who plans to assess control risk at a low level usually performs tests of controls and only limited tests of details or substantive tests

Answer 82

to express an opinion on the financial statements, but not to express an opinion on the effectiveness of the entity's internal control over financial reporting.

Answer 83

The accountant would be required to perform analytical procedures designed to identify relationships that appear to be unusual in a review engagement, but not in a compilation engagement.

Answer 84

Measurements and review of the entity's financial performance would be classified as control activities.

Answer 85

communication of integrity and ethical value competence participation of those charged with governance management philosophy and style organizaiton struction assingment of authority and responsibiity human resource policies and practices

Answer 86

A record count is a total of the number of input documents to a process or the number of records processed in a run.

Answer 87

the degree of reliance the auditor placed on the management representation letter. However, if an audit committee exists separate from management, the auditor should communicate the representations requested from management. The auditor may provide the audit committee a copy of the management representation letter.

Answer 88

performed in order to determine control risk

Answer 89

Judging the reasonableness of accounting estimates would be a substantive procedure used to audit the assertion of valuation and allocation.

Answer 90

inform the client of significant reservations concerning the benefits of the engagement.

Answer 91

negative assurance on capsule information

Answer 92

to verify that all of the entity's liabilities have been recorded

Answer 93

include: objective of the engagement, management responsibility, auditor responsibilities, limitation of the engagement , limit the auditor responsibility to detect fraud does not include: significant deficiencies, audit procedure, substantial doubt about entity to continue as a going concern

Answer 94

information processing, segregation of duties, physical control .

Answer 95

In this question, one-half of the sample ($5,000 out of $10,000) has been audited. The misstatement is for $1,000 ($5,000 − $4,000). Projecting the same error rate for the unaudited half of the sample, the projected misstatement is for $2,000.

Answer 96

The debit memo is usually a notification from a buyer to a seller that tells the seller that a debit was made in the seller’s account on the buyer’s book. In other words, a debit memo is a way for a buyer to inform a seller that it wants a refund on its purchase. In the instance when nonconforming goods are returned to a vendor, the purchasing department should prepare a debit memo to be sent to seller with a copy sent to accounting in order for accounting to remove the resulting payable from the accounting records.

Answer 97

Firms that audit more than 100 issuers are inspected annually. Firms that audit 100 or fewer issuers are inspected every three years.

Answer 98

shipping document file

Answer 99

A factual misstatement would include the misstatements the auditor is able to identify within an audit. A difference in management's and the auditor’s position would be a judgmental misstatemen

Answer 100

should disclose the departure in a separate paragraph of the review report 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.

Answer 101

the nature of the walkthrough is meant to help the auditor to understand the full process, and determine the effectiveness of controls

Answer 102

are direct borrowings on note payable authorized by board of director?

Answer 103

Since the production cycle handles raw products and materials, it is important to maintain proper custody of the assets, as assets can easily be misappropriated during this cycle.

Answer 104

sample size decrease

Answer 105

document the assessment

Answer 106

review prior year working paper review permanent file

Answer 107

the book value is $10,000. The sampling interval is $5,000, so the actual error of $2,000 ($10,000 - $8,000) specifies that the projected error is also $2,000.

Answer 108

the completion of the agreed upon procedure

Answer 109

The accountant is not required to search for fraud or noncompliance with laws and regulations during a compilation or a review. However, these acts may come to the attention of the accountant while performing procedures for the engagement. If noncompliance is discovered, it should be brought to the attention of the appropriate level of management.

Answer 110

amounts concerning related party transaction

Answer 111

enter invalid identification numbers or passwords to ascertain whether the system rejects them, thereby denying access.

Answer 112

IRS is not regulator

Answer 113

A compilation report is only required whenever the accountant is engaged to subject the financial statements to compilation procedures.

Answer 114

to prevent misunderstanding the degree of responsibility the auditor is assuming when the auditor's name is associated with financial statements

Answer 115

present the results of the tests of controls in the form of an opinion on the operating effectiveness of internal control over financial reporting.

Answer 116

adopted its own rules regarding auditing standards, ethics, and independence.

Answer 117

able to measure the sufficiency of the audit evidence obtained

Answer 118

an auditor most likely would inquire about and observe the segregation of duties concerning personnel responsibilities and payroll disbursement.

Answer 119

if the omission is not undertaken with the intention of misleading must include statement that management has elected to omit substantially all disclosures (might influence user) and not designed for those who are not informed

Answer 120

management

Answer 121

is an example of the completeness assertion

Answer 122

whether it is likely that additional audit evidence could be obtained to support a lower assessed level of control risk for these assertions.

Answer 123

an engagement letter a copy of FS a copy of accountant's report

Answer 124

include any findings of noncompliance with laws and regulations as well as a report on the study and evaluation of internal controls

Answer 125

first review those client's records that indicated the existence of fixed assets (property ledger, insurance and tax records) would attempt to verify their existence by physical observation

Answer 126

when overpayments are discovered in performing tests of detail

Answer 127

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

Answer 128

review subsequent cash disbursements to determine whether the related payables apply to the prior period.

Answer 129

Observe the consistency of the employees' use of cash registers and tapes.

Answer 130

considering the adequacy of disclosure about the client's possible inability to continue as a going concern.

Answer 131

number of shares issued and outstanding.

Answer 132

appropriate level of management

Answer 133

consideration of internal control

Answer 134

The auditor is not required to determine the operating effectiveness, i.e., to search for significant deficiencies, during this phase.

Answer 135

A structural threat is the threat that an audit organization's placement within a government entity, in combination with the structure of the government entity being audited, will impact the audit organization's ability to perform work and report results objectively.

Answer 136

intinal planning: determine the internal audit involvement | during the audit: get written representation letter, exam document to detect noncompliance , check the estimates

Answer 137

authorization, segregation of duties, safeguarding/physical control, performance review Example: Are direct borrowings on notes payable authorized by the board of directors?

Answer 138

Reliance on systems or programs that are inaccurately processing data unauthrized access unauthorized changes failure to make change

Answer 139

improper distribution of EDI transactions

Answer 140

A limit test or limit check is used to edit data during input or processing to validate data. The data is above an amount, below an amount, or between two amounts. Validity controls are designed to ensure that all recorded transactions are those that should have been recorded (i.e., that the transactions are real and actually occurred and are properly documented). To ensure the reliability and accuracy of data processing, an auditor would perform both tests.

Answer 141

in planning and as an overall review near the end of the audit

Answer 142

trace items from the inventory listing schedule to some form of evidence that assures that the items actually exist. Such evidence would include inventory tags and the auditor's recorded count sheets.

Answer 143

In this case, Nile, CPA, is providing technical assistance on an IT system. This kind of service would be considered consulting, since Nile is not performing an audit engagement and it does not involve the firm's quality control. Therefore, Nile would follow the Standards for Consulting Services as administered by the AICPA.

Answer 144

to verify that outstanding stock certificates are issued with the authorization of the board of directors and the articles of incorporation

Answer 145

the procedure that an auditor would least likely perform before the balance sheet date would be confirmation of accounts payable.

Answer 146

more secure than encryption performed by software, and helps prevent unauthorized access to data and the possibility of IT personnel gaining access privileges

Answer 147

misstatement that are trivial all the corrected misstatements uncorrected misstatement

Answer 148

is responsible for mailing the check.

Answer 149

In all cases; however, the letter to the regulator should outline the purpose of the regulatory request as understood by the practitioner

Answer 150

express an adverse opinion on the entity's internal control.

Answer 151

Periodic inventory counts are used to adjust the perpetual inventory records.

Answer 152

To identify overstatement errors

Answer 153

the auditor should read the latest available interim financial statements, compare them with the financial statements being reported upon, and make any comparisons considered appropriate in the circumstances. Scan records for unusual transactions Obtain letter of representation on subsequent events

Answer 154

To reissue the 20X1 auditor's report on financial statements that have been neither restated nor revised, the auditor should use the original report date on the reissued report.

Answer 155

The auditor would use this substantive testing of the physical inventory as evidence concerning the assertions about inventory Since the control risk is high (i.e., the controls should not be relied upon), nothing would be gained by further tests of controls of the records of the inventory cycle, which are believed to be unreliable. Performing the physical count several times is not necessary; the auditor is only interested in the year-end count. Gross profit tests would provide assurances about the reasonableness of the dollar amounts, but not the quantities (i.e., number of units) in the inventory

Answer 156

issue a combined report (i.e., one report containing both an opinion on the financial statements and an opinion on internal control over financial reporting) separate reports on the company's financial statements and on internal control over financial reporting."

Answer 157

should be limited to data that are derived from audited financial statements The report should not state that the presentation is a comprehensive basis of accounting other than GAAP, restrict the use of the report to those specified users within the entity, or indicate that the data are subject to prospective results that may not be achieved.

Answer 158

a bank lockbox system ( to prevent fraud)

Answer 159

Prenumbered remittance advices and daily deposits of cash receipts are control procedures that aid in information processing. They help ensure that transactions are completely and accurately recorded and processed. Each of these procedures makes it easier to determine if an error (or theft) has occurred in the processing of the customer receipts. These controls help detect fraud; they do not prevent it.

Answer 160

Monthly bank reconciliations, performed by a person other than the person who handles the cash or keeps the general ledger, are a control related to segregation of duties. This control procedure is meant to detect fraud.

Answer 161

to include a statement that the prior year's statements were audited by another auditor, the date of the other auditor's report, the opinion issued, and an explanation if the opinion was other than unmodified. no name should be mention if his or her report is not presented

Answer 162

Investigate changes in long-term debt occurring after year-end

Answer 163

An audit report would contain explanatory language about a company's ability to continue as a going concern if the auditor thought it was appropriate

Answer 164

The results of an analytical procedure disclose unexpected differences.

Answer 165

Intercompany transactions and large revenue transactions at period-end

Answer 166

schedule of accounts receivable and schedule of royalties.

Answer 167

scope of services effect of independence document the discussion with audit committee not require to document expected result of services

Answer 168

by following the firm policies and procedures

Answer 169

Since the allowance for uncollectible accounts directly affects the valuation of accounts receivable, the auditor's assessment of the allowance amount for reasonableness would provide the most assurance concerning the valuation of accounts receivable.

Answer 170

Analysis of capital stock | other equity accounts

Answer 171

the condensed financial statements is fairly stated in all material respects.

Answer 172

Payroll control objectives include: proper authorization of new employees, no fictitious employees included in the payroll, all terminated employees removed from payroll, employees paid authorized amounts, all transactions recorded correctly, detailed records maintained, and government regulations complied with.

Answer 173

The best answer choice to assist the auditor with planning would be to perform analytical procedures on the unaudited information from internal quarterly reports.

Answer 174

During the year, the officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. Stockholders' equity would increase by the following amount: $1,000 × $8 = $8,000. Entry to record exercise of options: Dr. Cash or Accrued liability - ESOP (1,000 x $8) 8,000 Cr. Stockholders' equity 8,000 The stockholders' equity is $500,000 on December 31, 20X1. This amount reflects the exercise of the stock options. Therefore, stockholders' equity before the exercise of the stock options would be $500,000 − $8,000 = $492,000. Debt/Equity ratio prior to exercise of options: $60,000 ÷ $492,000 = 0.122 Debt/Equity ratio after exercise of options: $60,000 ÷ $500,000 = 0.12 Note: Insufficient information is available for calculating any of the other ratios/answers.

Answer 175

At or shortly before the date of distribution, circulation, or submission of the exempt offering document

Answer 176

A top-down approach begins at the financial statement level and with the auditor's understanding of the overall risks to internal control over financial reporting.” (PCAOB AS 2201.21) The next step is to focus on entity-level controls, and then significant accounts, disclosures, and relevant assertions. The auditor then verifies his or her understanding of the risks in the company's processes and tests those controls that sufficiently address the assessed risk of misstatement to each relevant assertion.

Answer 177

entity adjust its allowance for doubtful account due to the assumption that more of the account receivable will be uncollectible

Answer 178

include restricting the use include statement that procedure performed were agreed by the specified party not include any form of assurance, opinion

Answer 179

Audit tests must be performed on a continual basis

Answer 180

provide evidence that shipments to customers were properly invoiced. No assurance regarding completeness or duplication is obtained by this method alone.

Answer 181

of an entity's compliance with requirements of specified laws, regulations, rules, contracts, or grants.

Answer 182

tolerable rate rate of deviation risk of assessing control risk too low

Answer 183

Employees in collusion can manipulate the entity's A/P and A/R accounts.

Answer 184

relationship of net income to cash flow comparison of entity profitability vs industry comparison of bad debt write off to comparable industry data

Answer 185

include a definition of internal control which is the same description of the entity's internal control as management uses in its report.

Answer 186

ID of specified party a list of procedure performed and findings statement of the party responsibility

Answer 187

to inspect shipping records documenting merchandise sold to the debtor (to prove that merchandise from sale was sent to the customer) to review the cash receipt journal for the month following year end (to see that the customer paid the amount of receivable)

Answer 188

study of sale records late in December and early January

Answer 189

The only time the auditor should refer to the work or findings of a specialist in the audit report would be if reference to the specialist's findings clarifies an emphasis-of-matter or other-matter paragraph (such as for an unusually important subsequent event) or facilitates an understanding of a departure from an unmodified opinion. requires the auditor to reach an understanding with the specialist about the objectives and scope of the specialist's work and the methods or assumptions used by the specialist.

Answer 190

A contingent fee would be permitted when representing a client in an examination by a revenue agent of the client’s federal or state income tax return.

Answer 191

when the records are well-maintained and periodically checked and compared to the physical amounts.

Answer 192

comparison of currrent year to prior year account balances asking actions taken at board of director meetings obtaning understanding of client business

Answer 193

project the detected error to the entire population

Answer 194

present the results of the auditor's tests of controls.

Answer 195

The allowance for sampling risk is 4.5%. It is the difference between the upper precision limit of 8% and the sample deviation rate of 3.5% (seven errors in a sample of 200 items).

Answer 196

would not rely on the record request client to schedule physical inventory count at year end (substantive testing)

Answer 197

Auditor's communication with those charged with governance

Answer 198

will obtain evidence about items on tags being included in the listing

Answer 199

account receivable is not an estimate. estimates are allowance for loan losses, effective tax rate

Answer 200

``` Authorization Performance reviews Information processing Physical controls Segregation of duties ```

Answer 201

Yes, because the stock would be a direct financial interest and materiality is not a factor

Answer 202

relative effectiveness and efficiency of the tests.

Answer 203

Parallel simulation is when the auditor uses client data and auditor-controlled software to obtain output. The auditor's output is compared to the output from the client. Differences indicate potential weaknesses or problems with the client's software.

Answer 204

Test data is introduced into the client's computer system using the same program to operate the application being tested. This type of control testing is not under the auditor's control, as it uses the client's actual program.

Answer 205

A review of program logic would not assist the auditor with testing the operating controls of the computer system. It may, however, provide information about the design of the automated controls.

Answer 206

An integrated test facility introduces a fictitious entity (such as a fake employee or customer) with real entries in the master files of the client's computer system. The auditor then compares the processing of data through the fictitious entity with what should be there in order to test that the data processing is reliable. Like the test data (or test deck) approach, an integrated test facility uses the client's system and is not under the auditor's control.

Answer 207

should disclose the departure from the applicable financial reporting framework in a separate paragraph.

Answer 208

A source code comparison program compares the coding of the program from its last run with the original program, testing for any unauthorized changes in the program.

Answer 209

A source code comparison program compares the coding of the program from its last run with the original program, testing for any unauthorized changes in the program.

Answer 210

Comparing the control amounts posted to the accounts receivable ledger with the control totals of invoices

Answer 211

the CPA's assessment of sampling risk factors.

Answer 212

an examination (audit) a review agreed upon procedures example: Preparing the income statement and balance sheet for one year in the future based on client expectations and predictions

Answer 213

in aggregate, encompass at least 20% of total federal awards expended. in aggregate, encompass at least 40% of total federal awards expended.

Answer 214

the adequacy of the disclosure of the related party transactions.

Answer 215

The auditor need not search for significant deficiencies but should document and communicate any significant deficiencies that are discovered.

Answer 216

match vendor's invoice with the related receiving report, (to make sure good billed were received) approve voucher for payment

Answer 217

Accounting for unused prenumbered purchase orders and receiving reports

Answer 218

agreement of the vendor's invoice (invoice details are correct) with the receiving report (goods and services actually received) and purchase order (procurements are properly authorized).

Answer 219

correlating interest expense recorded for the period with outstanding debt.

Answer 220

a statement that the cash receipts and disbursements basis of accounting is not a comprehensive basis of accounting.

Answer 221

Nonfinancial data have been accurately derived from related records.

Answer 222

communicate significant accounting policies | and management changes in the application of those policies

Answer 223

restriction on the distribution of the report.

Answer 224

prior-year checks listed in the cutoff statement to the year-end outstanding checklist. Deposits in transit at the end of the year are those deposited per the books that did not yet clear the bank. The auditor would start with the year-end bank reconciliation's deposits in transit and trace to the cutoff statement, not the other way around. Any deposits recorded in the cash receipts journal (on the books) after year-end should appear on the bank statements in the next year. The auditor would not be concerned about tracing these deposits to the cutoff statement

Answer 225

management

Answer 226

corroboration of the information furnished by management about litigation, claims, and assessments

Answer 227

Read the current report, compare it to the previous report, and obtain a letter of representation from the successor auditor.

Answer 228

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

Answer 229

enable continuous monitoring of transaction processing

Answer 230

The auditor must read the other information and consider if it is materially inconsistent with the audited financial statements. not obligated to apply audit procedure, nor opinion

Answer 231

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

Answer 232

General control procedures

Answer 233

Lapping involves the altering of accounts receivable when cash that is intended for the payment of a receivable is misappropriated. The first receivable collected is used to cover the misappropriation, while the second receivable is collected to account for the first, and so on. In order to prevent lapping, the best internal control activity would be the segregation of duties between those receiving cash and those posting to the accounts receivable ledger. To uncover the scheme, the best solution would be for the auditor to compare the dates checks are deposited with the dates of remittance credits. If lapping were to occur, over time the posting of remittance credits should occur prior to the date the check is deposited

Answer 234

is a nonfederal entity that receives a subaward from a pass-through entity to carry out part of a federal program; it does not include an individual that is a beneficiary of such a program. A recipient of other federal awards directly from a federal awarding agency also qualifies as a subrecipient.

Answer 235

assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions.

Answer 236

Tests of controls Substantive procedures Because effective internal controls generally reduce but do not eliminate the risk of material misstatement, tests of controls reduce but do not eliminate the need for substantive procedures

Answer 237

abstracts or copies of important documents.

Answer 238

engagement letter analytical procedure comparison of expectation vs recorded amount management response to accountant inquries significant matter unsual matter representation letter

Answer 239

discuss the timing of the audit procedures with the client's management.

Answer 240

all CPA owners must be members of the AICPA.

Answer 241

The integrity of the entity's management is suspect.

Answer 242

When a prior year's financial statements being used for comparative purposes were audited by another auditor, who expressed a qualified opinion and whose report is not being presented, the auditor's responsibility paragraph of the successor's report is changed to include a statement that the prior year's statements were audited by another auditor, the date of the other auditor's report, the opinion issued, and an explanation if the opinion was other than unmodified. The name of the predecessor auditor should not be mentioned if his or her report is not presented.

Answer 243

When control risk is assessed too low, the deviation rate for the sample is less than the true deviation rate of the population (or, as stated in the question, the deviation rate of the population is more than the deviation rate in the auditor's sample).

Answer 244

valuation or allocation. Since the auditor is testing whether credit sales are actually collectible (if credit has been granted according to policy), the auditor would be testing valuation. Valuation asserts that the credit sales have been disclosed at appropriate amounts. In other words, the entity has properly valued the credit sale for its full amount, and the customer is creditworthy and is likely to pay.

Answer 245

The assertion of rights and obligations relates to whether or not the entity holds or controls the rights to assets, and if liabilities are the obligations of the entity. Were the auditor to test the entity's rights to outstanding receivables, she would not test credit approval. Instead, she might look at sales orders and invoices to determine if items were actually purchased.

Answer 246

schedule of accounts receivable and schedule of royalties.

Answer 247

include a statement that: the auditor believes the audit provides a reasonable basis for the issued opinion. management is responsible for maintaining effective internal control. internal control over financial reporting includes policies and procedures regarding the ability to report financial data consistent with management's assertions. the audit was conducted in accordance with the standards of the Public Company Accounting Oversight Board (not in accordance with AICPA standards).

Answer 248

Comparing the total amounts posted to the accounts receivable ledger from remittance advices with the validated bank deposit slips most likely could assist MMI in preventing or detecting the recording of a credit for the customer's full account balance when the customer's check is for less than the customer's full account balance. If a credit for the customer's full account balance were recorded to the accounts receivable ledger, the total posted to the accounts receivable ledger would exceed the total on the validated bank deposit slip. This is an example of an independent check being used as a control.

Answer 249

Comparing the current year's financial statements with those of the prior year

Answer 250

A weakness in internal control over recording retirements of equipment means that it may be possible for a piece of equipment to be retired and thus no longer physically present but still be recorded in the entity's books as held by the entity. To investigate whether there are any instances of this, an auditor would select certain records and verify whether those assets actually exist.

Answer 251

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

Answer 252

The engagement team's evaluation of the firm's independence in relation to the specific engagement Whether appropriate consultation has taken place on matters involving differences of opinion or other difficult or contentious matters and the conclusions arising from those consultations Whether documentation selected for review reflects the work performed in relation to the significant judgments and support the conclusions reached

Answer 253

Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud

Answer 254

attribute Attribute sampling is used to estimate the rate (percentage) of occurrence of a specific quality (attribute) in a population and is used primarily for tests of controls; it allows the auditor to quantify the sampling risk. Variable sampling is used when the auditor needs to estimate or test a client's book value and is generally used in substantive testing; it does not enable the auditor to quantify risk in the population based on the sample results. Haphazard, block, and stratified nonstatistical sampling techniques all use the auditor’s judgement. Selection of a sample is not based upon statistics; therefore, the auditor cannot extrapolate the results of a sample to the broader population (i.e., sampling risk cannot be quantified).

Answer 255

completeness

Answer 256

Accounts receivable turnover is affected by the balance in accounts receivable, so fictitious credit sales could be the cause. The other answer choices would not cause the turnover ratio to decrease. If fictitious sales were recorded, the net credit sales (numerator) would increase. Since the sales are not real, the ending accounts receivable balance would also be higher than normal. These “fake” receivables are also not being repaid. This in turn, means that the average receivables (denominator) would get larger. This would in all likelihood result in a lower receivable turnover ratio.

Answer 257

When transactions are high-volume and recurring

Answer 258

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

Answer 259

firm personnel have experience with relevant industries or subject matters or the ability to effectively gain the necessary knowledge; firm personnel have experience with relevant regulatory or reporting requirements, or the ability to effectively gain the necessary competencies; the firm has sufficient personnel with the necessary competence and capabilities; specialists are available, if needed; individuals meeting the criteria and eligibility requirements to perform an engagement quality control review are available, where applicable; and the firm is able to complete the engagement within the reporting deadline.

Answer 260

An audit includes assessing significant estimates made by management

Answer 261

document the details of the disagreement with the conclusion reached.

Answer 262

through detailed tests of transactions, making inquiries of the client's management, and reading the minutes of the board of director's meetings

Answer 263

help the auditor determine the risk of material misstatement (due to errors or fraud) and identify reportable conditions, but this procedure would not be very helpful in identifying noncompliance with laws and regulations.

Answer 264

Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles

Answer 265

electronically accessing the details of dividend records on the Internet.

Answer 266

shipments to customers were properly invoiced.

Answer 267

perform substantive procedures consisting of inspection of records or documents, inspection of tangible assets, observation and inquiry, confirmation, recalculation and reperformance, and analytical procedures

Answer 268

Statements on Standards for Attestation Engagements

Answer 269

Review the aged trial balance for significant past due accounts.

Answer 270

records produced by investment services.

Answer 271

Issue a modified opinion. When internal control is not effective because one or more material weaknesses exist, the auditor is prohibited from expressing an opinion on management's assertion and should report directly on the effectiveness of internal control. The auditor's report should include the definition of a material weakness, a statement that one or more material weaknesses have been identified, and an identification of the material weaknesses described in management's assertion.

Answer 272

increase the assessment of control risk and increase the extent of substantive tests

Answer 273

80 hours of CPE in governmental auditing every two years for those auditors who spend at least 20% of their time on these audits. a system of quality control that includes independence, legal, and ethical requirements. human resources policies and procedures. An external peer review is required at least once every three years.

Answer 274

obtaining a detailed fixed asset register and ensuring items are appropriately capitalized

Answer 275

obtaining a listing of current year additions and verifying that items are recorded in the proper period

Answer 276

obtaining a detailed fixed asset register and ensuring depreciation methods are applied consisstenly

Answer 277

when both (a) the auditor’s report is included in the exempt offering document and (b) when the auditor performs one or more of the following activities with respect to that exempt offering document (assist in preparing, reading draft, issue comfort letter, participate) Perform a subsequent events review from the date of the financial statement auditor’s report through the date of the exempt offering

Answer 278

Unrecorded sales at year-end

Answer 279

Control amounts posted to the accounts receivable ledger are compared with control totals of invoices.

Answer 280

considered in the evaluation of audit findings in the current year.

Answer 281

is a concurrent audit technique where a special set of dummy master files is established and test transactions are entered to test the programs using the dummy files during regular processing runs.

Answer 282

International auditing standards issued by the International Auditing and Assurance Standards Board do not require an audit of internal control, while U.S. PCAOB (Public Company Accounting Oversight Board) standards do require such an audit.

Answer 283

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.

Answer 284

add an explanatory paragraph to the auditor’s report because of the uncertainty. A qualified opinion would not be issued in this instance because of the lawyer’s scope limitation because there was no scope limitation. A scope limitation would only occur in this instance when legal counsel refuses to furnish the information requested.

Answer 285

Receiving reports provide evidence that merchandise has been received and has become part of inventory. Thus, prenumbering receiving reports and periodically reconciling these reports to recorded inventory would directly address the completeness assertion for inventory. “Receiving reports are prenumbered and periodically reconciled” is the best answer.

Answer 286

conformity with other comprehensive basis of accounting reference to a note in the financial statements a statement that the presentation is a comprehensive basis of accounting principles other than GAAP.

Answer 287

If an auditor is unable to apply all necessary audit procedures he or she considers necessary, regardless of the reason

Answer 288

be unable to express an opinion on the current year's results of operations and cash flows.

Answer 289

a basis of accounting that the entity uses to comply with an agreement between the entity and one or more third parties other than the auditor

Answer 290

inventory is complete

Answer 291

identify specific control activities relevant to the specific assertions that are likely to prevent or detect material misstatements in those assertions and perform tests of controls to evaluate the effectiveness of such control activities

Answer 292

make preliminary judgments about materiality levels for audit purposes.

Answer 293

not provide a comfort letter but may provide another form of letter.

Answer 294

Review engagements provide less assurance than that provided in an audit. The accountant, primarily through inquiries of management and analytical procedures, expresses limited assurance that the financial statements are in accordance with the applicable financial reporting framework. The accountant does not test the entity's internal control system nor assess the risk of material misstatement (whether due to errors or fraud).

Answer 295

CPA seeking to enter into an audit contract to provide the CPA's most recent external quality control review report to the party contracting for the audit.

Answer 296

If each sales invoice has a corresponding shipping document, the auditor could determine that each customer billed was actually shipped something. To determine what the test proves, start with the population that is being sampled. In this instance, we start with the sales invoices. For each sales invoice sampled, the auditor is able to determine that goods were shipped to the customer on the invoice. If the auditor is unable to locate a shipping document to correspond to that customer's invoice, then the auditor cannot conclusively say that the billed customer was shipped goods.

Answer 297

To determine if entries in the accounts receivable ledger were for sales actually shipped, the auditor would have to start with the accounts receivable subsidiary ledger and then trace that entry to a shipping document.

Answer 298

If the auditor wished to determine that shipments to customers were properly billed, the population to be sampled would be the shipping documents. For each shipping document, the auditor should find a corresponding sales invoice.

Answer 299

Finding evidence to support the assertion that no duplicate shipments to customers were made would require the auditor to start with a sample from the population of sales orders. The auditor would then try to find duplicate shipments to each customer (sales) order pulled as part of the sample. If one is found, this is a deviation. If no deviations are found in the sample of sales orders, the auditor expresses certainty that no duplicate shipments were made, according to the statistical criteria determined before choosing the sample size.

Answer 300

A financial projection is appropriate for limited use only. This means that it can be used by the responsible party alone or by the responsible party and third parties with whom the responsible party is negotiating directly. The following would be examples of limited use: With a mortgage application (negotiating directly with the bank) With a report to the audit committee (for use by the responsible party) With a document for negotiating a labor contract (negotiating directly with the union) A prospective financial statement included in an offering statement would have to be a financial forecast, as it is the prospective financial statement that is appropriate for use by persons with whom the entity is not negotiating directly (general use).

Answer 301

A reasonableness test compares a known, recorded amount (number of overtime hours in a week) with an estimated, or expected, amount (the average of weekly overtime during a similar period in a prior year). The auditor looks to see if the actual number is reasonable based on prior historical data. This test is a type of analytical procedure.

Answer 302

Neither I nor II

Answer 303

Issue a modified opinion.

Answer 304

along with the audit of the financial statements, reports on internal control, compliance with laws and regulations, and provisions of contracts and grant agreements as they relate to financial transactions, systems, and processes. in the report on financial statement or a separate report

Answer 305

When no material effect on comparability results from a change in accounting principle or an adjustment to previously issued financial statements, the auditor need not refer to consistency in the auditor's report.”

Answer 306

unusual transactions and events.

Answer 307

Nonsampling risk is the risk that the auditor reaches an erroneous conclusion for any reason not related to sampling. Examples of nonsampling risk include the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation

Answer 308

the proper treatment of a lack of consistency is to add an emphasis-of-matter paragraph after the opinion paragraph.

Answer 309

may be engaged to reissue the prior-period report

Answer 310

the accountant's disclosure need not detail the specific information but can merely indicate that the client has not cooperated with the accountant's attempt to substantiate information that has come to the accountant's attention and that, if the information is true, the accountant believes that the compilation or review report must no longer be used or associated with the financial statements. No such disclosure should be made unless the accountant believes that the financial statements are likely to be misleading and that the accountant's review report should not be used.

Answer 311

the purpose of the financial statements, the intended users, and management's steps taken in determining the applicable financial reporting framework.

Answer 312

The introductory paragraph, which states: that the financial statements identified were audited and the entity's name on the financial statements The management's responsibility paragraph, which: states that the financial statements are the responsibility of management and includes the design, implementation, and maintenance of internal controls The auditor's responsibility paragraph, which states that the audit: was conducted in accordance with U.S. (or other country's) generally accepted auditing standards, was planned and performed to obtain reasonable assurance that the financial statements are free from material misstatements, and includes examining evidence, assessing principles and significant estimates, and evaluating overall statement presentation The opinion paragraph, which states that the financial statements are: presented fairly, presented in all material respects, and in conformity with U.S. (or other country's) GAAP The auditor's report would be inappropriate if it referred to the CPA's assessment of sampling risk factors.

Answer 313

consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.

Answer 314

The auditor's overall responses to address the assessed risks of material misstatement at the financial statement level may include the following: Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence Assigning more experienced staff or those with specialized skills such as specialists Providing more supervision Incorporating additional elements of unpredictability in the selection of further audit procedures to be performed Substantive responses, further audit procedures, and test of controls are specific responses, not an overall response

Answer 315

An analytical procedure is performed when the auditor compares financial data to expectations developed by the auditor. For example, the auditor may expect, based on the understanding of the entity obtained, this year's gross margin to be greater than last year's gross margin. Tests of controls would not compare two financial statement values. Rather, the auditor would be looking for deviations from a prescribed control activity. Tests of details (or transactions) are substantive procedures (as are analytical procedures). However, substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain relevant assertions about account balances, including existence and valuation.

Answer 316

the SEC will review disclosures made by issuers.

Answer 317

Comparing total amounts posted to the accounts receivable ledger from remittance advices with the validated bank deposit slips

Answer 318

While the auditor's responsibility does not extend beyond the financial information identified in the auditor's report, nor does the auditor have any obligation to perform any procedures to corroborate other information contained in a document, the auditor should read the other information and consider whether it is materially consistent with the financial statements. If the information is not materially consistent with the financial statements, the auditor should determine whether the financial statements or auditor's report require revision. If they do not, he should request that the client revise the other information (in this case, the letter of transmittal). Should the client refuse to revise the other information accompanying the financial statements, then the auditor should consider actions such as adding an emphasis-of-matter paragraph to the auditor's report describing the inconsistency, withdrawing from the engagement, or withholding the use of the auditor's report with the other information. The action taken will depend upon the auditor's judgment and the individual circumstances.

Answer 319

Since there are numerous errors in pricing and extensions in this case, ratio estimation would result in numerous usable results that would produce the most precise evaluation. Ratio estimation sampling is based on ratios between audited amounts and recorded amounts. This approach is most efficient when the ratio is not equal to one.

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