Terms Flashcards
(311 cards)
1
Q
audit risk equal what
A
audit risk equal inherent risk multiply control risk multiply detection risk
2
Q
detection risk equal what
A
detection risk equal analytical procedure multiply test of details
3
Q
when to use negative confirmation?
A
control is good, expect there is not to be a lot of exceptions, i think people pay attention to them . when client record a large number of relatively small balances
4
Q
effective application of analytical procedure
A
When the expectations of the auditor are more precise, there is a greater likelihood that significant differences from the expectations are due to misstatements. This is due to the fact that auditors are better able to anticipate appropriate client results and results that are inconsistent with the auditor’s expectations are likely to be the result of some form of financial statement error or fraud.
5
Q
control risk vs inherent risk
A
control risk is the risk that a meterial misstatement will not be prevented or detected on a timely basis by the client’s internal control
inherent risk is the risk that auditor will not detect a material misstatement
6
Q
risk assessment include
A
inquiries of management and others
analytical procedures
observation and inspection
7
Q
Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year-end?
A
Performing substantive procedures (such as confirmation of accounts receivable) at an interim date without undertaking additional procedures at a later date increases the risk that the auditor will not detect misstatements that may exist at the period-end. This risk increases as the remaining period is lengthened.
8
Q
when an accountant examine projected financial statement, the accountant report should include a separate paragraph that
A
describe the limitation on the usefulness of the presentation
include the intended recipient
9
Q
Analytical procedure
A
nalytical procedures, which consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data, can be used by the auditor in the planning phase, to obtain an understanding of the entity and its environment, as a substantive test, and as an overall review in the final stages of the audit. Analytical procedures are used for obtaining audit evidence (confirmation and recalculation, used in the incorrect answer choices, are two of those other procedures). Analytical procedures involve comparing recorded amounts (such as current-year balances) to expectations or anticipated results (such as a budget). This is a comparison that would occur in the planning phase of the audit. Scanning the payroll files for terminated employees would be an analytical procedure used during substantive testing, not the planning phase.
10
Q
What is the most likely source of the following statement?
“Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below.
A
standard financial institution confirmation request
11
Q
when adverse opinion is issued ?
A
An adverse opinion is issued when the financial statements are not presented in accordance with GAAP. An adverse opinion is expressed when the auditor, having already obtained sufficient appropriate audit evidence, concludes that misstatements are material and pervasive to the financial statements.
12
Q
what is reasonable test
A
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.
13
Q
sarbanes oxley act prohibit what ?
A
The Sarbanes-Oxley Act of 2002 specifically prohibits a registered accounting firm from providing internal audit outsourcing services during an audit, actuarial services related to the audit contemporaneously with the audit, and advice on financial information system design during an audit.
14
Q
When issuing letters for underwriters, commonly referred to as comfort letters, an accountant may provide negative assurance concerning:
A
When an issuer sells securities, the underwriter for those securities often asks an accountant to provide a comfort letter regarding the financial information filed with the SEC. The comfort letter provides “negative assurance” to the underwriters that “nothing came to our attention that would indicate that the information does not meet the specified standard.” The comfort letter is not an audit report.
If an accountant performs a review of interim financial information, he or she may then express negative assurance 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.” (AU-C 920.46
15
Q
Under PCAOB Auditing Standard 1215, the auditor should complete the final set of audit documentation within how many days following the report release date?
A
45 days
16
Q
when determining a sample size for test of control, the auditor should consider ?
A
When determining a sample size for a test of controls, the auditor should consider the tolerable rate of deviation from the controls (expressed in %), the likely rate of deviations (expressed in %), and the allowable risk of assessing control risk too low (the reliability level).
17
Q
bills of landing and account receivable confirmation are generated from ?
A
Bills of lading are generated by the carrier for goods being shipped to the entity.
Accounts receivable confirmations audit evidence comes from information generated by the entity’s clients when they respond to the auditor.
18
Q
what a management representation letter include ?
A
a confirmation that the entity has compiled with contractual agreements
19
Q
Normally, the only time a CPA can disclose confidential information is with the client’s consent. The exceptions to client’s consent are:
A
a peer review by state CPA society
a subpoena or court summon to release confidential information
an inquiry that is made by a recognized investigatory body
20
Q
what is allowance for sampling risk ?
A
an allowance for sampling risk is the difference between the upper precision limit and the sample deviation rate
21
Q
what is the objective of the analytical procedure in the overall review stage of an audit ?
A
The objective of analytical procedures used in the overall review stage of the audit is to assist the auditor in assessing the conclusions reached and in the evaluation of the overall financial statement presentation. The auditor may, at this time, determine that additional audit evidence may be needed.
Once the auditor is in the overall review stage of the audit, he is no longer evaluating the effectiveness of the internal control activities. An analytical procedure applied to balances at period end would not assist the auditor with identifying or understanding subsequent events. The workpaper review would be when the auditor determines if audit procedures were omitted by the staff accountants.
22
Q
what treasurer department should not do ?
A
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
23
Q
what items that the client’s lawyer can respond to the auditor’s letter of inquiry ?
A
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) to which he has “devoted substantive attention on behalf of the company in the form of legal consultation or representation.” (AU-C 501.22)
It is outside the scope of the lawyer’s response to speculate about whether or not the client can continue as a going concern. Considering this possibility is the auditor’s responsibility.
24
Q
what is test data approach ?
A
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.
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.
25
what stuffs to consider in the planning and performance of an audit ?
audit risk , materiality, statistical sampling
26
what are the elements of a CPA firm quality control system ?
leadership responsibilities for quality within the firm,
relevant ethical requirements,
acceptance and continuance of client relationships and specific engagements,
human resources,
engagement performance, and
monitoring.
27
what does the "introductory paragraph" include ?
"identify the entity whose financial statements have been audited,
"state that the financial statements have been audited,
"identify the title of each statement that the financial statements comprise, and
"specify the date or period covered by each financial statement that the financial statements comprise."
28
Before applying substantive tests to the details of asset accounts at an interim date, an auditor should assess:
Applying substantive tests at an interim date, rather than at the balance sheet date, increases audit risk that a misstatement may occur between the interim and year-end dates and exist at the balance sheet date. This increase in risk is the incremental audit risk. Therefore, before auditing asset accounts at an interim date, an auditor should 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).
It is not necessary to assess control risk below the maximum level, or materiality for the accounts tested as insignificant, before auditing at an interim date. If inherent risk is at the maximum level, the auditor should consider whether or not using interim procedures will be cost effective, since this assessment affects the nature, timing, and extent of substantive tests to cover the remaining period.
29
when a disclaimer of opinion can be issued ?
A disclaimer of opinion is issued when a significant (sufficiently material or client-imposed) scope limitation prevents the auditor from forming an opinion on the financial statements. A disclaimer is a report that states the auditor does not express an opinion. If an auditor is unable to observe the physical inventory count (and the inventory is material to the financial statements) and cannot perform alternate procedures to verify the accounting assertions associated with the inventory account balance, then the auditor should issue a disclaimer of opinion.
30
when a unmodified opinion can be issued ?
An unmodified opinion is a clean opinion. It states that the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of the company. The auditor would be precluded from issuing an unmodified opinion in this circumstance.
31
when a qualified opinion can be issued ?
A qualified opinion has an “except for” paragraph which highlights any material scope limitations or departures from an applicable financial reporting framework. These are items that are material, but not sufficiently material as to require a disclaimer or adverse opinion. Excepting the items mentioned in the report, the financial statements present fairly, in all material respects, the financial position, results of operations, and cash flow of the company.
32
when a adverse opinion can be issued ?
An adverse opinion states that the financial statements do not present fairly the financial position or the results of operations or cash flow in conformity with an applicable financial reporting framework. Adverse opinions result from a sufficiently material departure from an applicable financial reporting framework. The auditor must disclose the reason(s) for the adverse opinion.
33
risk of accessing control risk too low
The risk of assessing control risk too low is an aspect of sampling risk related to tests of controls. It is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. It causes the auditor to rely on a control when the true deviation rate does not justify reliance. It relates to the effectiveness of the audit—the auditor fails to perform additional work that should be performed. Risk of assessing control risk too low is more serious than the risk of assessing control risk too high. The risk of assessing control risk too low varies inversely with the sample size (as the sample size increases, the risk of assessing control risk too low decreases).
Test of Control Client's Internal Control Is:
Sample
Indicates: Reliable: Unreliable:
--------------- -------------------------------------------
Accept Correct Risk of assessing
Decision control risk too low
Reject Risk of assessing Correct
control risk too high Decision
34
when the control risk is accessed too low ?
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).
35
After considering an entity's negative trends and financial difficulties, an auditor has substantial doubt about the entity's ability to continue as a going concern. The auditor's considerations relating to management's plans for dealing with the adverse effects of these conditions most likely would include management's plans to:
Plans to dispose of assets
Plans to borrow money or restructure debt
Plans to reduce or delay expenditures
Plans to increase ownership equity
36
when an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that
When an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
37
what happen when the auditor change an audit or review to a review or compilation , what happen to the new engagement ?
The accountant is permitted to use professional judgment in deciding whether or not to change the engagement. If the change is justified, the new engagement should not make any reference to the original engagement, any procedures that were performed under the original engagement, or why the engagement changed.
38
The auditor's report on an integrated audit of internal control for an issuer should include which of the following?
PCAOB AS 2201.85 states that the auditor's report on the audit of internal control over financial reporting must include a definition of internal control which is the same description of the entity's internal control as management uses in its report.
The other items listed are reporting elements for an agreed-upon procedures report on controls
39
what is comfort letter and who sign it ?
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.
40
what is confirmation ?
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
41
When the auditor reissues a report of the financial statements, the date of the reissued report should be:
same as the original report
42
as the detection risk decrease, the auditor may ?
n this question, the auditor must reduce detection risk (a high risk of material misstatement has made it necessary to lower detection risk so that overall audit risk is acceptable). In order to reduce detection risk, the auditor will vary the nature, timing, or extent of testing. Moving substantive testing to year-end reduces the risk that errors at the balance sheet date may not be detected.
The auditor may also increase the extent of substantive testing (not reduce it). It is not possible to ignore the assessed level of inherent risk in planning, and the auditor must have a reason to lower the assessed level of control risk (such as tests of controls indicate that controls may be relied upon).
43
Which of the following procedures would the principal auditor most likely perform after deciding to make reference to another CPA who audited a subsidiary of the entity?
Whether or not the principal auditor decides to make reference to the audit of the other auditor, he or she should make inquiries concerning the professional reputation and independence of the other auditor. However, if the principal auditor decides to make reference to another CPA who audited a subsidiary of the entity, he or she is not required to review the working papers and audit programs of the other CPA, visit the other CPA and discuss the results of the other CPA's audit procedures, or determine that the other CPA has a sufficient understanding of the subsidiary's internal control.
44
Members employed by others to prepare financial statements or to perform auditing, tax, or consulting services are charged with the same responsibility for --------------- as members in public practice.
objectivity
45
when a negative confirmation can be used ?
this form of confirmation is used only under specific conditions, such as when the combined assessed level of inherent and control risk relative to accounts receivable is low. Negative confirmations are also used when there are a large number of small balances involved and the auditor expects a small number of errors.
46
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
test the operating effectiveness of such control in the current audit
47
When an auditor plans to rely on controls that have changed since they were last tested, which of the following courses of action would be most appropriate?
The use of the ratio estimation sampling technique is most effective when the calculated audit amounts are approximately proportional to the client's book amounts. Ratio estimation takes the ratio of the mean of the sample audit values to the mean of the sample book values and applies it to the total book value. This would provide a valid statement about the total population if the calculated audit amounts are approximately proportional to the client's book amounts.
48
which auditing procedure would assist auditor to identify related party transaction ?
A guarantee is a responsibility for the payment of a debt or performance of some obligation if the person primarily liable fails to perform. The presence of a guarantee would be a possible indicator of a related party transaction. Of the responses provided, reviewing confirmations of loans receivable and payable for indications of guarantees most likely would assist an auditor in identifying related party transactions. Loans and guarantees are commonly entered into with related parties.
49
how should a practitioner present the result of applying agreed upon procedure ?
A practitioner should present the results of applying agreed-upon procedures to specified subject matter in the form of findings.
50
an accountant should perform analytical procedure 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.
51
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
If an entity prepares its financial statements on its income tax basis, a note to the financial statements should describe the special-purpose framework.
52
An entity prepares its financial statements on its income tax basis. A description of how that basis differs from GAAP should be included in the:
An auditor may reissue an audit report; however, the auditor may become aware of an event that occurred subsequent to the date of the original report that requires adjustment or disclosure in the financial statements. In this situation, the auditor should make inquiries to determine how the information will affect the prior-year financial statements.
If an adjustment or disclosure is needed, the dating of the reissued report can be either of the following:
“Dual dating” allows for the disclosure of subsequent events. With dual dating, the auditor’s responsibility is limited to the specific event referred to in the note.
The auditor may date the report for a later date. In this case, the auditor’s responsibility for subsequent events extends to the date of the report, and subsequent event procedures should be extended to that date.
53
the risk of accessing control risk too high ?
The risk of assessing control risk too high is the risk that the assess level of control risk based on the sample is greater than the true operating effectiveness of the control. The risk of assessing control risk too low is the risk that the assessed level of control risk based on the sample is less than the true operating effectiveness of the control. The risk of incorrect acceptance is the chance that the statistical evidence might support fair statement of a materially misstated book value. The risk of incorrect rejection is the chance that the statistical evidence might fail to support fair statement of a correct book value.
Since the sampling results in this question were on tests of details, the risk would only be concerned with the risk of incorrect acceptance or the risk of incorrect rejection. The sample results concluded that the recorded balance was materially misstated, when in fact it was not materially misstated. This is an example of incorrect rejection.
54
what does section 404 include ?
Section 404 of Title IV of the Sarbanes-Oxley Act (SOX) dictates that each annual report filed with the SEC contain an internal control report. This report states the responsibility of management for establishing and maintaining an adequate internal control structure and procedures for financial reporting. It also includes an assessment of the effectiveness of the internal control structure and procedures.
55
what does section 402 include ?
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.
56
what does section 403 include ?
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.
57
what does section 406 include ?
Section 406 requires disclosure of whether or not the issuer had adopted a code of ethics for senior financial officers (and if not, why not). Any change in or waiver of this code requires disclosure as well.
58
If an auditor is obtaining an understanding of an issuer's information and communication component of internal control, which of the following factors should the auditor assess?
Internal controls consist of five interrelated components: control environment, risk assessment, information and communication, control activities, and monitoring.
Information and communication systems support the identification, capture, and exchange of information and consist of the procedures and records relevant to financial reporting objectives (including the accounting system). As such, the auditor should obtain sufficient knowledge of the information system to understand the following:
Significant classes of transactions in the entity’s operations
Manual and automated procedures by which transactions are initiated, authorized, recorded, processed, and reported in the financial statements
The related accounting records supporting information, and specific accounts in the financial statements involved in initiating, authorizing, recording, processing, and reporting transactions
The financial reporting process used to prepare the entity’s financial statements, including significant accounting estimates and disclosures
Controls surrounding journal entries
Assessing management’s integrity, ethical values, philosophy, and operating style are related to the control environment component, not information and communication.
59
An accountant who accepts an engagement to compile a financial projection most likely would make the client aware that the:
The practitioner's standard report on a compilation of prospective financial statements should include a statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the prospective financial statements or the assumptions.
The projection may be included in a document with audited historical financial statements. The practitioner does not have a responsibility to update the projection for future events and circumstances limited to one year. A financial forecast, not a projection, omits all hypothetical assumptions and presents the most likely future financial position.
60
the engagement letter of compilation include ?
objective of the compilation
no opinion or any form of assurance
Acknowledgment of management's representation and agreement that the financial statements are not to be used by third parties
61
what does analytical procedure include ?
comparable information for prior periods,
anticipated results (e.g., budgets or forecasts including extrapolations from interim or annual data),
relationships among elements of financial information within the period,
similar industry information (e.g., gross margin information), and
relationships of financial information with relevant nonfinancial information.
Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics is a procedure used to interpret the result of statistical sampling, and is not an analytical procedure.
62
ineffective general control by themselves..... ?
Ineffective general controls by themselves do not cause misstatements; however, they can permit application controls to operate improperly and allow misstatements to occur.
63
what does substantive analytical procedure applicable ?
Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time. Tests of details are more appropriate to obtain audit evidence regarding certain relevant assertions about account balances, including existence and valuation.
Analytical procedures can encompass the investigation of identified fluctuations and relationships that are inconsistent with other relevant information or deviate from significantly predicted amounts.
Data subject to audit testing in prior years and transactions subject to management decisions have no bearing on analytical procedures. The relationships involving balance sheet items are not predictable over time and do not have plausible relationships.
64
what does section 303 do ?
The Public Company Accounting Oversight Board (PCAOB) has the authority to enforce Section 303 of the Sarbanes-Oxley Act (SOX) in civil proceedings.
Although Section 303 gives the Securities and Exchange Commission (SEC) exclusive authority to enforce the section, in practice the PCAOB enforces compliance and levies civil monetary penalties while the SEC oversees the PCAOB's operations.
65
An audit client failed to maintain copies of its procedures manuals and organizational flowcharts. What should the auditor do in an audit of financial statements?
The auditor's workpapers must reflect that the auditor has performed risk assessment procedures to assess the risk of material misstatement both at the financial statement and relevant assertion levels. Risk assessment begins with obtaining an understanding of the entity and its environment. The auditor must document the sources of information from which the understanding was obtained.
Part of obtaining the understanding of the entity and its environment involves evaluating the design of internal controls and whether they have been implemented. For example, the auditor could create a flowchart for the workpapers that documents this understanding.
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.
66
what are some of the example of attribute sampling ?
An attribute is any characteristic that is either present or absent. In tests of controls, the presence or absence of evidence of the application of a specified control is sometimes referred to as an attribute (e.g., the proper approval by supervisors for a purchase order, in a credit sale, credit approval before the sale is initiated is the attribute or control condition of the credit sale). Absence of, or rate of occurrence of deviation from, the attribute is measured in tests of controls and used to determine whether a control is reliable.
The incorrect answer choices (making independent estimate of recorded payroll expense, determining all payables are recorded at year-end, and selecting accounts receivable for confirmation of account balances) are not examples of attribute testing.
67
when can the auditor perform substantive test of control in the interim date ?
An auditor may perform substantive procedures at an interim date, and she is more likely to do so for certain account balances and classes of transactions over others. The auditor would favor interim testing if:
the assessed risk of material misstatement is low,
the controls are strong,
the auditor can reduce the risk that misstatements that exist at the period-end are not detected by performing appropriate procedures, and
GAAS does not require testing at the balance sheet.
Travel and entertainment expenses are the only classes of transactions for which interim testing would increase the efficiency of the audit.
Subsequent events are those events that occur after the balance sheet date but before the date of the report, and they cannot be tested at an interim date. The search for unrecorded liabilities also must be performed as of the balance sheet date. The response from the attorney must cover the entire year under audit and would not be useful to the auditor if it were dated prior to the balance sheet date
68
what does section 404 do ?
Section 404 of the Sarbanes-Oxley Act of 2002 requires that the audit report attest to, and report on, the internal control assessment made by management. This internal control assessment will not be the subject of any other separate engagement.
69
the use of ratio estimation sampling technique is most effective when ?
The use of the ratio estimation sampling technique is most effective when the calculated audit amounts are approximately proportional to the client's book amounts. Ratio estimation takes the ratio of the mean of the sample audit values to the mean of the sample book values and applies it to the total book value. This would provide a valid statement about the total population if the calculated audit amounts are approximately proportional to the client's book amounts.
70
If a registered public accounting firm is in violation of any rule or regulation of the SEC or PCAOB:
they may not prepare or issue any audit report with respect to that issuer.
71
what should an auditor perform to obtain an understanding of the entity and its environment ?
the auditor should perform the following risk assessment procedures to obtain an understanding of the entity and its environment, including its internal control:
Inquiries of management and others within the entity
Analytical procedures
Observation and inspection
The auditor is not required to perform all the risk assessment procedures described above for each aspect of the understanding. However, all the risk assessment procedures should be performed by the auditor in the course of obtaining the required understanding. Confirmation of significant receivables is a substantive audit procedure. Monitoring is an element of an entity's internal control. Sampling is used in testing controls or in substantive tests.
72
Which of the following types of engagements is not permitted under the professional standards for reporting on an entity's compliance?
practitioner should not perform a review of an entity's compliance with requirements of specified laws, regulations, rules, contracts, or grants.
73
what is the differences between a deficiency, a significant deficiency and a material weakness ?
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.
74
what can auditor do to identify possible litigation, claims and assessments (LCA)?
The auditor should perform procedures to identify possible litigation, claims, and assessments (LCA) by:
discussing with management the policies and procedures that management uses for identifying, evaluating, and accounting for LCA;
obtaining a list of all LCA from management, along with assurance that all LCA have been disclosed; and
examining documents in the client's possession that would contain information concerning LCA.
The only answer choice that represents a source of information that could reveal outstanding litigation, claims, and assessments to the auditor is reading the file of correspondence from taxing authorities. In this file, the auditor may discover delinquent tax notices and substantial unpaid interest and penalties.
75
Title II of the Sarbanes-Oxley Act prohibits registered public accounting firms from providing certain nonaudit services. These services include all of the following
Title II of the Sarbanes-Oxley Act of 2002 specifically prohibits bookkeeping, financial information systems design and implementation, appraisal or valuation services, actuarial services, internal audit outsourcing, management functions, broker or dealer services, and legal services. Tax services are permissible, but must be preapproved by the audit committee.
76
procedure to conduct a review are usually limited to what ?
The process used by management to determine the balance for accrued wages would not be performed for a review engagement. Procedures for conducting a review of financial statements generally are limited to performing analytical procedures (e.g., comparing financial information with statements for comparable prior periods, giving consideration to known changes), 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. Written representations are required from management for all financial statements and periods covered by the accountant’s review report.
77
The objective of a review of interim financial information of an issuer is to provide an accountant with a basis for reporting whether:
The objective of a review of interim financial information of an issuer is to provide the CPA with a basis for reporting whether material modifications should be made to the interim information to comply with the applicable financial reporting framework.
78
what to do when you notice there is an unjustified accounting change and a material weakness ?
The auditor is required to state whether GAAP has been consistently applied. Inconsistency in the application of GAAP is a common reason for qualified opinions by auditors. Therefore, an unjustified accounting change would not result in an unmodified opinion with an emphasis-of-matter paragraph. Auditors are required to communicate material weaknesses in internal control to both company management and those charged with governance. However, this is done in a separate communication and is not included as an emphasis-of-matter paragraph to an unmodified opinion in the auditor's report.
79
According to the PCAOB, which of the following tax services may be provided jointly with the audit of an issuer's financial statements without impairing independence?
A registered public accounting firm is not independent of its audit client, or any affiliate of the firm, if during the audit and professional engagement period, the firm provides any nonaudit services to the audit client.
Only the answer choice "reviewing a proposed transaction and informing the client of the tax consequences" is allowed during the engagement period; otherwise, the registered public accounting firm would not be considered independent.
The other answer choices cannot be performed during the professional engagement period.
80
when an accountant is engaged to compile financial statement that omit all disclosure with no reference to basis but are otherwise in conformity with special purpose framework ?
When financial statements have been prepared on a comprehensive basis of accounting other than GAAP and omit substantially all disclosures, 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.”
81
in regard to perform concerning litigation, claim, and assessment, what would be the most likely audit procedure ?
“Management is responsible for adopting policies and procedures to identify, evaluate, and account for litigation, claims, and assessments as a basis for the preparation of financial statements, in accordance with the requirements of the applicable financial reporting framework” (AU-C 501.A41). Therefore, the audit procedure that an auditor most likely would perform concerning litigation, claims, and assessments would be to discuss with management its policies and procedures adopted for evaluating and accounting for litigation, claims, and assessments. Although a letter of inquiry to the client's lawyer is a primary means of obtaining corroborating evidence of litigation, claims, and assessments, the letter only asks the lawyer to evaluate the outcome and estimated range of potential loss of the asserted and unasserted claims as listed by management and to state whether there are any others management should list. The attorney is not asked if these claims represent a going concern problem, if they are recorded or disclosed in the financial statements, or if the auditor may examine the documents in the lawyer's possession.
82
when an auditor is requested to change from an audit to a compilation, what should auditor do ?
When requested to change from an audit to a compilation engagement, an auditor should consider the additional audit effort necessary to complete the audit and the reason management has requested the change. He should also consider what it will cost to complete the audit. If the reason to change the engagement is reasonably justified by Tech Resources, for example, because:
due to a change in circumstances, Tech no longer has a need for an audit, or
Tech misunderstood the nature of an audit.
Davis could issue a compilation report. However, the auditor should evaluate the propriety of the request if:
there is no reasonable justification for the change,
a scope restriction has been placed on the audit (and the related financial statement information), or
the audit procedures are substantially complete.
83
what do auditors do in the planning stage of an audit ?
in the planning stage of an audit: auditor would make a preliminary judgement about materiality
84
what do auditors do in the fieldwork stage of an audit?
during the fieldwork stage of an audit, the auditor would confirm a sample of the entity account payable with known creditors . also, obtain written representations from mangement that there are no unrecorded transactions
85
what does auditor do in the reporting stage of the audit ?
during the reporting stage of the audit, auditor would communicate management 's initial selection of accounting policies to the audit committee
86
does accountant need to limit the distribution of the report when doing the review ?
A review, while still an attest engagement, offers only limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. As a review does not offer the same level of assurance that an audit does, the requirements and procedures are different.
The review would involve asking about actions taken at board of directors' meetings, as well as obtaining an understanding of the client's business and utilizing inquiry and analytical procedures. It would not involve obtaining an understanding of internal control, assessing fraud risks, or testing accounting records (confirming accounts receivable balances). The accountant would not need to limit the distribution of the accountant's report.
87
In auditing an entity's computerized payroll transactions, an auditor would be least likely to use test data to test controls concerning:
Test data is introduced into the client's computer system and processed with the client's software in order to determine if specified controls are operating effectively. 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.
88
Section 409 of SOX Title IV, “Real Time Issuer Disclosures,” dictates dictate what ?
Section 409 of the Sarbanes-Oxley Act (SOX) dictates that issuers disclose to the public on a rapid and current basis any additional information concerning material changes in the financial condition or operations.
89
what is the definition of control risk ?
control risk is the risk that a material misstatement will not be prevented or detected on a timely basis by the client's internal controls
90
what is the definition of detection risk ?
The risk that the auditor will not detect a material misstatement
91
to express an unmodified opinion using an unmodified report covering single year financial statement.... ?
To express an unmodified opinion using an unmodified report covering single-year financial statements:
comparative financial statements are not presented—i.e., the prior year's financial statements audited by another CPA are not presented.
the prior report expresses an unmodified opinion.
A qualified opinion is issued when the auditor is unable to obtain an investee's audited financial statements (scope limitation), or a statement of cash flows is not presented (departure from an applicable financial reporting framework, although material, does not justify an adverse opinion). Comparability is not affected, since only single-year financial statements are presented.
92
how an auditor test of controls over the issuance of raw material to production ?
Material requisitions are received by the store's department for the purpose of issuing such materials to production. Thus, examining material requisitions and then re-performing client controls designed to process and record issuances is the best method to test controls.
93
what is an audit trail ? does it related to analytical purpose ?
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.
Other major reasons for an audit trail include:
monitoring the system and the data produced, and
answering queries by tracking a specific transaction through the accounting records or tracing a transaction back to the original source and observing how it is processed through the system.
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
94
what include in a analytical procedure ?
Analytical procedures evaluate significant ratios, operating statistics, and trends in financial data. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristic is a use of tests of details, not analytical procedures.
95
what is check digit verification ?
A check digit is a specific type of input control, consisting of a single digit at the end of an identification code that is computed from the other digits in a field. If the identification code is mis-keyed, a formula or algorithm will reveal that the check digit is not correct, and the field will not accept the entry.
In this situation, the difference is one digit at the end of an identification code (4 versus 5). Based on the algorithm or formula involved, the check digit verification process would have detected this error.
96
Under PCAOB Auditing Standard 1215, audit documentation should be retained no fewer than how many years following the report release date?
7 years
97
what are the seven type of circumstance that could lead to threat of independence from GAO ? Government accoutability office
The Government Accountability Office (GAO) has identified seven types of circumstances that could lead to threats of independence:
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Self-interest
Self-review
Bias
Familiarity
Undue influence
Management participation
Structural threats
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98
the written report under Government Auditing standard should include what ?
The reporting standards under Government Auditing Standards require that written audit reports should include weaknesses in internal control considered to be significant deficiencies; any indication of fraud, abuse, or noncompliance with laws and regulations; and significant violations of contracts or grant agreements.
99
the analytical procedure effectiveness depend on what ?
Analytical procedures may be effective and efficient tests for assertions in which potential misstatements would not be apparent from an examination of the detailed evidence or in which detailed evidence is not readily available. The expected effectiveness and efficiency of an analytical procedure in identifying potential misstatements depends on, among other things:
the nature of the assertion,
the plausibility and predictability of the relationship,
the availability and reliability of the data used to develop the expectation, and
the precision of the expectation.
100
An example of reporting on information accompanying the basic financial statements when the information has been subjected to auditing procedures follows
"Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The [identify accompanying supplementary information] is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole."
101
what consider consulting service ?
Advisory services, implementation services, and product services all fall within the broad category of “consulting services.” Such services are subject to the Statements of Standards for Consulting Services and also include consultations, transaction services, and staff and other support services.
102
in understanding the business rationale , the auditor should consider what ?
In understanding the business rationale, the auditor should consider the following:
Whether the form of such transactions is overly complex (for example, involves multiple entities within a consolidated group or unrelated third parties)
Whether management has discussed the nature of and accounting for such transactions with the audit committee or board of directors
Whether management is placing more emphasis on the need for a particular accounting treatment than on the underlying economics of the transaction
Whether transactions that involve unconsolidated related parties, including special purpose entities, have been properly reviewed and approved by the audit committee or board of directors
Whether the transactions involve previously unidentified related parties or parties that do not have the substance or the financial strength to support the transaction without assistance from the entity under audit
103
When there are numerous property and equipment transactions during the year, an auditor who plans to assess control risk at a low level usually performs
The assessed level of inherent and control risk is the level of risk that the auditor uses in determining the detection risk to accept for a financial statement assertion and, accordingly, in determining the nature, timing, and extent of substantive tests. For control risk, this level may vary along a range from maximum to minimum as long as the auditor has obtained audit evidence to support that assessed level. The lower the assessed level of control risk, the fewer substantive tests that will be needed. The assessed level of control risk is arrived at by compliance testing of controls. 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.
104
The written communication regarding significant deficiencies and material weaknesses identified during the audit of financial statements should:
include a statement that indicates the purpose of the auditor's consideration of internal control was 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.
105
in a review engagement, the accountant issue a report prepared in accordance with applicable standard... ?
In a review engagement, the accountant issues a report prepared in accordance with applicable standards—the Statements on Standards for Accounting and Review Services (SSARS). In this report the accountant indicates that the degree of responsibility assumed for the financial statements is to express limited, not reasonable, assurance regarding the financial statements. That is, the accountant does not express an opinion, but rather states, “Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles.”
106
the accountant would be required to perform analytical procedure designed to identify relationships that appear to be unusual in where ?
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.
107
how to classify "measurement and review of the entity financial performance ?
The control environment involves those factors that set the tone for the entire entity. In evaluating the entity's control environment, the auditor should consider the following elements and how they have been incorporated into the entity's processes:
Communication and enforcement of integrity and ethical values
Commitment to competence
Participation of those charged with governance
Management's philosophy and operating style
Organizational structure
Assignment of authority and responsibility
Human resource policies and practices
Measurements and review of the entity's financial performance would be classified as control activities.
108
what is record count ?
A record count is a total of the number of input documents to a process or the number of records processed in a run.
109
What is the most likely source of the following statement?
“Although we have not conducted a comprehensive, detailed search of our records, no other deposit or loan accounts have come to our attention except as noted below
A 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.
110
what auditor is not required to communicate with the audit committee ?
The auditor is not required to communicate with the audit committee regarding 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.
111
what is the purpose of segregation of duties ?
Tests regarding segregation of duties would be performed in order to determine control risk
112
judging the reasonableness of accounting estimate is what ?
Judging the reasonableness of accounting estimates would be a substantive procedure used to audit the assertion of valuation and allocation.
113
what auditor do to identify related party transaction?
Review confirmations of compensating balance arrangements for indications that balances are or were maintained for or by related parties.
114
what type of analytical procedure used in planning ?
Analytical procedures used in planning the audit may be helpful in identifying the existence of unusual transactions or events, and amounts, ratios, and trends that might indicate matters that have financial statement and audit implications. These procedures are usually performed at a high level; for example, comparing current-year to prior-year sales volumes
115
what type of analytical procedure used as substantive test ?
Ratio analysis, such as comparing the current-year ratio of aggregate salaries paid to the number of employees to the prior year's ratio, would be an example of an analytical procedure used as a substantive test (not one used during the planning phase of an audit). Reading the financial statements and considering the adequacy of evidence is not an analytical procedure. Analytical procedures rely on comparisons of recorded amounts, or ratios developed from recorded amounts, to expectations developed by the auditor. Reading the letter from the client's attorney is an important audit procedure, but it is not an analytical procedure.
116
what is CPA responsibility when undertaking a consulting service engagement ?
inform the client of significant reservations concerning the benefits of the engagement.
117
When an accountant issues to an underwriter a comfort letter containing comments on data that have not been audited, the underwriter most likely will receive:
negative assurance on capsule information
118
what is the primary focus of an auditor in the examination of liability ?
The primary focus of an auditor in the examination of liabilities (e.g., accounts payable) is to verify that all of the entity's liabilities have been recorded
119
auditor's engagement letter include what ? and doesnt include what?
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
120
what factors related to control activities impact an auditor's consideration of the effect of IT on internal control:
information processing, segregation of duties, physical control .
no impact factor: resolution of defiencies,
121
In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
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.
122
When the shipping department returns nonconforming goods to a vendor, the purchasing department should send to the accounting department the:
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.
123
A scope limitation sufficient to preclude an unmodified opinion always will result when management:
A scope limitation occurs when the auditor is not able to collect sufficient appropriate audit evidence to support an opinion regarding the financial statements being in conformity with GAAP. No scope limitation exists when auditors are limited in their activities but use alternative sources of information to support an opinion. When no alternatives are available, however, as when clients refuse to acknowledge their responsibility for the fair presentation of the financial statements in conformity with GAAP, the auditor cannot determine if the financial statements are in accordance with GAAP and cannot issue an unmodified opinion.
124
Section 104 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB) has t
Section 104 of the Sarbanes-Oxley Act (SOX) dictates that the Public Company Accounting Oversight Board (PCAOB) has the mandate and authority to conduct compliance inspections of each registered public accounting firm. Firms that audit more than 100 issuers are inspected annually. Firms that audit 100 or fewer issuers are inspected every three years.
125
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:
shipping document file
126
what is factual misstatement?
A factual misstatement would include the misstatements the auditor is able to identify within an audit. Inaccuracy in processing data and a misapplication of accounting principles would be considered factual misstatements.
A difference in management's and the auditor’s position would be a judgmental misstatement, not a factual misstatement. The difference is how management and the auditor are interpreting the information and the process. An opinion is not a factual idea or process, while a fact or number is known or factual.
127
the aditor express a disclaimer of opinion when ?
The auditor would express a disclaimer of opinion only in the event of scope limitations, which is not the case here.
128
if an accountant who is engaged to review financial statement become aware of a departure from the applicable financial reporting framework, the accountant should... ?
If an accountant who is engaged to review financial statements becomes aware of a departure from the applicable financial reporting framework, 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.
129
does the responsibility for noncompliance with laws and regulations by employees fall under the management?
A written management representation that management has made available all financial records and related data should be obtained by the auditor. The responsibility for noncompliance with laws and regulations by employees is not assumed by management. Sufficient appropriate audit evidence is obtained by the auditor in order to issue an opinion on the client's financial statements. The auditor reports any material weaknesses noted in internal control.
130
what is the purpose of when auditor do the walkthrough?
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.
131
Which of the following questions would an auditor most likely include on an internal control questionnaire for notes payable?
are direct borrowings on note payable authorized by board of director?
132
what is the definition of term "reasonable assurance"?
A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement
133
what is the objective of internal control for production cycle?
The production cycle is the period in which raw products and materials remain in the production process, from the beginning of manufacturing through the output of a finished product.
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.
134
as the number of allowable deviations increase, the sample size... ?
As the number of allowable deviations increases, the sample size decreases. Sample size increases as the expected population deviation rate increases.
135
Identifying entries posted to incorrect accounts use what type of sampling?
Attribute sampling is used for tests of controls. This type of sampling answers the question of “how many,” and the auditor would be looking for the appearance (or absence) of a specific characteristic. To estimate amounts, evaluate the reasonableness of a number in the financial statements, or select a sample of receivables for confirmation, the auditor would use substantive procedures. The only answer choice dealing with tests of controls is “identifying entries posted to incorrect accounts.”
136
Which of the following should an auditor do when control risk is assessed at the maximum level?
document the assessment
137
Other procedures which aid in understanding the client's business in planning the audit include?
review prior year working paper and the permanent file for the client
inquiring about current business development
reading curr year interm financial statement
considering the effect of applicable accounting and auditing pronouncement
138
An internal auditor's work would most likely affect the nature, timing, and extent of an independent CPA's auditing procedures when the internal auditor's work relates to assertions about the:
An internal auditor's work may affect the nature, timing, and extent of an independent auditor. AU-C 610.22 states: "In making judgments about the extent of the effect of the internal auditors' work on the auditors' procedures, the auditor considers:
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"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.
"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.
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139
how to find the projected error?
In probability-proportional-to-size sampling, the projected error is equal to the actual sample error when the book value of the item sampled is equal or greater than the sampling interval. In this instance, 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.
140
A nonissuer engaged a practitioner to perform agreed-upon procedures on specified matters. The date of the practitioner's report would ordinarily be determined by the occurrence of which of the following events?
the completion of the agreed upon procedure
141
CPA firm should establish procedures for conducting and supervising work at all organizational levels to provide reasonable assurance that the work performed meets the firm's standards of quality. To achieve this goal, the firm most likely would establish procedures for:
Conducting and supervising work at all organizational levels includes reviewing the work that has been completed by the audit team. This would include working papers and reports. Client relationships, independence rules, and personnel files are supervised, but are not associated with the actual work performed on an audit.
142
so auditor engage in a review, discovered that the company is noncompliance with law and regulation, wut to do ?
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. AR-C 90.51 states, “If the fraud or noncompliance with laws or regulations involves senior management or results in a material misstatement of the financial statements, the accountant should communicate the matter directly to those charged with governance…the accountant should consider the need to obtain legal advice and take appropriate action, including potential withdrawal."
Reviews do not provide opinions; the other answer choices are not appropriate for this type of engagement.
143
In obtaining written representations from management, materiality limits ordinarily would apply to representations related to:
amounts concerning related party transaction
144
To obtain evidence that online access controls are properly functioning, an auditor most likely would:
Access controls are designed to limit the use of the system and the entry to files of authorized persons. To test that online access controls are properly functioning, the auditor would enter invalid identification numbers or passwords to ascertain whether the system rejects them, thereby denying access.
145
who is not regulator?
IRS is not regulator
146
who are regulators?
state insurance and utility regulator
health care authority
Federal agencies such as the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the Department of Housing and Urban Development, the Department of Labor, and the Rural Electrification Administration
147
when is a compilation report required?
A compilation report is only required whenever the accountant is engaged to subject the financial statements to compilation procedures.
148
When performing a substantive test of a random sample of cash disbursements, an auditor is supplied with a photocopy of vendor invoices supporting the disbursements for one particular vendor rather than the original invoices. The auditor is told that the vendor's original invoices have been misplaced. What should the auditor do in response to this situation?
The reliability of audit evidence is influenced by its source and by its nature and is dependent on the individual circumstances under which it is obtained. Internally generated audit evidence, as with the photocopies, is more reliable when the related controls imposed by the entity are effective. Reevaluating the risk of fraud and designing alternate tests will help the auditor determine the reliability of the audit evidence. Increasing the number of items tested does not increase the reliability because the evidence for one vendor is still photocopies and counting the document as a misstatement may not be a valid classification.
149
The auditor's report is required to 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).
why ?
The auditor's report is required to 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 is to prevent misunderstanding the degree of responsibility the auditor is assuming when the auditor's name is associated with financial statements.
150
Reporting standards for financial audits under Government Auditing Standards (the “Yellow Book”) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:
the auditor is not required to provide positive assurance regarding a specific control activity (such as segregation of duties), provide negative assurance regarding intentional override of internal controls (an audit provides reasonable assurance), or describe the scope of the substantive tests. The auditor would, however, present the results of the tests of controls in the form of an opinion on the operating effectiveness of internal control over financial reporting.
151
With respect to Auditing Standards and Ethics and Independence Rules, the PCAOB:
In addition to adopting some rules from the AICPA and Auditing Standards Board (ASB), the Public Company Accounting Oversight Board has adopted its own rules regarding auditing standards, ethics, and independence.
152
what is the advantage of statistical sampling over nonstatistical sampling ?
Because the auditor is able to measure and control the sampling risk, the auditor is able to measure the sufficiency of the audit evidence obtained.
153
In determining the effectiveness of an entity's policies and procedures relating to the existence assertion for payroll transactions, an auditor most likely would inquire about and:
In payroll transactions, existence refers to the existence of valid employees being paid for authorized business activity only. Employment and timekeeping are personnel functions. The easiest way to pay a fictitious employee or to pay an employee for unauthorized time is to have no separation between employment/timekeeping duties and the payroll disbursement duty. In determining the effectiveness of an entity's policies and procedures relating to the existence assertion for payroll transactions, an auditor most likely would inquire about and observe the segregation of duties concerning personnel responsibilities and payroll disbursement.
154
General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General's request provided the omission is clearly indicated in Ford's report and the:
The accountant may compile financial statements that omit substantially all disclosures if the omission is not undertaken with the intention of misleading those who might reasonably be expected to use the financial statements. In addition, the accountant must include a paragraph in the compilation report with the following elements:
A statement that management has elected to omit substantially all disclosures
A statement that if the omitted disclosures were included, they might influence the user's conclusions
A statement that, accordingly, the financial statements are not designed for those who are not informed about such matters
155
the auditor should apply what procedures to required supplementary information?
The auditor should apply the following procedures to required supplementary information:
Make inquiries of management regarding the measurement and presentation of the information (Was it according to specified guidelines? Were there any changes from the way it was prepared in previous years? What are the significant assumptions underlying the preparation?)
Compare the information for consistency with management's responses to the inquiries, the audited financial statements, and other knowledge obtained during the audit
Consider adding the supplementary information to management's representations
Apply any other prescribed additional procedures (which would vary according to the specific type of supplementary information)
156
fraudulent financial reporting is committed by who ?
Fraudulent financial reporting is usually committed by management to deceive financial statement users. Employees are most often involved in fraudulent activities related to misappropriation of assets.
157
testing that all inventory on hand is reflected in the ending inventory is wut assertion ?
Testing that all inventory on hand is reflected in the ending inventory balance is an example of the completeness assertion. That the entity has rights to the inventory is an example of the rights and obligations assertion. Inventory is properly valued is an example of the valuation assertion. Inventory is properly presented in the financial statements is an example of the accuracy and valuation assertion.
158
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's:
Before accepting an engagement, a successor auditor is required to, with client permission, make inquiries of the predecessor auditor. The successor auditor should also request that the client authorize the predecessor auditor to allow a review of the predecessor auditor's working papers. It is not necessary to review the engagement letter.
159
After assessing control risk below the maximum level, an auditor desires to seek a further reduction in the assessed level of control risk. At this time, the auditor would consider whether:
If a further reduction in the assessed level of control risk is desired for some assertions, the auditor should consider whether it is likely that additional audit evidence could be obtained to support a lower assessed level of control risk for these assertions.
The other three answer choices relate to the preliminary understanding of internal controls, not to the testing of controls to obtain sufficient appropriate audit evidence that controls are operating effectively (and thus reduce the assessed level of control risk and risk of material misstatement)
160
wut nonaudit service that a registered public accounting firm may engage in ?
A registered public accounting firm may engage in any nonaudit service, including tax services, but only if the activity is approved in advance by the issuer's audit committee. Preapproval must follow certain requirements (outlined in Section 202 of Sarbanes-Oxley Act of 2002).
161
what a compilation include ?
At the minimum, a compilation documentation should include:
the engagement letter,
a copy of the financial statements, and
a copy of the accountant's report
162
Analytical procedures used in the planning phase of an audit should focus on:
enhancing the auditor's understanding of the transactions and events that have occurred since the last audit.
163
government auditting standard require what ?
Government Auditing Standards require that the financial and compliance audit report include any findings of noncompliance with laws and regulations as well as a report on the study and evaluation of internal controls
164
what auditor do when performing a search for unrecorded retirement of fixed assets ?
In performing a search for unrecorded retirements of fixed assets, an auditor would first review those client's records that indicated the existence of fixed assets and then, knowing what fixed assets were claimed to be in existence, would attempt to verify their existence by physical observation. The property ledger and the insurance and tax records would all be records that would indicate the existence of fixed assets. A tour of the client's facilities would be the best way to verify the existence of fixed assets by physical observation. If an asset that was listed on the client's records failed to be found, this would indicate an unrecorded retirement of fixed assets.
165
substantive test of payroll should be extended when ?
Substantive tests of payroll should be extended when overpayments are discovered in performing tests of details. Since the auditor has substantial doubts concerning the validity of payroll transactions, he should obtain additional audit evidence to remove this doubt. When payroll is extensively audited by the state government, the auditor may consider a higher acceptable level of detection risk (i.e., fewer substantive tests). The fact that payroll expense is substantially higher than in the prior year and that employees complain about too much overtime does not necessarily result in material misstatements of payroll expense.
166
what is the definition of inherent risk ?
Inherent risk (IR) is the susceptibility of a relevant assertion to a misstatement that could be material, assuming that there are no related controls. The auditor would be looking for situations such as accounts that are more susceptible to misstatement or theft, complex calculations, amounts derived from accounting estimates, and business risks arising from outside the entity.
167
what is the definition of control risk ?
The risk that the internal control system will not detect a material misstatement of a financial statement assertion is control risk (CR). The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion is detection risk (DR). The independent auditor is not concerned with the internal audit department's risk of objectivity when reporting a misstatement to the audit committee.
168
When assessing internal auditors' objectivity, an independent auditor should:
consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.
169
Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
To identify unrecorded trade accounts payable, the auditor should review subsequent cash disbursements to determine whether the related payables apply to the prior period. Using subsequent transactions provides evidence about conditions that existed at the balance sheet date. Using recorded accounts payable would not discover unrecorded accounts payable. For example, matching recorded accounts payable to receiving reports would provide evidence that the items were received. Unusual relationships between monthly accounts payable balances and recorded cash payments would be difficult to define, since the timing of payments varies according to credit terms and the availability of cash. In the normal course of accounts payable processing, items billed and received prior to the balance sheet date are recorded as payables.
170
attribute sampling vs variable sampling
Attribute sampling is used to estimate the rate of occurrence of a specific attribute in a population. Two common types of attribute sampling are testing correct account distributions and adequate supporting documentation. Account distributions would include cash disbursements.
Attribute sampling is used primarily for tests of controls, whereas variable sampling is most used as a substantive test.
Variable sampling is used when the auditor wants to reach a conclusion about a population in terms of dollar amount.
Stratified sampling is dividing the population into relatively homogeneous groups (layers). It is a sample selection strategy that increases the efficiency and coverage of dollar amounts in audit sampling and is used when the population is highly variable (high standard deviation).
171
Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet?
Observe the consistency of the employees' use of cash registers and tapes.
172
the objective of the auditor is to obtain what audit evidence?
“The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement through designing and implementing appropriate responses to those risks.”
Appropriateness refers to the quality of audit evidence—whether or not it is reliable and relevant.
173
Financial statements of a nonissuer compiled without audit or review by an accountant should be accompanied by a report stating that:
the accountant does not express an opinion or any other form of assurance on the financial statements.
174
analytical procedure evaluate what ?
Analytical procedures evaluate significant ratios, operating statistics, and trends in financial data. Projecting an error rate by comparing the results of a statistical sample with the actual population characteristic is a use of tests of details, not analytical procedures.
175
After considering management's plans, an auditor concludes that there is substantial doubt about a client's ability to continue as a going concern for a reasonable period of time. The auditor's responsibility includes:
considering the adequacy of disclosure about the client's possible inability to continue as a going concern.
176
When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:
number of shares issued and outstanding.
177
Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?
appropriate level of management
178
When auditing an entity's financial statements in accordance with Government Auditing Standards, an auditor should prepare a written report on the auditor's:
consideration of internal control
179
Effective policies and procedures ask that the auditor adequately plan the work and properly supervise any assistants. These policies and procedures are ordinarily interpreted to require:
critical review of the judgment exercised at every level of supervision.
180
When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy's absence most likely indicates the possibility of:
The absence of the original insurance policy on plant equipment most likely indicates the existence of a lien on the plant equipment. The lienholder has likely taken possession of the policy to verify appropriate insurance coverage as a protection to the lienholder.
181
the auditor is not required to determine what ?
The auditor is not required to determine the operating effectiveness, i.e., to search for significant deficiencies, during this phase.
182
the auditor is not required to determine what ?
The auditor is not required to determine the operating effectiveness, i.e., to search for significant deficiencies, during this phase.
183
what is a structural threat ?
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.
184
what you do in initial planning vs during the audit?
intinal planning: determine the internal audit involvement
| during the audit: get written representation letter, exam document to detect noncompliance , check the estimates
185
when asking questions for note payable , what to look for?
look for these elements: authorization, segregation of duties, safeguarding/physical control, asset accountability/information processing, performance review
Example:
Are direct borrowings on notes payable authorized by the board of directors?
186
what are some of the IT risk?
IT systems pose certain risks in an entity’s internal control system. Such risks can include the following:
Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both
Unauthorized access to data that may result in destruction of data or improper changes to data
Possibility of IT personnel gaining access privileges beyond those necessary to perform assigned duties
Unauthorized changes to data in master files
Failure to make necessary changes to systems or programs
Inappropriate manual intervention
Potential loss of data or inability to access data as required.
A system where documentation of transactions will be retained for only a short time represents one of the risks listed above for IT systems. The best way to obtain an understanding that internal controls are properly in place and implemented correctly would be to test during interim dates before the data is lost or cannot be accessed.
187
when an auditor qualified his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate what?
When an auditor qualifies his or her opinion because of a scope limitation, the wording in the opinion paragraph should indicate that the qualification pertains to the possible effects on the financial statements and not to the scope limitation itself.
188
what is an example of reporting on information accompanying the basic statement ?
An example of reporting on information accompanying the basic financial statements when the information has been subjected to auditing procedures follows (AU-C 725.A17):
"Our audit was conducted for the purpose of forming an opinion on the financial statements as a whole. The [identify accompanying supplementary information] is presented for purposes of additional analysis and is not a required part of the financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated in all material respects in relation to the financial statements as a whole."
189
When an accountant compiles projected financial statements, the accountant's report should include a separate paragraph that:
A compilation of projected financial statements describes the limitations on the usefulness of the projection by including a caveat that the prospective results may not be achieved.
A compilation of projected financial statements disclaims any assurance on the projected financial statements, not on historical financial statements. In other words, no assurance is provided in a compilation of projected financial statements.
An examination, not a compilation, of projected financial statements evaluates the hypothetical assumptions used to prepare the projection.
190
Which of the following would an auditor ordinarily consider the greatest risk regarding an entity’s use of electronic data interchange (EDI)?
improper distribution of EDI transactions
191
what is limit test and validity check test ?
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.
192
Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?
The determination of the auditability of an entity is one of the first matters the auditor considers in the initial planning for an audit engagement and before accepting it. One of the requisites of auditability is the availability of adequate, i.e., sufficient, reliable accounting records. Without adequate accounting records, auditors may not be able to obtain sufficient appropriate audit evidence to support an opinion on the entity's financial statements.
In planning the audit, the auditor considers the methods used by the entity to accumulate, process, and review accounting information because such methods influence the design of internal control, another critical audit concern.
The other answer choices—the complexity of the accounting system, the existence of related party transactions, and the operating effectiveness of controls—relate more to the auditor's consideration of the nature, timing, and extent of audit procedures that will be required (e.g., whether any extension or modification of audit testing will be necessary).
193
analytical procedures are required when?
Analytical procedures are required in two phases in all audits:
At the initial planning as part of the risk assessment procedures required in the audit, which also include inquiries of management and others, and observation and inspection. These procedures help the auditor in planning the nature, extent, and timing of audit procedures.
As an overall review near the end of the audit to assist the auditor in forming an overall conclusion on whether the financial statements are consistent with the understanding of the entity
The auditor may use analytical procedures as substantive procedures to obtain audit evidence, but it is not required by auditing standards. Tests of balances is such a procedure.
194
To gain assurances that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace:
To gain assurance that all inventory items in a client's inventory listing schedule are valid, an auditor most likely would trace items from the document he or she wished to validate back to evidence that the items exist. In this case, the document the auditor wishes to validate is the inventory listing schedule. Therefore, the auditor would 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.
195
materiality level are
Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements.
analytical procedure performed during audit review do not affect materiality
materiality used in evaluating audit findings should be the same amount used in audit planning
196
the auditors are not responsible for reporting
ordinarily responsible for reporting fraud or noncompliance with laws and regulations to a party other than the entity's senior management. Specific exceptions are provided for audits of entities that receive financial assistance from a government agency (AU-C 240.A72, AU-C 250.05). In the event that the auditor reports the misappropriation of assets to the entity's governing body and the governing body fails to report to the federal inspector general, the auditor would likely be required to report the event directly to the federal inspector general.
197
possible error is what
This interval is called a precision interval since it provides a range with some precision in which the true population value is likely to fall given a specified confidence level.
198
The client's financial reporting includes supplementary financial information outside the basic financial statements but required by the Financial Accounting Standards Board (FASB). Which of the following statements is correct regarding the auditor's responsibility for this supplementary financial information
the auditor should perform liimited procedure
the auditor should report supplementary information either in an other matter paragraph in the report on financial statement or in a separate report on the supplementary information
199
In evaluating the reasonableness of an estimate, the auditor normally concentrates on key factors and assumptions that are:
In evaluating the reasonableness of an estimate, the auditor normally concentrates on key factors and assumptions that are:
significant to the accounting estimate,
sensitive to variations,
deviations from historical patterns, and
subject and susceptible to misstatement and bias.
200
Nile, CPA, on completing an audit, was asked by the client to provide technical assistance in integrating a new IT system. The set of pronouncements designed to guide Nile in this engagement is the Statement(s) on:
When performing any kind of engagement or service for a client, it is important to determine what kind of services are being provided in order to determine what standards to follow. 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.
201
The primary responsibility of a bank acting as registrar of capital stock is to:
The purpose of a registrar is to keep records of outstanding stock certificates for an issuer. Therefore, the primary purpose of a bank acting as a registrar would be to verify that outstanding stock certificates are issued with the authorization of the board of directors and the articles of incorporation.
The registrar (physical custody) would have no decision in the declaration of dividends (authorization); would not have access to accounting records, such as a subsidiary ledger (information processing); and would not be involved in management decisions concerning mergers, acquisitions, and the sale of stock (authorization).
202
Which of the following procedures would an auditor least likely perform before the balance sheet date?
confirmation of account payable because Of the procedures listed, the one least likely to be performed before the balance sheet date would be the procedure that is attempting to verify the dollar value of an asset or a liability. Procedures that evaluate processes and procedures or are attempts to better understand the client's business and accounting environment may be effectively done at times other than the balance sheet date. Therefore, the procedure that an auditor would least likely perform before the balance sheet date would be confirmation of accounts payable.
203
Which of the following statements is correct concerning an auditor's use of the work of an actuary in assessing a client's pension obligations?
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.
The appropriateness and reasonableness of the specialist's assumptions are the responsibility of the specialist, not the auditor. The auditor (not the client) determines if hiring a specialist is appropriate, as it is the auditor who must support his opinion with audit evidence. If the specialist has a relationship with the client, the auditor should assess the risk that the specialist's objectivity may be impaired (the client may have the ability to influence the specialist). The work of a specialist that has a relationship with the client may still be acceptable under certain circumstances.
204
encryption performed by physically secure hardware devices is more secure than what?
Encryption performed by physically secure hardware devices is more secure than encryption performed by software, and helps prevent unauthorized access to data and the possibility of IT personnel gaining access privileges
205
the auditor include waht in the audit documentation?
"The auditor should include in the audit documentation:
"the amount below which misstatements would be regarded as clearly trivial;
"all misstatements accumulated during the audit and whether they have been corrected; and
"the auditor's conclusion about whether uncorrected misstatements are material, individually or in aggregate...."
206
if an auditor is unable to apply all necessary audit procedure he or she consider necessary regardless of the reason....
If an auditor is unable to apply all necessary audit procedures he or she considers necessary, regardless of the reason, a scope limitation has occurred. In the case where an auditor is unable to verify beginning balances because he was hired at some point during the year being audited, then those accounts which are measured over a period of time (such as revenues and expenses) cannot be verified. The auditor may not issue an opinion on the income statement and statement of cash flows for this period. However, the auditor would be able to express an opinion on the balance sheet since it is dated on the last day of the period.
207
what is performance materiality
"Performance materiality. The amount or amounts set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable, performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level or levels for particular classes of transactions, account balances, or disclosures."
Test of controls may or may not determine any misstatements. Performance materiality is often used in analytical procedures to investigate significant differences in current-year and prior-year comparison information. Tolerable misstatement is the application of performance materiality to a particular sampling procedure (AU-C 320.A2).
208
In evaluating controls over cash disbursements, an auditor most likely would determine that the control risk is lower when the person who signs checks also:
is responsible for mailing the check.
To prevent a check from being misdirected, the person who signs checks should also mail the checks. This prevents someone from intercepting and misdirecting a check made either to a fictitious payee/addressee or to a real payee but for a fictitious amount or purpose. In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks is also responsible for mailing the checks. This arrangement represents appropriate segregation of duties.
209
Interpretation No. 1 to AU-C 230, Audit Documentation, entitled “Providing Access to or Copies of Audit Documentation to a Regulator,” contains guidance relating to providing access to or copies of audit documentation to a regulator. Under what circumstances does this apply to an attestation engagement?
In all cases; however, the letter to the regulator should outline the purpose of the regulatory request as understood by the practitioner
210
If an auditor performing an integrated audit identifies one or more material weaknesses in a nonissuer's internal control, the auditor should:
express an adverse opinion on the entity's internal control.
211
Which of the following internal control procedures most likely would be used to maintain accurate inventory records?
Periodic inventory counts are used to adjust the perpetual inventory records.
212
Which of the following is the primary objective of probability proportional to sample size?
To identify overstatement errors
213
Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures?
Detection risk is the risk that the auditor will not detect a misstatement that exists in a relevant assertion that could be material, either individually or when aggregated with other misstatements. Detection risk relates to the substantive audit procedures and is managed by the auditor’s response to risk of material misstatement. The risk of material misstatement and detection risk are inversely related. If the risk of material misstatement increases, the auditor decreases the acceptable level of detection risk. In other words, the auditor is not willing to accept the risk that she or he will not detect a material misstatement. The auditor would plan to perform more substantive procedures to find the material misstatements.
214
An auditor's report on financial statements of a regulated entity prepared in accordance with provisions of a government regulatory agency to whose jurisdiction the entity is subject should be issued by an auditor only if:
the financial statements are intended solely for filing with one or more regulatory agencies to whose jurisdiction the entity is subject.
215
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
In order to obtain evidence about subsequent events, the auditor would be interested in events occurring after year-end but before the date of the auditor's report that would have a material effect on the financial statements. Only one of these choices represents a procedure that would uncover an event after the balance sheet date that could potentially have a material effect. Generally accepted auditing standards (GAAS) suggest that, as part of the subsequent-period auditing procedures, 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.
216
In May 20X3, an auditor reissues the auditor's report on the 20X1 financial statements at a continuing client's request. The 20X1 financial statements are not restated, and the auditor does not revise the wording of the report. The auditor should:
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. Dual dating is used when a subsequent event occurs after the date of the report, but the report has not been issued. The subsequent event is disclosed in the financial statements, and the auditor's report also includes the date of the subsequent event. Using the reissued report release date, or the current-period auditor's report date, would extend the auditor's responsibility for subsequent events to that date.
217
client maintains perpetual inventory records in both quantities and dollars. If the assessed level of inherent and control risk is high, an auditor would probably:
Because the assessed level of control risk over the client's perpetual inventory records is high, the auditor would not rely on the records. Rather, the auditor would request the client to schedule the physical inventory count at the end of the year. 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
218
What is an auditor's responsibility for supplementary information, such as the disclosure of pension information, which is outside the basic financial statements but required by the GASB?
The auditor has an obligation to apply limited procedures to and report deficiencies in the required supplementary information (RSI), as the information is considered by the Government Accounting Standards Board (GASB) to be an essential part of the financial reporting package. The CPA should inquire of management and consider if the information is consistent with the audited financials and other information obtained during the audit. The auditor should also consider whether or not the RSI should be covered in the representation letter from management. There is no need to apply substantive tests of transactions to the supplementary information.
219
When reporting on an entity's internal control over financial reporting for an issuer, the auditor may choose to issue which of the following?
The auditor may choose to 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) or separate reports on the company's financial statements and on internal control over financial reporting."
220
An auditor is engaged to report on selected financial data that are included in a client-prepared document containing audited financial statements. Under these circumstances, the report on the selected data should:
If the auditor is engaged to report on the selected financial data, the auditor's report should be limited to data that are derived from audited financial statements (which may include data that are calculated from amounts presented in the financial statements, such as working capital).
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.
221
Which of the following control activities most likely would reduce the risk of diversion of customer receipts by an entity's employees?
A system that would be most effective in reducing the risk of diversion of customer receipts by an entity's employees is one that would remove the necessity for employees to handle customer receipts. A bank lockbox system is such a system. A lockbox is a cash management system whereby a company's customers mail payments directly to the company's bank or to a post office box near the company's bank, and the bank collects the checks from the lockbox. The employees of the company never touch the customer receipts. This type of control activity is a physical control. It is designed to prevent fraud.
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.
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.
222
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
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.
223
Which of the following procedures most likely would assist an auditor to identify litigation, claims, and assessments?
The auditor should perform procedures to identify possible litigation, claims, and assessments (LCA) by:
discussing with management the policies and procedures that management uses for identifying, evaluating, and accounting for LCA;
obtaining a list of all LCA from management, along with assurance that all LCA have been disclosed; and
examining documents in the client's possession that would contain information concerning LCA.
The only answer choice that represents a source of information that could reveal outstanding litigation, claims, and assessments to the auditor is reading the file of correspondence from taxing authorities. In this file, the auditor may discover delinquent tax notices and substantial unpaid interest and penalties.
224
An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to:
measure the sufficiency of the audit evidence obtained
225
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?
Investigate changes in long-term debt occurring after year-end
226
What is the most likely source of the following statement as an emphasis of matter?
“The Company has suffered recurring losses from operations and has a net capital deficiency that raises substantial doubt about its ability to continue as a going concern.”
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
227
Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements?
The results of an analytical procedure disclose unexpected differences.
228
examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement.
Intercompany transactions and large revenue transactions at period-end are examples of nonroutine or nonsystemic transactions that may indicate a risk of material misstatement.
229
A CPA is permitted to accept a separate engagement (not in conjunction with an audit of financial statements) to audit an entity's:
schedule of accounts receivable and schedule of royalties.
230
PCAOB require the registered public accounting firm to describe in writings what ?
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.
231
In which of the following circumstances would a covered member's independence be impaired with respect to a nonissuer client?
According to the AICPA Code of Professional Conduct, independence will be impaired if, during the period of the professional engagement, a covered member had or was committed to acquire any direct or material indirect financial interest in the client. Although the bonds are not material in relation to the member's total wealth, independence is still impaired because the ownership of the bonds represents a direct financial interest in the client.
Independence is not violated if a member is designated to serve as guardian of a friend's children if the need arises, and the friend's estate, which would be held in trust for the children because the member is the children's guardian, but is not a trustee of the estate held in trust for the children.
Independence is not impaired by membership in a client credit union.
According to an AICPA ethics ruling, as long as the membership in the golf club is essentially a social matter, the covered member's association with the golf club would not impair independence because the debt ownership is not considered to be a direct financial interest.
232
Under the Sarbanes-Oxley Act of 2002, exactly how many consecutive years may an audit partner lead an audit for an issuer?
5 years
233
How should differences of opinion between the engagement partner and the quality control reviewer be resolved?
by following the firm policies and procedures
234
Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
Assessing the allowance for uncollectible accounts for reasonableness
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.
235
fraud risk factors may come to auditor attention when?
Fraud risk factors may come to the auditor's attention:
while performing procedures relating to acceptance and continuance of clients (e.g., management's integrity may be called into question, or the relationship between management and the predecessor auditor may be strained),
during engagement planning or obtaining an understanding of an entity's internal control (e.g., management may have a disregard for internal control, or supervisors may foster ill will among the employees), or
while conducting fieldwork (e.g., the auditor may find unusual journal entries close to year-end, or confirmations from customers may not match information in the financial records).
236
what does the permanent workpaper file of the auditor contain ?
The permanent workpaper file of the auditor should contain items that remain relatively unchanged from year to year. Analysis of capital stock and other owner's equity accounts represent accounts which have very few transactions each year and would be appropriate for the permanent file.
237
An auditor may report on condensed financial statements that are derived from complete audited financial statements if the:
auditor indicates whether the information in the condensed financial statements is fairly stated in all material respects.
238
how does proper approval of overtime by supervisor relate to the accuracy and completeness of a computer program?
The proper approval of overtime by supervisors does not relate to the accuracy and completeness of a computer program.
239
what does payroll control objective include?
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.
240
When performing analytical procedures in the planning stage, the auditor most likely would develop expectations by reviewing which of the following sources of information?
Analytical procedures applied during the planning stage would help enhance the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date. The auditor would also be scanning for areas that may represent specific risks relevant to the audit. The best answer choice to assist the auditor with planning would be to perform analytical procedures on the unaudited information from internal quarterly reports.
Account assertions, comments on the management letter, and the control risk assessment would be addressed in later phases of the audit.
241
The following information pertains to Ali Corp. as of and for the year ended December 31, 20X1:
Liabilities $ 60,000
Stockholders' equity $500,000
Shares of common stock issued and outstanding 10,000
Net income $ 30,000
During 20X1, Ali's officers exercised stock options for 1,000 shares of stock at an option price of $8 per share. What was the effect of exercising the stock options?
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.
242
Which of the following circumstances would ordinarily preclude a CPA from issuing a review or a compilation report on the financial statements of a nonissuer client that had originally engaged the CPA to perform an audit?
The CPA has been prohibited by the client from corresponding with the entity's legal counsel.
The entity refuses to provide the CPA with a signed representation letter.
When a client refuses to allow correspondence with legal counsel (a required procedure for an audit) or to provide a representation letter (a required procedure for both an audit and a review), the accountant cannot ignore that there may be reasons behind the client's refusal to cooperate. SSARSs ordinarily preclude the accountant from downgrading the engagement under these circumstances.
243
Which of the following factors would least likely affect the quantity and content of an auditor’s working papers?
Management's representation letter is issued by an auditor's client to the auditor in writing as an artifact of audit evidence. The letter only complements the other auditing procedures. Since it is only a complement and not the actual evidence, the auditor will rely on client records, assessed risk of material misstatement, and the nature of the auditor’s report over the content of the representation letter.
244
Which of the following is the date through which subsequent events review procedures should be performed when an auditor is complying with AU-C 945, Auditor Involvement with Exempt Offering Documents?
At or shortly before the date of distribution, circulation, or submission of the exempt offering document
245
when the disclaimer of opinion is used?
The auditor would probably issue a disclaimer of opinion, which is no opinion at all. A disclaimer is normally issued when the auditor has not performed an audit sufficient in scope to enable the auditor to form an opinion on the financial statements. A client creates a material scope limitation by refusing to permit inquiry of outside legal counsel. Most likely, this scope limitation would be significant enough to disclaim, rather than qualify, the opinion.
The auditor is not permitted to issue an unmodified opinion when a material scope limitation exists. An adverse opinion would only be issued due to a sufficiently material departure from an applicable financial reporting framework.
246
what is top down approach?
The top-down approach describes the auditor's sequential thought process in identifying risks and the controls to test, not necessarily the order in which the auditor will actually perform the auditing procedures. Public Company Accounting Oversight Board (PCAOB) Auditing Standard 2201, An Audit of Internal Control Over Financial Reporting That Is Integrated with an Audit of Financial Statements, states: “The auditor should use a top-down approach to the audit of internal control over financial reporting to select the controls to test. 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.
247
If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
A recession is a period in time during which the gross domestic product (GDP) decreases. The GDP is the value of all the reported goods and services produced by people and institutions operating in a country. This means that demand for goods has decreased and unemployment is usually higher (due to layoffs). People and businesses may have difficulty paying their debts during a recession. The auditor would expect to see the entity adjusting its allowance for doubtful accounts due to the assumption that more of the accounts receivable will be uncollectible.
The auditor would not necessarily expect to see more customers returning purchased items (purchase returns and allowances). Although the market value of the entity's common stock may drop, the auditor would not necessarily expect to see a change in the common stock account. A noncontrolling interest in a subsidiary would be recorded as an available-for-sale equity security (an asset). This investment is not adjusted for the gains and losses experienced by the subsidiary. Therefore, the auditor would not expect to see this number change.
248
In an audit of management's assessment of the effectiveness of internal control over financial reporting that is integrated with an audit of the financial statements, an auditor should issue an adverse opinion on the effectiveness of an entity's internal control in which of the following situations?
existence of a material weakness in internal control results in an adverse opinion. The statement must include an understanding of internal controls, assessing the risk of material weaknesses, testing and evaluating the design and operating effectiveness, and performing any other procedures.
249
what auditor required to do related to subsequent events?
the auditor is required to do the following procedures related to subsequent events:
Read and review interim financial statements
Inquire of management and, when appropriate, those charged with governance:
the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data
any unusual adjustments that have been made since the balance sheet date
Read minutes of stockholders', directors', and officers' meetings
Inquire of legal counsel
Observe events in subsequent period
Scan records for unusual transactions
Obtain letter of representation on subsequent events
250
the auditor is required to do the following procedures related to subsequent events:
Read and review interim financial statements
Inquire of management and, when appropriate, those charged with governance:
the current status of items in the financial statements that were accounted for on the basis of tentative, preliminary, or inconclusive data
any unusual adjustments that have been made since the balance sheet date
Read minutes of stockholders', directors', and officers' meetings
Inquire of legal counsel
Observe events in subsequent period
Scan records for unusual transactions
Obtain letter of representation on subsequent events
An implicit representation is one that is implied rather than stated; an explicit representation is one that is fully and clearly expressed.
If the accountant is not independent with respect to a client when issuing a compilation report, the accountant should specifically disclose the lack of independence in a final paragraph in the compilation report. Otherwise, the report contains the implicit representation that the accountant is independent.
A review consists of inquiries and analytical procedures, not a compilation.
The other two representations are made explicitly in the report:
The financial statements have not been audited.
The accountant does not express any assurance on the financial statements.
251
When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:
For the financial statements being audited, the auditor has a responsibility to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time in the future.
If, while performing audit procedures, the auditor discovers a situation that instills doubt about the entity's ability to continue as a going concern (such as negative trends and recurring operating losses appearing to be irreversible), the auditor should discuss these concerns with management. If management is not planning activity to alleviate the conditions (one plan would be to reduce or delay future expenditures), then the auditor should consider adding an emphasis-of-matter paragraph to the audit report. The addition of the emphasis-of-matter paragraph does not result in a qualified opinion, and the explanation refers to the note disclosure for more information.
However, if management does not disclose this information, then the report would be misleading for users. The auditor would most likely express a qualified opinion if information about the entity's ability to continue as a going concern is not disclosed.
It is important to remember that the auditor is not responsible for predicting future conditions or events. The auditor cannot be sure that the adverse financial conditions will cause a bankruptcy filing. The auditor is precluded from stating any conclusions like this in the report.
252
As the acceptable level of detection risk increases, an auditor may change the:
Detection risk is a function of the effectiveness of an auditing procedure (i.e., the auditor/audit technique will fail to detect a material misstatement), and is inversely related to the assurance provided by substantive tests. The key to this question is the wording “the acceptable level of detection risk increases.” This means the auditor is able to place more reliance on the entity's internal control and, thus, requires less assurance from substantive testing. This allows the nature, timing, and extent of substantive tests to be modified and, in this case, lessened. As a result, timing of substantive tests could be shifted from year-end to an interim date.
253
what include in agreed upon procedure and what does not include?
The practitioner's report on agreed-upon procedures should contain a statement restricting the use of the report to the specified parties, an identification of the responsible party, and a statement that the procedures performed were agreed to by the specified parties. The report should not include any form of limited or negative assurance, opinion, or representation regarding the sufficiency of the procedures.
254
An auditor most likely would be responsible for assuring that management communicates significant deficiencies in the design of the internal control:
When reporting under Government Auditing Standards, the auditor is required to provide in all audits a written report on internal control for distribution to specific legislative and regulatory bodies, as well as management and the audit committee. This report should include a description of significant deficiencies in the design of the internal control.
255
Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?
Audit tests must be performed on a continual basis throughout the year in an audit of an entity that processes most of its financial data in electronic form without any paper documentation. Electronic evidence that exists at one point in time may not be available for review and testing after a specified period, making it impossible to test such transactions, for example, at year-end. Management fraud may be more difficult to detect in a totally electronic system, but the SAS requirements regarding the testing and evaluation of internal controls remain the same as in a traditional setting. It may be possible to test completeness of processing in an entity that processes most of its financial data in electronic form only at various times throughout the year.
256
Tracing shipping documents to prenumbered sales invoices provides evidence that:
Tracing shipping documents to prenumbered sales invoices merely provides evidence that shipments to customers were properly invoiced. No assurance regarding completeness or duplication is obtained by this method alone. Accounting for prenumbered sales invoices is a separate step entirely.
257
a ptractioner should not perform a review of what of an entity?
a practitioner should not perform a review of an entity's compliance with requirements of specified laws, regulations, rules, contracts, or grants.
258
when determining a sample size for a test of control, the auditor should consider what?
When determining a sample size for a test of controls, the auditor should consider the tolerable rate of deviation from the controls (expressed in %), the likely rate of deviations (expressed in %), and the allowable risk of assessing control risk too low (the reliability level)
259
Which of the following is not an example of analytical relationships that could help indicate material misstatement due to fraud?
Some unusual or unexpected analytical relationships may have been identified and may indicate a risk of material misstatement due to fraud because management or employees generally are unable to manipulate certain information to create seemingly normal or expected relationships. Examples include the following:
The relationship of net income to cash flows from operations may appear unusual because management recorded fictitious revenues and receivables but was unable to manipulate cash.
A comparison of the entity's profitability to industry trends, which management cannot manipulate, may indicate trends or differences for further consideration when identifying risks of material misstatement due to fraud.
A comparison of bad debt write-offs to comparable industry data, which employees cannot manipulate, may provide unexplained relationships that could indicate a possible theft of cash receipts.
Employees in collusion can manipulate the entity's A/P and A/R accounts.
260
auditor report on the audit of internal control over financial reporting must include what
auditor's report on the audit of internal control over financial reporting must include a definition of internal control which is the same description of the entity's internal control as management uses in its report.
The other items listed are reporting elements for an agreed-upon procedures report on controls.
261
what are the reporting elements of an agreed upon procedures?
identification of specified parties, A statement that the sufficiency of the procedures is solely the responsibility of the specified parties and a disclaimer of responsibility for the sufficiency of those procedures,
A list of the procedures performed and related findings
262
Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should:
Sound internal control procedures would involve preparing a duplicate list of checks received from customers. By doing so, there is documented backup that there was an actual check received (with an appropriate check number and signature) that could easily be posted by the accounts receivable department to the customer account.
Adding checks to the daily cash summary would not ensure proper posting to the customer account by the accounts receivable department as they would not know who the check was for. Verifying the check against a prenumbered sales invoice would mean that there is a lack of segregation of duties, as the person receiving the mail would also have access to sales and/or accounts receivable. The same could be said for recording the checks in the cash receipts journal.
263
which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
If an accounts receivable confirmation response is not received, the best procedure would be for the auditor to inspect shipping records documenting merchandise sold to the debtors. This procedure provides evidence that merchandise from a recorded sale was sent to the customer, substantiating the amount owed, which is the objective of the accounts receivable confirmation.
An alternative procedure would be to review the cash receipts journal for the month following year-end to see that the customer paid the amount of the receivable.
264
which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff?
The auditor's review will include a study of sales records late in December and early in January. This will be accomplished by reviewing the period when the revenue was earned by shipment of goods or the performance of services compared to the period the revenue was recorded.
265
The auditor's review will include a study of sales records late in December and early in January. This will be accomplished by reviewing the period when the revenue was earned by shipment of goods or the performance of services compared to the period the revenue was recorded.
The practitioner is independent.
The party engaging the practitioner is responsible for the subject matter, or has a reasonable basis for providing a written assertion about the subject matter when the nature of the subject matter is such that a responsible party does not otherwise exist.
For agreed-upon procedures engagements on prospective financial information, the prospective financial statements include a summary of significant assumptions.
266
Which of the following procedures would least likely result in the discovery of possible noncompliance with laws and regulations?
The auditor is responsible for designing the audit to provide reasonable assurance of detecting noncompliance with laws and regulations by the client that are material to the financial statements taken as a whole. Noncompliance with laws and regulations generally has an effect on the recording of transactions (revenue is recognized in a manner that is not in conformity with a government contract) or on operations (a governmental entity did not advertise a bid for a project above a certain amount of money or they did not bid at all when required to). Due to the nature of these acts, the auditor would discover them through detailed tests of transactions, making inquiries of the client's management, and reading the minutes of the board of director's meetings.
Reviewing an internal control questionnaire would 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.
267
The auditor is responsible for designing the audit to provide reasonable assurance of detecting noncompliance with laws and regulations by the client that are material to the financial statements taken as a whole. Noncompliance with laws and regulations generally has an effect on the recording of transactions (revenue is recognized in a manner that is not in conformity with a government contract) or on operations (a governmental entity did not advertise a bid for a project above a certain amount of money or they did not bid at all when required to). Due to the nature of these acts, the auditor would discover them through detailed tests of transactions, making inquiries of the client's management, and reading the minutes of the board of director's meetings.
Reviewing an internal control questionnaire would 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.
The auditor projects the sample results to the entire population. In this question, an overstatement of $3,700 and an understatement of $200 were found when the auditor sampled 5% of the total population. Projecting the misstatement to the entire population results in $74,000 in overstatements and $4,000 for understatements. Since the total projected misstatement is more than the tolerable misstatement, there is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement.
5% of total population = 1/20 of total population
$3,700 overstatement × 20 = $74,000
$200 understatement × 20 = $4,000
($74,000 overstatement - 4,000 understatement) - $60,000 = $10,000
Therefore, the projected misstatement exceeds the tolerable misstatement by $10,000.
Another way to calculate the excess overstatement over the tolerable misstatement is by netting the $3,700 overstatement and $200 understatement.
$3,700 overstatement - $200 understatement = $3,500 net overstatement in the sample
$3,500 × 20 = $70,000 projected overstatement
$70,000 - $60,000 = $10,000 excess
268
An auditor uses the assessed level of control risk to:
The acceptable level of detection risk for financial statement assertions is determined using the auditor's assessed level of control risk (along with the assessed level of inherent risk). Detection risk level is determined in order to plan substantive testing which would detect a material misstatement in a financial statement assertion. Control risk describes the risk that an entity's internal control will not prevent or detect a material misstatement in a financial statement assertion. Tests of controls are used to evaluate the effectiveness of the entity's internal control activities in place. An auditor should plan and evaluate an audit (including materiality thresholds) so that audit risk is limited to a low level.
269
when should an auditor refer to the work of specialist?
The auditor should not refer to the work or findings of a specialist in an audit report with an unmodified opinion. If, however, the auditor modifies the report (issues a modified opinion) and wishes to facilitate an understanding of the emphasis-of-matter or other-matter paragraph or the reason for the qualification, the work of the specialist may be mentioned.
270
when contigent fee is allowed?
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.
271
when to use qualified and when to use disclamer of opinion ?
The auditor is required to state whether the financial reporting framework has been consistently applied. Inconsistency in the application of the framework is a common reason for qualified opinions by auditors. A change in accounting principle must be reasonably justified. If not, the auditor's report should state that fact. A disclaimer of opinion would not be appropriate when management does not provide reasonable justification for a change in accounting principles. This would result in a qualified opinion or, if the effect of the change is sufficiently material, an adverse opinion. Only when an auditor is not independent, the scope of an audit has been severely limited, or there is an unresolved uncertainty that is far-reaching and serious should an auditor disclaim an opinion.
272
Which of the following is a primary objective of AU-C 945, Auditor Involvement with Exempt Offering Documents?
AU-C 945 explicitly details auditors’ responsibilities with regard to exempt offerings, and is applicable when both of the following two conditions are met:
the auditor’s report on either interim or annual financial statements is included or incorporated by reference in an offering document related to securities which are exempt from the Securities Act of 1933, or franchise offerings regulated by the Federal Trade Commission or applicable state law, and
the auditor performs one or more of the activities listed in the auditing standard.
The objectives of the auditor when involved with an exempt offering document are to perform procedures and respond appropriately in the following situations:
when the auditor determines that information included or incorporated by reference in the exempt offering document could undermine the credibility of the financial statements and the related auditor’s report, and/or
to facts that become known to the auditor after the date of the auditor’s report that, had they been known to the auditor at that date, may have caused the auditor to revise the auditor’s report.
273
inventory observation may be observed before and after the balance sheet date when the record are what?
Inventory observation may be observed before or after the balance sheet date when the records are well-maintained and periodically checked and compared to the physical amounts.
274
what to do in a review?
A review, while still an attest engagement, offers only limited assurance that there are no material modifications that should be made to the financial statements for them to be in conformity with the applicable financial reporting framework. As a review does not offer the same level of assurance that an audit does, the requirements and procedures are different.
The review would involve a comparison of current-year to prior-year account balances (an analytical procedure), asking about actions taken at board of directors' meetings (though not necessarily examining the board minutes), as well as obtaining an understanding of the client's business and utilizing inquiry and other analytical procedures.
A review would not involve obtaining an understanding of internal control, assessing fraud risks, or testing accounting records (confirming cash and accounts receivable balances). The accountant would not need to recalculate depreciation expense. These procedures are performed in an audit.
275
In a test of purchase orders, the auditor selected a random sample of 60 items out of a population of 1,200 purchase orders. The auditor discovered $4,000 in overstatement in the sample. The company's materiality is $65,000. The tolerable misstatement for purchases is $50,000. What should the auditor do next?
Performance materiality is a planning concept and is related to the auditor’s determination of materiality for planning the audit in such a way that misstatements, combined for all of the tests in the entire audit, do not exceed materiality for the financial statements. Because it is not feasible for the auditor to anticipate all the circumstances that may ultimately influence judgments about materiality, the auditor’s judgment about materiality for planning purposes may differ from the judgment about materiality used in evaluating the audit findings.
The auditor should project the detected error to the entire population and, if the auditor concludes that a lower materiality level than that initially determined is appropriate, the auditor should reconsider the related levels of performance materiality and appropriateness of the nature, timing, and extent of further audit procedures.
276
Reporting standards for financial audits under Government Auditing Standards (the “Yellow Book”) differ from reporting under generally accepted auditing standards in that Government Auditing Standards require the auditor to:
present the results of the auditor's tests of controls.
277
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide a 1% risk of assessing control risk too low (99% confidence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2.5% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%.
The allowance for sampling risk was:
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).
278
The authoritative body designated to promulgate standards concerning an accountant's association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity's securities is the:
The preface to the Accounting and Review Services Statements (AR) notes that the Accounting and Review Services Committee is the committee designated by the AICPA Council to promulgate standards in connection with unaudited financial statements of nonpublic entities. A nonpublic entity is any entity other than one whose securities trade on a stock exchange or over-the-counter market or that makes a filing with a regulatory agency in preparation for sale of securities (i.e., a nonpublic entity is not required to file financial statements with an agency regulating the issuance of the entity's securities).
279
A client maintains perpetual inventory records in both quantities and dollars. If the assessed level of inherent and control risk is high, an auditor would probably:
Because the assessed level of control risk over the client's perpetual inventory records is high, the auditor would not rely on the records. Rather, the auditor would request the client to schedule the physical inventory count at the end of the year. 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.
280
What is the most likely source of the following statement?
“There were unreasonable delays by management in permitting the commencement of the audit and in providing needed information.”
Auditor's communication with those charged with governance
281
After accounting for a sequence of inventory tags, an auditor traces a sample of tags to the physical inventory listing to obtain evidence that all items:
Once the sequence of tags is accounted for, the auditor, by taking a sample of those tags and tracing to the physical inventory listing, will obtain evidence about items on tags being included in the listing.
282
Which of the following statements is correct concerning statistical sampling in tests of controls?
Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.
283
Which of the following is not an example of an accounting estimate that might be included in financial statements?
Examples of accounting estimates are allowances for loan losses, annual effective tax rate in interim reporting, and the percent of completion under contracts. Accounts receivable in itself is not an accounting estimate. The collectibility and thus any allowance is an estimate.
284
Which of the following types of audit evidence generally is the most appropriate?
Inquiries made of management
Confirmation of account information
Analytical procedures
Review of prior-year audit procedures
confirmation of account information
285
what are control activities and what they do ?
Control activities are the policies and procedures that help ensure management directives are carried out. Specific control activities include the following:
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Authorization
Performance reviews
Information processing
Physical controls
Segregation of duties
When someone has the ability to perform more than one of the control activities, there is a violation of the segregation of duties.
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Segregation of duties (SOD) is a basic building block of risk management and internal controls for a business. The principle of SOD is based on shared responsibilities of a key process that disperses the critical functions of that process to more than one person or department. Without this separation in key processes, fraud and error risks are far less manageable.
By having control over the authorization of transactions from the custody of transaction, key processes are separated as defined above.
286
In reporting on an entity's internal control over financial reporting for an integrated audit of an issuer, a practitioner should include a paragraph that describes the:
The standard form of report when reporting on internal accounting control includes a paragraph that describes the inherent limitations of any internal control.
The third section of the auditor's report on the audit of internal control over financial reporting must include the section title "Definition and Limitations of Internal Control Over Financial Reporting" and the following elements:
A definition of internal control (The auditor should use the same definition of the entity’s internal control as management uses in its report.)
A paragraph stating that, because of inherent limitations, internal control may not prevent, or detect and correct, misstatements and that projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate
287
A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA's minor child. The trust securities are not material to the CPA's wealth but are material to the child's personal net worth. According to the AICPA Code of Professional Conduct, would this action impair the CPA's independence with the client?
Yes, because the stock would be a direct financial interest and materiality is not a factor
288
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.
289
what are the basic element of a compilation?
The basic elements of the compilation report are as follows:
A statement that the compilation has been performed in accordance with SSARS issued by the AICPA
A statement that a compilation is limited to presenting in the form of financial statements information that is the representation of management
A statement that the financial statements have not been audited or reviewed and that the accountant does not express an opinion on them
A signature of the accounting firm or accountant
The date of the compilation report (dated as of the date of completion of the procedures required by AR-C 80.17)
The report does not include a description of the procedures performed during the compilation, and the accountant is permitted to perform the compilation even if she is not independent. In this circumstance, the report would state that the accountant is not independent
290
what is parallel simulation?
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.
291
what is test data?
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.
292
what is Review of program logic
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.
293
what is an integrated test facility?
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.
294
During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of a material departure from the applicable financial reporting framework. If the accountant decides to modify the standard review report because management will not revise the financial statements, the accountant should:
In reference to a departure from the applicable financial reporting framework in the financial statements of a nonissuer which are to be reported on by a review engagement, AR-C 90.56 specifies the appropriate reporting. This section explains that the report, if modified, should disclose the departure from the applicable financial reporting framework in a separate paragraph.
Positive assurance and adverse or “except for” qualified opinions are appropriate only in an audit engagement. A review provides limited assurance, thus expression of negative assurance is not appropriate.
295
what is a source code comparison program ?
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.
296
the more what the relationship, the what control may be?
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.
297
Select the internal control that most likely could assist MMI in preventing or detecting the sending of an invoice for shipped goods and its recording in the sales journal without being posted to any customer account.
Comparing the control amounts posted to the accounts receivable ledger with the control totals of invoices is the best procedure for preventing or detecting the generation of an invoice for shipped goods which is recorded in the sales journal, but is not posted to any customer account.
The control amount for the accounts receivable ledger would be less than the control total of invoices if the sale were not posted to the customer's account. This is an example of an independent check being used as a control.
298
A CPA's standard report on audited financial statements would be inappropriate if it referred to:
the CPA's assessment of sampling risk factors.
299
An independent auditor is issuing an audit report for a governmental entity and plans to issue separate reports on internal control over financial reporting and compliance with laws and regulations. The auditor should do which of the following?
When providing an audit report on governmental financial statements, the auditor should also report on internal control over financial reporting and on compliance with laws, regulations, and provisions of contracts or grant agreements. This information may be in the same or in separate reports. The auditor should include a reference to the separate reports and also state that the reports on internal control and compliance with provisions of laws, regulations, contracts, and grant agreements are an integral part of a GAGAS (generally accepted government auditing standards) audit and important for assessing the results of the audit.
300
what are the three forms of attestation ?
There are three forms of attestation (attest) engagements: an examination (an audit), a review (lesser in scope than an audit and lends only limited assurance), and agreed-upon procedures. In an attestation engagement, the CPA issues a report on subject matter or on an assertion about subject matter that is the responsibility of another party. A CPA can attest to the reliability of information such as financial forecasts, internal control, compliance with laws and regulations, advertising claims, or lottery results. The Auditing Standards Board has issued SSAEs (Statements on Standards for Attestation Engagements) to describe the professional requirements of practitioners in this area.
Issuing a report about a firm's compliance with laws and regulations (management has asserted that it is in compliance with laws and regulations, and the CPA will be preparing a report to attest to the reliability of that claim) would be an attestation engagement.
SSAEs do not cover engagements that are professional services performed in accordance with the Statements on Standards for Consulting Services (SSCS), such as when a CPA is hired solely to assist the client. Therefore, consulting with management representatives of a firm to provide advice would not be an attestation engagement. SSAEs also do not cover engagements in which the practitioner is engaged to advocate a client's position (a tax matter being reviewed by the IRS) or a tax engagement in which a practitioner is engaged to prepare tax returns or provide tax advice. Therefore, these services would not be considered attestation engagements.
301
The OMB’s Uniform Guidance rules contain a “percentage of coverage” rule that requires the auditor of entities receiving federal financial support who do not meet the criteria for low risk to test major programs that, in the aggregate, encompass at least:
If the auditee meets the criteria for a low-risk auditee, the auditor only needs to audit the major programs that, in aggregate, encompass at least 20% of total federal awards expended. Otherwise, the auditor must audit the major programs that, in aggregate, encompass at least 40% of total federal awards expended.
302
In auditing related party transactions, an auditor ordinarily places primary emphasis on:
the adequacy of the disclosure of the related party transactions.
303
Which of the following statements describes an auditor's obligation to identify deficiencies in the design or operation of internal control?
The auditor need not search for significant deficiencies but should document and communicate any significant deficiencies that are discovered.
304
what should voucher payable department do?
The vouchers payable department should:
match vendor's invoice with the related receiving report, which ensures that goods billed were received (i.e., that voucher is valid).
approve vouchers for payment by having an authorized employee sign the vouchers (authorization).
indicate the asset and expense accounts to be debited (ensuring proper classification).
305
what should the purchasing and receiving department do?
Accounting for unused prenumbered purchase orders and receiving reports
306
what risk assessment procedure to obtain audit evidence about the design and implementation of relevant contorl may include?
"inquiring of entity personnel.
"observing the application of specific controls.
"inspecting documents and reports.
"tracing transactions through the information system relevant to financial reporting.
307
what are the inherent limitation of internal control?
Internal controls have certain inherent limitations. These are:
human errors due to misunderstanding of instructions, mistake of judgment, carelessness, distractions, or fatigue,
collusion which circumvents the segregation of duties,
management override that may override the structure to commit fraud or misstate the financial statements, and
changing conditions that may weaken a system which was adequate before the change.
Inherent limitations means that, no matter how well designed and operated, internal controls cannot provide absolute assurance that an entity can achieve its financial, operational, and compliance objectives.
The other choices (a complex information processing system, an ineffective board of directors, and the lack of management's desire to improve the internal controls) describe situations where the auditor would conclude that the audit has a higher inherent risk due to the nature of the entity and its environment
308
Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?
In the overall review stage, analytical procedures evaluate significant ratios, operating statistics, and trends in financial data. If unusual or large differences are discovered, further explanation is sought. Comparing the current year's financial statements with those of the prior year would be one such procedure to identify trends in financial data.
Reading minutes of board of directors' meetings or obtaining attorney or client representation letters are all important audit procedures in gathering corroborating evidence, but not for evaluating ratios, operating statistics, or trends in financial data.
309
According to the AICPA Code of Professional Conduct, which of the following financial interests in the client during the period of the engagement impairs a CPA's independence?
Independence is impaired when a CPA of a public company will acquire any direct or material indirect financial interest in the client while the professional engagement is being performed.
310
Which of the following statements regarding the going concern assumption is correct?
The statement “Continuation of an entity as a going concern is assumed in financial reporting in the absence of significant information to the contrary” is correct (AU-C 570.02). The auditor makes a decision based on relevant conditions and events that exist at, or have occurred prior to, the auditor's report.
311
“The objective of our audit is to express an unmodified opinion on the financial statements although it is possible that facts or circumstances encountered may preclude us from expressing an unmodified opinion.” What is the most likely source of this statement?
The auditor's engagement letter should address such matters as the objective of the engagement and, therefore, would include a statement such as, “The objective of our audit is to express an unmodified opinion on the financial statements although it is possible that facts or circumstances encountered may preclude us from expressing an unmodified opinion.”
