Wilely CPA Excel Weekly Quizzes Flashcards Preview

AUD CPA Review - (Becker, Roger, Wiley, NINJA) > Wilely CPA Excel Weekly Quizzes > Flashcards

Flashcards in Wilely CPA Excel Weekly Quizzes Deck (14):
1

Which of the following statements is correct concerning an auditor’s use of the work of a specialist?


A) The auditor need not obtain an understanding of the methods and assumptions used by the specialist.
B) The auditor may not use the work of a specialist in matters material to the fair presentation of the financial statements.
C) The reasonableness of the specialist's assumptions and their applications are strictly the auditor's responsibility.
D) The work of a specialist who has a contractual relationship with the client may be acceptable under certain circumstances.

The correct answer is: D.

A. Incorrect… An auditor is required to obtain an understanding of the methods and assumptions used by the specialist, ensure that appropriate tests of the data provided to the specialist are performed, and evaluate whether the specialist’s findings support the related assertions in the financial statements.

B. Incorrect… An auditor is not precluded from using the work of a specialist in matters material to the fair presentation of the financial statements. In fact, the auditor would, normally, devote efforts primarily to material matters and, therefore, would call upon a specialist only if the matter were material.

C. Incorrect… Responsibility for the reasonableness of the methods and assumptions used and their application belongs to the specialist. The auditor is responsible for obtaining an understanding of the methods and assumptions used by the specialist, ensuring that the data provided to the specialist are tested, and evaluating whether the specialist’s findings support the related assertions in the financial statements.

D. Correct! An auditor may be allowed to use a specialist who has a relationship with the client, such as a contractual relationship, under certain circumstances. The auditor should assess the risk that the specialist’s objectivity is impaired. If the auditor believes that objectivity might be impaired, the auditor should take additional steps.

2

Question 2:
When using the work of a specialist, an auditor may refer to and identify the specialist in the auditor's report if the

A) Auditor expresses a qualified opinion as a result of the specialist's findings.
B) Specialist is not independent of the client.
C) Auditor wishes to indicate a division of responsibility.
D) Specialist's work provides the auditor greater assurance of reliability.

The correct answer is: A.

A. Correct! The auditor may refer to (and, with the specialist’s permission, identify) the specialist in the report, if the opinion is modified as a result of the specialist’s findings, and the auditor believes that such a reference will be helpful to readers in understanding the reason(s) for the modification.

B. Incorrect… The auditor may refer to and identify the specialist in the report, if the report is modified as a result of the specialist’s findings. The fact that the specialist is not independent of the client would not, by itself, warrant reference to the specialist in the report. The specialist’s relationship with the client should be evaluated by the auditor and the risk of potential impairment of the specialist’s objectivity should be assessed.

C. Incorrect… The auditor would not refer to the specialist to indicate a division of responsibility. The auditor is not allowed to share responsibility with the specialist.

D. Incorrect… The auditor may refer to and identify the specialist in the report, if the report is modified as a result of the specialist’s findings. The auditor should not, otherwise, refer to the specialist as it might imply that use of the specialist resulted in greater assurance of reliability.

3

Question 3:
An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the

A) Specialist's findings provide the auditor greater assurance of reliability about management's representations.
B) Auditor issues a modified opinion because of a matter related to the specialist's findings.
C) Auditor's use of the specialist's findings is different from that of prior years.
D) Specialist is a related party whose findings fully corroborate management's financial statement assertions.

The correct answer is: B.

A. Incorrect… The auditor’s report may refer to the specialist if the report is modified as a result of the specialist’s findings, either through the addition of an explanatory paragraph or departure from an unqualified opinion. Reference, otherwise, is not allowed as it may imply that a more thorough audit was performed than an audit that did not result in such a reference.

B. Correct! The auditor’s report may refer to the specialist if the opinion is modified as a result of the specialist’s findings by adding a separate paragraph to explain the reason(s) for the modified opinion. Reference, otherwise, is not allowed as it may imply that a more thorough audit was performed than an audit that did not result in such a reference.

C. Incorrect… The auditor’s report may refer to the specialist if the report is modified as a result of the specialist’s findings by adding a separate paragraph to explain the reason(s) for the modified opinion. The report may NOT refer to the specialist because the auditor’s use of the specialist’s findings is different from that of prior years.

D. Incorrect… The auditor’s (unmodified) report would NOT refer to the specialist when the specialist’s findings fully corroborate management’s financial statement assertions. The specialist’s objectivity would also be evaluated by the auditor to ensure that it was not impaired.

4

Question 4:
Which of the following statements concerning the auditor's use of the work of a specialist is correct?

A) If the auditor believes that the determinations made by the specialist are unreasonable, only a qualified opinion may be issued.
B) If the specialist is related to the client, the auditor is still permitted to use the specialist's findings as corroborative evidence.
C) The specialist need not have an understanding of the auditor's corroborative use of the specialist's findings.
D) The specialist may be identified in the auditor's report when the auditor issues an unmodified audit report.

The correct answer is: B.

A. Incorrect… If the auditor believes that the determinations made by the specialist are unreasonable, the auditor may apply additional procedures including, if considered necessary, obtaining the opinion of another specialist. Issuing a qualified opinion based solely on the unreasonableness of the specialist’s findings would not be appropriate.

B. Correct! The specialist is NOT REQUIRED to be INDEPENDENT. The auditor, however, must evaluate the nature of the relationship of the specialist to the client and assess the specialist’s ability to be objective.

C. Incorrect… The auditor is required to understand the methods and assumptions used by the specialist, ensure that significant data provided to the specialist are tested, and evaluate whether the specialist’s findings support the related financial statement assertions. The specialist should also understand how the auditor plans to use the specialist’s findings.

D. Incorrect… The auditor may only refer to the specialist in the report when, as a result of the specialist’s findings, the auditor expresses a modified opinion in the auditor’s report.

5

Question 5:
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?

A) The auditor is required to understand the objectives and scope of the actuary's work.
B) The reasonableness of the actuary's assumptions is strictly the auditor's responsibility.
C) The client is required to consent to the auditor's use of the actuary's work.
D) If the actuary has a relationship with the client, the auditor may not use the actuary's work.

The correct answer is: A.

A. Correct! When using a specialist, in general, the auditor is obligated to obtain an understanding of the work to be performed by the specialist, including the nature, objectives, and scope of the specialist’s work.

B. Incorrect… The auditor is obligated to evaluate the reasonableness of the specialist’s findings, but the methods and assumptions used are primarily the responsibility of the specialist.

C. Incorrect… The auditor may choose to engage a specialist for substantive purposes to evaluate material financial statement assertions, which would NOT require the client’s consent.

D. Incorrect… The auditor is not prohibited from using a specialist who has a relationship with the client entity. AICPA Professional Standards require that the objectivity of the specialist be evaluated along with competence and capability.

MAIN FOCUS on using Actuary work based on this question:
(1) It is the Auditor's responsibility to understand how the Specialist (actuary) does its work (nature, objective, scope of specialist's work).

(2) Auditor does not worry about the actuary's use of its own assumptions to do the job.

6

Reference in a principal auditor's report to the fact that part of the audit was performed by another auditor most likely would be an indication of the:

A. divided responsibility between the auditors who conducted the audits of the components of the overall financial statements.

B. lack of materiality of the portion of the financial statements audited by the other auditor.

C. principal auditor's recognition of the other auditor's competence, reputation, and professional certification.

D. different opinions the auditors are expressing on the components of the financial statements that each audited.

Answer: A

A) – A division of responsibility between the auditors who conducted the audits of the components of the overall financial statements is shown by referring in the principal auditor’s report to the fact that part of the audit was performed by another auditor.

If the portion of the financial statements audited by the other auditor is immaterial, then it is most likely that no reference would be made in the principal auditor’s report.

The principal auditor should satisfy himself as to the competence, reputation, and professional certification of the other auditor, regardless of whether or not a division of responsibility is reported.

Expressing different opinions on the components of the financial statements would result in piecemeal opinions, which is prohibited by AU-C 600.28.



7

2. Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common?

A. The auditor determines whether the federal financial assistance has been administered in accordance with applicable laws and regulations.

B. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient.

C. The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political repercussions.

D. The auditor is required to express both positive and negative assurance that noncompliance with laws and regulations that could have a material effect on the recipient's financial statements is disclosed to the inspector general.

Answer: A

A) – Audits of entities receiving federal financial assistance usually have the following common elements:

• Auditors must follow generally accepted auditing standards and government auditing standards (GAGAS).

• The auditor’s consideration of internal control is to include obtaining and documenting an understanding of internal control established to ensure compliance with the laws and regulations applicable to the federal financial assistance.

• The auditor issues a report on the consideration of internal control.

• The auditor is to determine and report on whether funds are administered in accordance with applicable laws and regulations.

8

3. Audit committees (or similar subgroups with different names) exist in many jurisdictions. Although their specific authority and functions may differ, communication with the audit committee, where one exists, has become a key element in the auditor's communication with those charged with governance. Good governance principles do not include which of the following?

A. The auditor will be invited to regularly attend meetings of the audit committee.

B. The chair of the audit committee and, when relevant, the other members of the audit committee will liaise with the auditor periodically.

C. The audit committee will meet the auditor without management present at least annually.

D. Management and those charged with governance will be kept separate.

Answer: D.

D – Per ISA 260, paragraph 11, governance structures vary by jurisdiction and by entity, reflecting influences such as different cultural and legal backgrounds, as well as size and ownership characteristics. In many cases, it is necessary and prudent to keep management and governance intertwined.

The reason for TCWG and Management to be intertwined is to have a direct Check and Oversight on Management's work and to have direct communication between TCWG and MGT on any important matters like company's financial well being, operations issues, and ways to deal with compliance issues with laws and regulations.

9

1. Material misstatements due to fraudulent financial reporting often occur in the form of revenue recognition. The auditor should presume a higher risk of fraud in which of the following accounts?

I. Cash Balance
II. Accounts Receivable
III. Accounts Payable

A. I
B. I and II
C. I, II, and III
D. None of the answer choices are correct.

Answer: B. I and II

B – Material misstatements due to fraudulent financial reporting often result from an overstatement of revenues (for example, through premature revenue recognition or recording fictitious revenues) or an understatement of revenues (for example, through improperly shifting revenues to a later period). Therefore, the auditor should ordinarily presume that there is a risk of material misstatement due to fraud relating to revenue recognition.

The two accounts in the question that relate to revenue recognition are cash (money received from customers for valid sales should be reflected in cash) and accounts receivable (sales made on account would be recorded in accounts receivable). The sales income account would also relate to revenue recognition, but accounts payable relates to expenses.

In short: Revenue fraud deals with company manipulating the Cash Account and Accounts Receivable account.

Dr. Cash
Cr. (earned) revenue

Dr. A/R
Cr. (earned) revenue

10

2. Which of the following information discovered during an audit most likely would raise a question concerning possible noncompliance with laws and regulations?

A. Related party transactions, although properly disclosed, are pervasive during the year.
B. The entity prepared several large checks payable to cash during the year.
C. Material internal control weaknesses previously reported to management were not corrected.
D. The entity was a campaign contributor to several local political candidates during the year.

Answer: B. The entity prepared several large checks payable to cash during the year.

B – Although the primary purpose of an audit is not to detect noncompliance with laws and regulations, the auditor must be aware of possible noncompliance that may have occurred to the extent that they have a material impact on the financial statements. Observing large checks payable to cash begs the question of why the cash is needed and why the payee on the check is not a vendor or another logical third party. The other answer choices listed above are not necessarily indicative of noncompliance with laws and regulations that materially affect financial statements.

11

3.The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that:

A. Tests of controls may fail to identify procedures relevant to assertions.
B. Material misstatements may exist in the financial statements.
C. Specified controls requiring segregation of duties may be circumvented by collusion.
D. Entity policies may be overridden by senior management.

Answer: B. Material misstatements may exist in the financial statements.

Hint: Internal controls over F/S. Internal controls risk that internal controls cannot prevent, detect, correct material misstatements from still landing on F/S

B. - The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that material misstatements may exist in the financial statements. The assessed levels of control risk and inherent risk are used to determine how much detection risk the auditor can accept in designing substantive tests to detect material misstatements that may exist in financial statement assertions. The assessed levels of control risk and inherent risk are inversely related to detection risk.

Tests of controls are not designed to identify the procedures that are relevant to financial statement assertions. Tests of controls provide evidence about the effectiveness of specific internal control activities that the auditor has already identified as relevant.

That specified controls requiring segregation of duties may be circumvented by collusion and entity policies may be overridden by senior management are among the inherent limitations of an entity’s internal control.

12

On August 13, a CPA completed fieldwork on an engagement to audit financial statements for the year ended June 30. On August 27, an event came to the CPA's attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual date the auditor's report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for:

A. all subsequent events that occurred through August 27.
B. only the specific subsequent event disclosed by the entity.
C. all subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity.
D. only the subsequent events that occurred through August 13.

Answer: A.

A -- Should the auditor choose to date the report August 27, her responsibility extends to the date of the report. She is responsible for all subsequent events that occurred through August 27, and all necessary auditing procedures should be extended to that date.

An alternate choice is for the auditor to date the report as of the end of the fieldwork (August 13) and date the note about the subsequent event as of the date of disclosure (August 27). This is called dual dating. In this case, the auditor’s responsibility for events subsequent to the original report date is limited to the note dated August 27.

13

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:

A. Increase the extent of tests of controls of the inventory cycle.

B. Request the client to schedule the physical inventory count at the end of the year.

C. Insist that the client perform physical counts of inventory items several times during the year.

D. Apply gross profit tests to ascertain the reasonableness of the physical counts.

Answer: B.

B – 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 (records = internal control method), 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.

14

Which of the following statements is correct concerning statistical sampling in tests of controls?

A. As the population size increases, the sample size should increase proportionately.

B. Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate.

C. There is an inverse relationship between the expected population deviation rate and the sample size.

D. In determining tolerable rate, an auditor considers detection risk and the sample size.

Answer: B.

B – Two types of sampling risk that affect performing tests of controls are:
• The risk of assessing control risk too low (RACRTL)
• The risk of assessing control risk too high (RACRTH)

If the auditor assesses control risk too high, which would occur if there are deviations from an internal control procedure in the sample, additional substantive procedures would normally be applied and often times results in the true operating effect.

Other words, Assess CTRL RISK HIGH = THEN you do MORE Substantive procedures (thus lowers Detection risk)