1
Q
At what period of time is an auditor permitted to accept an audit engagement?
A) at interim period
B) near or after year end
C) 45 days before year end
D) 5 business days after speaking with predecessor auditor
A
B) near or after year end
2
Q
If auditor considers late appointment for a timing of an audit engagement, what opinion could possibly be expressed?
A) unqualified
B) qualified or adverse
C) withdrawal of engagement
D) qualified or disclaimer of opinion
A
D) qualified or disclaimer of opinion
Late appointment poses limitations on an audit, which leads to a qualified or disclaimer of opinion. This concern should be discussed with the client
3
Q
Auditor should make oral or written inquiries of the predecessor auditor:
A) before accepting an engagement
B) after accepting an engagement
C) while planning the audit
D) without getting permission from client first
A
A) before accepting an engagement
Client permission is necessary for this step
4
Q
Which of the following matters generally is included in an auditor’s engagement letter?
A. Management’s vicarious liability for violations of laws and regulations committed by its employees.
B. The auditor’s responsibility to search for significant internal control deficiencies.
C. The factors to be considered in setting preliminary judgments about materiality.
D. Management’s responsibility for the fair presentation of the financial statements.
A
D. Management’s responsibility for the fair presentation of the financial statements
Engagement letter is written communication stating an understanding with the client on services to be performed
5
Q
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s:
Engagement letter - YES / NO
Working papers - YES / NO
A
Engagement letter - NO (Not appropriate to ask for prior year engagement letter)
Working papers - YES (Appropriate and customary with the request)
6
Q
The primary objective of an auditor when considering the acceptance of an initial audit engagement of a nonissuer is to:
A. Establish whether the preconditions for an audit are present.
B. Specify the degree to which management intends to rely on the auditor’s testing of internal controls.
C. Limit the auditor’s responsibility if management fails to provide written representations.
D. Agree with management on the timing of tests at interim and year end.
A
A. Establish whether the preconditions for an audit are present
Preconditions include:
-management acceptance of responsibility of FS
-management agreeing to provide access to information
-objective and scope of audit are agreed on
7
Q
Under which of the following circumstances, if any, can an auditor who is not independent perform an audit engagement of a nonissuer?
A. The auditor has performed the financial statement audit in multiple prior years.
B. The auditor is required by law to accept the engagement and report on the financial statements.
C. The auditor’s lack of independence is not due to financial reasons.
D. The auditor is precluded from accepting the engagement and reporting on the financial statements under any circumstances.
A
B. The auditor is required by law to accept the engagement and report on the financial statements
This is the ONE AND ONLY exception to accept the engagement, if auditor is not independent from client
8
Q
Which of the following would prevent an auditor from accepting a new client engagement?
A. Management has a reputation within the business community for materially overstating its revenues.
B. The auditor does not have a clear understanding of client accounting methodology.
C. The client’s accounting system is completely computerized, and the audit staff will be unable to access accounting data without the help of an information technology specialist.
D. Accounting data is only maintained in paper form for a very short period of time.
A
A. Management has a reputation within the business community for materially overstating its revenues
Risk of integrity by management, risk of fraud, and potential legal damage if auditor went to accept this audit
9
Q
Before accepting an audit engagement, a CPA should evaluate whether conditions exist that raise questions as to the integrity of management. Which of the following conditions most likely would raise such questions?
A. There are significant differences between the entity’s forecasted financial statements and the financial statements to be audited.
B. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.
C. There have been substantial inventory write-offs just before the year-end in each of the past four years.
D. The CPA becomes aware of the existence of related party transactions while reading the draft financial statements
A
B. The CPA will not be permitted to have access to sensitive information regarding the salaries of senior management.
This is concerning to integrity of management because for the preconditions, auditor should have access to all information that is relevant to the preparation and fair presentation of the FS
10
Q
Which of the following factors most likely would cause a CPA not to accept a new audit engagement?
A. Management’s unwillingness to make all financial records available to the CPA.
B. The CPA’s lack of understanding of the entity’s operations and industry.
C. The CPA’s inability to review the predecessor auditor’s working papers.
D. Management reputation for failing to provide schedules to prior auditors on a timely basis.
A
A. Management’s unwillingness to make all financial records available to the CPA
This is a precondition that is not being met, therefore, this would raise as a reason not to accept an engagement. Although it is helpful, having trouble obtaining predecessor’s audit work should not be a required procedure
11
Q
An auditor’s engagement letter most likely would include a statement regarding:
A. Conditions under which the auditor may modify the preliminary judgment about materiality.
B. Materiality matters that could modify the auditor’s preliminary assessment of fraud risk.
C. Internal control activities that would reduce the auditor’s assessment of risk.
D. Management’s responsibility to provide certain written representations to the auditor.
A
D. Management’s responsibility to provide certain written representations to the auditor
Engagement letter is to establish an understanding with the client. No information would be included about materiality, audit procedures, or internal control activities
12
Q
As part of communicating the overall strategy for an audit of an issuer’s internal control over financial reporting, an auditor should communicate which of the following matters to the audit committee?
A. The extent of interim testing to be performed
B. The effect of specific internal controls on the financial statements
C. The extent to which the auditor plans to use the work of company personnel
D. The accounts that will be tested exclusively by substantive tests
A
C. The extent to which the auditor plans to use the work of company personnel
Using the work of company personnel is helpful to include in communications with those charged with governance, so that client can help with planning
13
Q
Which of the following is not a required part of the understanding between the client and the auditor?
A. Management’s responsibility to correct deficiencies in internal control identified by the auditor.
B. Management’s responsibility to adjust the financial statements if the auditor identifies material misstatements.
C. The auditor’s responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement caused by unintentional error.
D. The auditor’s responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatement caused by deliberate fraud.
A
A. Management’s responsibility to correct deficiencies in internal control identified by the auditor
Management may choose not to correct internal control deficiencies due to cost-benefit considerations.
However, choice B, C, and D must be included for management and auditors responsibility
14
Q
Which of the following statements would most likely appear in an auditor’s engagement letter?
A. Management agrees to correct all deficiencies in internal control activities identified by us.
B. We will identify internal controls relevant to specific assertions that may prevent or detect material misstatements.
C. Management is responsible for making all financial records and related information available to us.
D. Management is responsible for reporting to us any inadequate provisions for the safeguarding of assets.
A
C. Management is responsible for making all financial records and related information available to us
15
Q
Which of the following matters does an auditor usually communicate to management within the engagement letter?
A. Arrangements involving a predecessor auditor.
B. Indications of adverse key financial ratios.
C. Identification of recurring operating losses.
D. An agreement regarding preliminary materiality thresholds.
A
A. Arrangements involving a predecessor auditor
16
Q
Before accepting an engagement to audit a new client, a CPA is required to obtain:
A. An understanding of the prospective client’s industry and business.
B. The prospective client’s signature to the representation letter.
C. A preliminary understanding of the prospective client’s control environment.
D. The prospective client’s consent to make inquiries of the predecessor auditor.
A
D. The prospective client’s consent to make inquiries of the predecessor auditor
17
Q
An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant’s review report should include reference to the:
Scope limitation that caused the changed engagement - YES / NO
Original engagement that was agreed to - YES / NO
A
Scope limitation that caused the changed engagement - NO
Original engagement that was agreed to - NO
If the accountant concludes that there is reasonable justification to change the engagement, the accountant’s review report should
-NOT include reference to the original engagement,
-NO to any auditing procedures that may have been performed,
-NO to the scope limitation that resulted in the changed engagement.
18
Q
A successor auditor’s inquiries of the predecessor auditor should include questions regarding:
A. Communications to management and those charged with governance regarding significant deficiencies in internal control.
B. The number of engagement personnel the predecessor assigned to the engagement.
C. The response rate for confirmations of accounts receivable.
D. The assessment of the objectivity of the client’s internal audit function.
A
A. Communications to management and those charged with governance regarding significant deficiencies in internal control
19
Q
Which of the following individuals would be considered a predecessor auditor?
A. A client’s accounting employee responsible for the preparation of the company’s financial statements.
B. An independent CPA who is considering accepting an engagement to audit financial statements.
C. A client’s accounting employee who audits the company’s branches, subsidiaries, or other outlying locations from the company’s home office.
D. An independent CPA who was engaged to perform, but did not complete an audit of financial statements.
A
D. An independent CPA who was engaged to perform, but did not complete an audit of financial statements
Look for key words ENGAGED to audit, someone who actually worked on audit related responsibilities
20
Q
Which of the following statements is true regarding the communication with a predecessor auditor?
A. Contact with the predecessor auditor before client acceptance is not mandatory, but encouraged, and client permission is required.
B. Contact with the predecessor auditor before client acceptance is mandatory and based on this requirement, client permission is not required prior to communication.
C. Contact with the predecessor auditor before client acceptance is mandatory, but client permission is required.
D. Contact with the predecessor auditor should not take place prior to engagement acceptance, but such communications may take place after testwork has begun.
A
C. Contact with the predecessor auditor before client acceptance is mandatory, but client permission is required.
Contact with predecessor auditor is MANDATORY and client permission is REQUIRED beforehand! If client does not grant permission, client should not accept the engagement
21
Q
An accountant had begun to audit the financial statements of a nonissuer. Which of the following circumstances most likely would be considered a reasonable basis for agreeing to the entity’s request to change the engagement to a compilation?
A. The entity’s management does not provide the accountant with a signed representation letter.
B. The accountant is prohibited from corresponding with the entity’s legal counsel.
C. The accountant is prevented from examining the minutes of the board of directors’ meetings.
D. The entity’s principal creditors no longer require the entity to furnish audited financial statements.
A
D. The entity’s principal creditors no longer require the entity to furnish audited financial statements
Reasonable basis would be a change in client requirements, which would be a valid reason for client to change
22
Q
If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do?
A. Discuss the matter with the client’s legal counsel.
B. Review the risk assessment of the opening balances of the financial statements.
C. Disclaim an opinion due to a scope limitation.
D. Withdraw from the engagement.
A
B. Review the risk assessment of the opening balances of the financial statements
Auditor can still technically accept an engagement if the predecessor auditor refuses to give current auditor access to documentation. Alternative procedure that can be implemented is to review risk assessment of opening balance of the FS
23
Q
Which of the following is required before accepting a new audit engagement?
I. Making inquiries of the predecessor auditor regarding management integrity.
II.Making inquiries of the predecessor auditor regarding matters that may affect the conduct of the audit.
III.Understanding the prospective client’s business and the industry in which it operates.
A. Only I and III.
B. Only II and III.
C. I, II, and III.
D. I only.
A
D. I only.
BEFORE accepting engagement, inquiring with predecessor auditor about management integrity is the only correct choice.
Regarding matters that may affect conduct of audit and understanding prospective client’s business and industry are options that can be done AFTER accepting engagement
24
Q
Hill, CPA, has been retained to audit the financial statements of Monday Co. Monday’s predecessor auditor was Post, CPA, who has been notified by Monday that Post’s services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post?
A. Post, the predecessor auditor.
B. Hill, the successor auditor.
C. Monday’s controller or CFO.
D. The chairman of Monday’s board of directors
A
B. Hill, the successor auditor.
Note that the successor auditor must still receive permission from the client do perform this
SUCCESSOR AUDITOR REQUESTS PERMISSION»_space;> CLIENT»_space;> PREDECESSOR AUDITOR
25
Fill in the blanks:
(1)_______________ relate to the conduct of each individual audit engagement, whereas (2)________________relate to the conduct of all professional activities of the firms practice as a whole
A) GAAP, GAAS
B) Quality Management Standard, IFRS
C) GAGAS, SSARS
D) GAAS, Quality Management Standard
D) GAAS, Quality Management Standard
GAAS related to individual audit engagement ; Quality management standards relate to conduct of all professional activities of firm practice
26
Which of the following is an element of a CPA firm's quality management system that should be considered in establishing its quality management responses?
A. Using statistical sampling techniques.
B. Considering audit risk and materiality.
C. Including proper disclosures.
D. Assigning personnel to engagements.
D. Assigning personnel to engagements
Policies for HR should be established to provide reasonable assurance that the persons engaged Will have the competency to carry out their responsibilities
Choice A, B are for GAAS standards
Choice C falls for GAAP standards
27
Which of the following is not true about the relationship between quality management standards and professional standards such as GAAS?
A. Quality management standards relate to the conduct of a firm's entire practice, whereas professional standards such as GAAS relate to the conduct of an individual engagement.
B. A firm that has not adopted an appropriate system of quality management may still be in compliance with professional standards with respect to individual engagements.
C. The adoption of quality management standards increases the likelihood of compliance with professional standards on individual engagements.
D. A firm's failure to establish or comply with an appropriate system of quality management implies that the firm has also failed to follow professional standards on individual engagements.
D. A firm's failure to establish or comply with an appropriate system of quality management implies that the firm has also failed to follow professional standards on individual engagements.
GAAS and SQMS (Quality management standards) are not synonymous of each other, meaning one can be in compliance, while another standard was not adopted
28
Which of the following are components of a CPA firm's quality management that should be considered in establishing its quality management objectives and responses?
Engagement Performance - YES / NO
Relevant Ethical Requirements - YES / NO
Monitoring and Remediation - YES / NO
Engagement Performance - YES
Relevant Ethical Requirements - YES
Monitoring and Remediation - YES
REAL MICE nemonic
R: Resources
E: Engagement performance
A: Assessment for risk process
L: Leadership and governance
M: Monitoring and remediation
I: Information and communication
C: Continuance and acceptance of client relationships and specific engagements
E: Ethical requirements
29
One of a CPA firm's basic objectives is to provide professional services that conform with professional, legal, and regulatory standards. Reasonable assurance of achieving this basic objective is provided through:
A. A system of quality management.
B. A system of peer review.
C. Continuing professional education.
D. Compliance with Generally Accepted Reporting Standards.
A. A system of quality management
30
Which of the following is not true about quality management standards?
A. Quality management standards relate to the firm's practice as a whole.
B. A CPA firm is required to adopt a system of quality management.
C. The objective of the standards is to ensure that there are no issues raised during engagement quality reviews.
D. They apply to attestation engagements as well as to audit engagements
C. The objective of the standards is to ensure that there are no issues raised during engagement quality reviews
The true objective of the quality management standards is to ensure the firm and firm personnel carry out their responsibilities in accordance with professional, legal, and regulatory requirements and to ensure that the report issued is appropriate in the circumstances.
31
Which of the following is a component of a CPA firm's quality management system applicable to the firm's accounting and auditing practice?
A. Engagement performance.
B. Information processing.
C. Technology selection.
D. Professional skepticism.
A. Engagement performance
REAL MICE nemonic
R: Resources
E: Engagement performance
A: Assessment for risk process
L: Leadership and governance
M: Monitoring and remediation
I: Information and communication
C: Continuance and acceptance of client relationships and specific engagements
E: Ethical requirements
32
Which of the following activities is not an area of a CPA firm's quality management system to be considered in establishing quality objectives and responses?
A. Monitoring the effectiveness of professional development activities.
B. Deciding whether to accept or continue a client relationship.
C. Assessing a client's ability to establish effective internal controls.
D. Selecting personnel for an engagement who have the necessary qualifications.
C. Assessing a client's ability to establish effective internal controls
33
The primary purpose of establishing quality management objectives and responses for deciding whether to accept a new client is to:
A. Anticipate before performing any fieldwork whether an unmodified opinion can be expressed.
B. Minimize the likelihood of association with clients whose management lacks integrity.
C. Satisfy the CPA firm's duty to the public concerning the acceptance of new clients.
D. Enable the CPA firm to attest to the reliability of the client
B. Minimize the likelihood of association with clients whose management lacks integrity
34
If differences of opinion arise between the engagement partner and the engagement quality reviewer, then the engagement partner should:
A. Issue a disclaimer of opinion and report the issue to the entity's audit committee.
B. Discuss the differences of opinion with the entity's management and issue a modified auditor's report.
C. Withdraw from the engagement when permissible under law or regulation.
D. Follow the firm's policies and procedures for resolving differences of opinion.
D. Follow the firm's policies and procedures for resolving differences of opinion
Difference of opinion would not be a basis to modify an opinion or withdraw from the engagement. Choice D is one of them. These policies will include consultation with outside professionals or regulatory body
35
A 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:
A. Requiring personnel to adhere to the applicable independence rules.
B. Maintaining personnel files containing documentation related to the evaluation of personnel.
C. Reviewing audit documentation and engagement reports.
D. Evaluating prospective and continuing client relationships.
C. Reviewing audit documentation and engagement reports
36
Which requirements relate to the quality management component of ethical requirements?
A. Requiring personnel to adhere to the applicable independence rules.
B. Maintaining personnel files containing documentation related to the evaluation of personnel.
C. Reviewing audit documentation and engagement reports.
D. Evaluating prospective and continuing client relationships.
A. Requiring personnel to adhere to the applicable independence rules
37
Which policies are established to provide for appropriate hiring, assignment, development, and advancement of employees?
A. Requiring personnel to adhere to the applicable independence rules.
B. Maintaining personnel files containing documentation related to the evaluation of personnel.
C. Reviewing audit documentation and engagement reports.
D. Evaluating prospective and continuing client relationships
B. Maintaining personnel files containing documentation related to the evaluation of personnel
38
Which policies are performed to minimize the likelihood of association with a client whose management lacks integrity?
A. Requiring personnel to adhere to the applicable independence rules.
B. Maintaining personnel files containing documentation related to the evaluation of personnel.
C. Reviewing audit documentation and engagement reports.
D. Evaluating prospective and continuing client relationships
D. Evaluating prospective and continuing client relationships
39
An audit firm should obtain written confirmation from its employees of their compliance with policies and procedures on independence at least how often?
A. Once every quarter
B. Before the release of each auditor's report
C. Annually
D. After every performance evaluation
C. Annually
40
If an audit firm determines that a quality review is required, but it has not yet been performed, what should an audit engagement partner do?
A. Request that the audit engagement team members perform the quality review in a timely manner.
B. Issue a qualified audit report with an explanatory paragraph.
C. Refrain from issuing the audit report until after the quality control review has been completed.
D. Issue an unqualified audit report with an explanatory paragraph.
C. Refrain from issuing the audit report until after the quality control review has been completed
No reports or expression of opinions should be made without having the quality review completed first. Auditor can refrain from issuing the audit report
41
When an auditor of a parent nonissuer is also the auditor of a component, then each of the following factors would ordinarily influence the decision to obtain a separate engagement letter from the component, except:
A. Whether there has been any turnover of the component's board members.
B. Whether a separate audit report is to be issued on the component.
C. The legal requirements regarding the appointment of the auditor.
D. The degree of independence of the component management from the parent entity.
A. Whether there has been any turnover of the component's board members
Choice B, C, and D are Instances where separate engagement letter from component auditor would be necessary:
42
For document retention, as a non-issuer (non-public), how long should audit documentation be retained for?
A) 5 years
B) 7 years
C) 3 years
D) 10 years
A) 5 years
This is 5 years from the report release date
43
For document retention, as an issuer (public), how long should audit documentation be retained for?
A) 5 years
B) 7 years
C) 3 years
D) 10 years
B) 7 years
This is 7 years from the report release date
44
For audit completion date, as a non-issuer, how long is the window of time for the auditor to assemble final audit documentation file?
A) 14 days
B) 60 days
C) 1 year
D) 45 days
B) 60 days
SAS rules require final audit documentation file to be assembled within 60 days following the report release date
45
For audit completion date, as an issuer, how long is the window of time for the auditor to assemble final audit documentation file?
A) 14 days
B) 60 days
C) 1 year
D) 45 days
A) 14 days
PCAOB requires preparation of engagement completion document 14 dats following the report release date. Also, if work is performed by another auditor, the office issuing the report must obtain, review, and retain certain audit documentation from the other auditor
46
Audit documentation should:
A. Not be permitted to serve as a reference source for the client.
B. Not contain critical comments concerning management.
C. Show that the accounting records agree or reconcile with the financial statements.
D. Be considered the primary support for the financial statements being audited.
C. Show that the accounting records agree or reconcile with the financial statements
Also
-serves as a reference source for client
-contain critical comments concerning management
-principle support for the work the auditor has done
47
Audit documentation should be prepared in enough detail so that:
A. An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
B. An experienced auditor who has worked with the client in the past can understand the procedures performed and the evidence obtained.
C. A reader of the financial statements who has no previous connection with the audit can understand the procedures performed and the evidence obtained.
D. A reader of the financial statements who has a background in financial analysis can understand the procedures performed and the evidence obtained.
A. An experienced auditor who has no previous connection with the audit can understand the procedures performed and the evidence obtained
48
Which of the following statements is most accurate regarding sufficient and appropriate documentation?
A. Accounting estimates are considered sufficient and appropriate audit evidence.
B. Audit documentation is the property of the client, and sufficient and appropriate copies should be retained by the auditor for at least five years.
C. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed.
D. If additional evidence is required to document significant findings or issues, the original evidence is not considered sufficient and appropriate and therefore should be deleted from the working papers.
C. Sufficient and appropriate documentation should include evidence that the audit working papers have been reviewed
49
Which of the following documents the procedures that are applied and the conclusions reached in an audit engagement?
A. Audit guide.
B. Working papers.
C. Management representation letter.
D. Auditor's report.
B. Working papers
50
Which of the following is where the client asserts that all material matters have been adequately disclosed to the auditor?
A. Audit guide.
B. Working papers.
C. Management representation letter.
D. Auditor's report
C. Management representation letter
51
Which of the following statements is correct regarding an auditor's documentation of the risk assessment during an audit of a nonissuer?
A. The auditor's risk assessment should be documented separately from the auditor's documentation of the overall strategy and audit plan.
B. The extent of documentation must be consistent among all audits.
C. The auditor must document a complete understanding of the nonissuer's industry.
D. The form and extent of the documentation should be influenced by the nature, size, and complexity of the entity and its internal control.
D. The form and extent of the documentation should be influenced by the nature, size, and complexity of the entity and its internal control
Auditor may need to tailor form and extent of documentation to specific circumstances of the engagement
52
In the audit of a nonissuer, each of the following actions or events is required to be completed on or before the date of the auditor's report, except:
A. The entity's audit committee or others charged with governance have agreed with the audit findings and conclusions in the auditor's report.
B. All statements comprising the financial statements, including the related notes, have been prepared.
C. Management has asserted that they have taken responsibility for the financial statements.
D. The audit documentation has been reviewed and found to support the conclusions reached.
A. The entity's audit committee or others charged with governance have agreed with the audit findings and conclusions in the auditor's report
This is not required to be completed on or before date of audit report. For non-issuer, this can be done 60 days beyond the report release date
53
Which of the following statements is correct about actions taken after the documentation completion date?
A. An auditor must not make any additions to audit documentation before the end of the specified retention period.
B. The auditor must not make any deletions to audit documentation before the end of the specified retention period.
C. An auditor must not make any amendments to audit documentation before the end of the specified retention period.
D. An auditor must not make any changes to audit documentation before the end of the specified retention period.
B. The auditor must not make any deletions to audit documentation before the end of the specified retention period
NO deletions allowed! Additions, amendments, and / or changes are allowed
54
On which of the following dates would it be appropriate for an auditor of a nonissuer to discard audit documentation if the engagement letter was signed on June 30, Year 1, the audit was substantially complete on September 1, Year 1, and the audit report was released on March 15, Year 2?
A. September 1, Year 6
B. June 30, Year 6
C. March 30, Year 7
D. June 30, Year 3
C. March 30, Year 7
Retention period for non-issuer is 5 years. From the release date of March 15, Y2 + 5 years = March Y7
55
Which of the following is not required documentation in an audit in accordance with generally accepted auditing standards?
A. A written audit program describing audit procedures to be performed.
B. An engagement letter.
C. A narrative description of the internal control system.
D. The auditor's assessment of the risk of material misstatement.
C. A narrative description of the internal control system
56
Which of the following statements is most accurate regarding audit documentation requirements?
A. The auditor should document findings that could result in a modification of the auditor's report.
B. If different audit procedures were performed due to a lack of responsiveness by the client, the lack of responsiveness should not be included in the working papers.
C. If the results of audit procedures indicate a need to revise the previous assessment of risk, the new assessment should be documented and the original assessment should be removed.
D. If an oral explanation serves as sufficient support for the work the auditor performed, the explanation should be documented in the working papers.
A. The auditor should document findings that could result in a modification of the auditor's report
Remember that NO documentation should be removed. Everything must be included. Oral explanations do not represent adequate support for conclusions drawn, but may be used to clarify information obtained from sufficient audit documentation
57
A company that retains a CPA with the appropriate knowledge, skills, and abilities to prepare timely and effective financial reporting is applying the ideas from which principle of effective internal control over financial reporting?
A. Commitment to competence
B. Board independence and oversight
C. Accountability
D. Commitment to ethics and integrity
A. Commitment to competence
Choice A relates to encouraging the company to retain qualified personnel to handle financial reporting
58
The Internal Control—Integrated Framework contains objectives that cover each of the following, except:
A. High-level goals established by leadership to develop the entity’s mission.
B. Ensuring all applicable laws and regulations are followed.
C. The safeguarding of the entity’s assets against potential losses.
D. The transparency of internal and external financial reporting.
A. High-level goals established by leadership to develop the entity’s mission
Choice A mostly relates to strategic objectives, which are a part of enterprise risk management. Not a part of Integrated control - integrated framework
59
An auditor would most likely be concerned with controls that provide reasonable assurance about the:
A. Appropriate prices the entity should charge for its products.
B. Efficiency of management's decision-making process.
C. Methods of assigning production tasks to employees.
D. Entity's ability to process and summarize financial data.
D. Entity's ability to process and summarize financial data
Auditor is primarily concerned with fair presentation of the financial statements
60
Objectives of an entity include:
-Information and Communication Systems - YES / NO
-Reliable Financial Reporting - YES / NO
-Effective and Efficient Operations - YES / NO
-Information and Communication Systems - NO
-Reliable Financial Reporting - YES
-Effective and Efficient Operations - YES
Three categories are reliability of financial reporting, effectiveness/efficiency of operations, and compliance with laws
Information and communication systems is one of the 5 components of internal control instead, making that a NO response
61
Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?
A. The existence of related party transactions.
B. The complexity of the information system relevant to financial reporting.
C. The adequacy of the accounting records.
D. The operating effectiveness of controls.
C. The adequacy of the accounting records
Auditability - whether FS can be effectively be audited by obtaining sufficient appropriate evidence to form opinion. Factors such as incompleteness, inaccuracy, or missing support will affect auditability since they cannot gather enough reliable evidence
62
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A. Management's refusal to permit the CPA to perform substantive tests before the year-end.
B. Management's disregard of its responsibility to maintain an adequate internal control environment.
C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions.
D. The CPA's lack of understanding of the prospective client's internal auditor's computer-assisted audit techniques.
B. Management's disregard of its responsibility to maintain an adequate internal control environment
63
Which of the following statements would least likely appear in an auditor's engagement letter?
A. Our engagement is subject to the risk that material errors or fraud, including defalcations, if they exist, will not be detected.
B. Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.
C. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.
D. Arrangements to be made with the predecessor auditor.
C. After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement
Auditor will not consult with client about audit procedures, never
64
Obtaining a signed engagement letter would most likely help the auditor to avoid which of the following?
A. The auditor believed that management intended to correct an identified material misstatement, however, management determined that the misstatement should be left as uncorrected.
B. Management needed to obtain an audit report in accordance with a special purpose framework other than U.S. GAAP, but the auditor does not have the appropriate training and knowledge to perform the required engagement.
C. The auditor assumed that all subsequent events had been disclosed by management, but management failed to communicate a transaction that closed just before the audit report was issued.
D. A disagreement between management and the auditor on the terms of the contingent portion of the audit fee agreement.
B. Management needed to obtain an audit report in accordance with a special purpose framework other than U.S. GAAP, but the auditor does not have the appropriate training and knowledge to perform the required engagement
Engagement letter’s purpose is to establish an agreement with auditor and client to reduce misinterpretation. Eng letter should include applicable financial reporting framework to be used on the report
Choice A and C relate to the Representation letter, which confirms all promises by management
Choice D - contingent fees are not allowed
65
The permanent file of the audit documentation for an engagement generally would not include:
A. Lease agreements.
B. Working trial balance.
C. Flowchart of internal control.
D. Bond indenture agreements.
B. Working trial balance
Working trial balance would most likely be found in Current file
66
Audit documentation serves mainly to:
A. Monitor the effectiveness of the CPA firm's quality management activities.
B. Satisfy the auditor's responsibilities concerning the Code of Professional Conduct.
C. Provide the principal support for the auditor's report.
D. Document the level of independence maintained by the auditor.
C. Provide the principal support for the auditor's report
Documentation serves as:
-principal support for audit report
-assist in planning conduct and supervision of audit
-accountability
-useful information
67
According to COSO, which of the following must be established prior to the risk assessment process?
A. Control activities
B. External environment changes
C. Fraud scenarios
D. Entity-level objectives
D. Entity-level objectives
Choice D, because entity level objectives must be established before the risk assessment process, as risk is evaluated in terms of potential impact on the objectives.
Choice A is for after, and Choice B and C are for during the risk assessment process
68
The COSO Cube is used to most effectively illustrate that:
A. All categories of objectives and components are applicable across all organizational levels.
B. Monitoring activities are secondary to the other components.
C. The entity level is held most accountable for the five components.
D. The most relevant objectives for the various organizational structure levels are the compliance objectives.
A. All categories of objectives and components are applicable across all organizational levels
All 5 categories (control environment, risk assessment, information and communication, monitoring and existing control activities) and 3 objectives (reliability, effective/efficient, and compliance) are all interrelated and linked together
69
According to COSO, an executive’s deliberate misrepresentation to a banker who is considering whether to make a loan to an enterprise is an example of which of the following internal control limitations?
A. Breakdown
B. Collusion
C. Management override
D. Costs versus benefits
C. Management override
Misrepresentation to the banker was overridden, therefore making this choice C
70
The control environment component of the Internal Control—Integrated Framework includes which of the following principles?
A. The selection and development of control activities.
B. The appropriate communication of control deficiencies.
C. The identification and analysis of risks.
D. The independence and oversight responsibilities of the board of directors.
D. The independence and oversight responsibilities of the board of directors
71
The (existing) control activities component of the Internal Control—Integrated Framework includes which of the following principles?
A. The selection and development of control activities.
B. The appropriate communication of control deficiencies.
C. The identification and analysis of risks.
D. The independence and oversight responsibilities of the board of directors
A. The selection and development of control activities
72
The monitoring component of the Internal Control—Integrated Framework includes which of the following principles?
A. The selection and development of control activities.
B. The appropriate communication of control deficiencies.
C. The identification and analysis of risks.
D. The independence and oversight responsibilities of the board of directors
B. The appropriate communication of control deficiencies
73
The risk assessment component of the Internal Control—Integrated Framework includes which of the following principles?
A. The selection and development of control activities.
B. The appropriate communication of control deficiencies.
C. The identification and analysis of risks.
D. The independence and oversight responsibilities of the board of directors
D. The independence and oversight responsibilities of the board of directors
74
Internal control includes which of the following components:
Control Environment - YES / NO
Monitoring - YES / NO
Information and Communication Systems - YES / NO
Risk Assessment - YES / NO
Control Environment - YES
Monitoring - YES
Information and Communication Systems - YES
Risk Assessment - YES
Internal control rounds out all 5 components for COSO. Last one missing is (existing) control activities
75
Which of the following correctly matches a factor with the related internal control component?
A. Recording the proper monetary value of transactions is part of control activities.
B. Human resource policies and practices are part of control activities.
C. Participation of the audit committee is part of monitoring.
D. The internal audit function is part of monitoring.
D. The internal audit function is part of monitoring
Correct answers for the other options:
A) recording proper monetary value of transactions is information and communication
B) human resource policies and practices are control environment
C) participation of audit committee is control environment
76
The Gotham Corporation regularly produces budget vs. actual data for its managers. The company is particularly sensitive to personnel costs, and division variances of greater than five percent for any period are promptly investigated to determine if budgeted positions have not been filled or if there has been extraordinary overtime. Timely exception resolution of this character illustrates the information and communication principles typically associated with:
A. Internal Communication.
B. Financial Reporting Information.
C. External Communication.
D. Obtain and Use Information.
D. Obtain and Use Information
Organization obtains, generates and uses relevant information to support functioning of the control
77
An internal audit manager requested information detailing the amount and type of training that the IT department's staff received during the last year. According to COSO, the training records would provide documentation for which of the following principles?
A. Exercising oversight of the development and performance of internal control.
B. Demonstrating a commitment to retain competent individuals in alignment with objectives.
C. Developing general control activities over technology to support the achievement of objectives.
D. Holding individuals responsible for their internal control responsibilities in the pursuit of objectives.
B. Demonstrating a commitment to retain competent individuals in alignment with objectives
Of the 17 principles (commit to competence) this relates to hiring, developing and retaining of competent employees
78
According to COSO, what is the first ongoing monitoring step in evaluating the effectiveness of an internal control system?
A. Reevaluating the design and implementation to establish a new baseline.
B. Identifying changes in internal control that have taken place.
C. Periodically revalidating operations where no known change has occurred.
D. Establishing a control baseline.
D. Establishing a control baseline
Without a baseline established, there is nothing to compare it to when the evaluation is performed
79
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses an entity's commitment to competency?
A. Risk Assessment.
B. Information and communication.
C. Control Environment.
D. Control Activities.
C. Control Environment
Control environment - commit to competency, accountability and organizational structure
80
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework specifies objectives, identify/analyze risk and consider fraud and control changes?
A. Risk Assessment.
B. Information and communication.
C. Control Environment.
D. Control Activities
A. Risk Assessment
81
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework internal and external communication and obtain & use information?
A. Risk Assessment.
B. Information and communication.
C. Control Environment.
D. Control Activities
B. Information and communication
82
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework includes deployment of policies and procedures and the selection and development of controls around information technology?
A. Risk Assessment.
B. Information and communication.
C. Control Environment.
D. Control Activities
D. Control Activities
83
According to COSO, each of the following is a principle relating to the risk assessment component of internal control, except:
A. The organization considers the potential for fraud in assessing risks to the achievement of objectives.
B. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.
C. The organization selects and develops activities contributing to the mitigation of risks to the achievement of objectives to acceptable levels.
D. The organization identifies and assesses changes that could significantly impact the system of internal control.
C. The organization selects and develops activities contributing to the mitigation of risks to the achievement of objectives to acceptable levels
This principle is more related with (existing) control activities
Choice A, B and D are related to the risk assessment component
84
According to COSO, management oversight of the effectiveness of internal control provides evidence for which of the following control components?
A. Monitoring activities
B. Risk assessment
C. Control activities
D. Information and communication
A. Monitoring activities
Monitoring involves ongoing and separate evaluations which consist of oversight, reviews or inspections
85
Which of the following factors are included in an entity's control environment?
Participation of those charged with governance - YES / NO
Management philosophy - YES / NO
Organizational structure - YES / NO
Participation of those charged with governance - YES
Management philosophy - YES
Organizational structure - YES
86
Which of the following would an auditor most likely consider in evaluating the control environment of an audit client?
A. The entity's process to regularly monitor control performance.
B. Overall employee satisfaction with assigned duties.
C. Management's operating style.
D. Management reviews of monthly financial statements.
C. Management's operating style
This would also include management philosophy on their approach to taking and managing business risk, attitudes toward financial reporting and functions
87
Which of the following would an auditor most likely consider in evaluating the monitoring of an audit client?
A. The entity's process to regularly monitor control performance.
B. Overall employee satisfaction with assigned duties.
C. Management's operating style.
D. Management reviews of monthly financial statements
A. The entity's process to regularly monitor control performance
88
Which of the following would an auditor most likely consider in evaluating the (Existing) control activities of an audit client?
A. The entity's process to regularly monitor control performance.
B. Overall employee satisfaction with assigned duties.
C. Management's operating style.
D. Management reviews of monthly financial statements
D. Management reviews of monthly financial statements
89
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:
A. Management is dominated by one individual who is also a shareholder.
B. Internal auditors have direct access to those charged with governance.
C. External policies established by parties outside the entity affect its accounting practices.
D. The audit committee is active in overseeing the entity's financial reporting policies.
A. Management is dominated by one individual who is also a shareholder
90
Which of the following statements is true regarding the risk assessment component of internal control?
A. An auditor need not consider an entity's risk assessment because he or she is primarily concerned with audit risk in a financial statement audit.
B. An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting.
C. An auditor's evaluation of an entity's risk assessment may not be applicable to the audit of every entity.
D. An auditor evaluates an entity's risk assessment because it is a component of overall audit risk in a financial statement audit.
B. An auditor evaluates an entity's risk assessment to understand how management addresses risks relevant to financial reporting
91
Which of the following statements about internal control is correct?
A. A properly maintained system of internal control reasonably ensures that collusion among employees cannot occur.
B. The cost-benefit relationship is a primary criterion that should be considered in designing a system of internal control.
C. The establishment and maintenance of a system of internal control is an important responsibility of the external auditor.
D. An exceptionally strong system of internal control is enough for the auditor to eliminate substantive tests on a significant account balance.
B. The cost-benefit relationship is a primary criterion that should be considered in designing a system of internal control
92
The monitoring component of internal control excludes:
A. Assessing the quality of control performance over time.
B. Improving controls that are not operating effectively.
C. Assessing information derived from external parties.
D. Eliminating controls that are not operating effectively.
D. Eliminating controls that are not operating effectively
93
Within the COSO Internal Control—Integrated Framework, which of the following components is designed to ensure that internal controls continue to operate effectively?
A. Monitoring.
B. Information and communication.
C. Risk assessment.
D. Control environment.
A. Monitoring
94
According to COSO, an effective approach to monitoring internal control involves each of the following steps, except:
A. Designing and executing monitoring procedures that are prioritized based on risks to achieve organizational objectives.
B. Establishing a foundation for monitoring.
C. Increasing the reliability of financial reporting and compliance with applicable laws and regulations.
D. Assessing and reporting the results, including following up on corrective action where necessary.
C. Increasing the reliability of financial reporting and compliance with applicable laws and regulations
This is more in line with management philosophy related to effective reporting and control environment
95
A not-for-profit organization periodically conducts focus groups of employees, service beneficiaries and governance board members to reevaluate its mission vision and values to determine the accuracy of the strategic statements to refine them where necessary. This activity relates to which component of internal control?
A. Risk assessment.
B. Information and communication.
C. Monitoring.
D. Control activities.
C. Monitoring
96
Which of the following is usually considered a monitoring activity?
A. Segregating duties of employees.
B. Processing entity transactions.
C. Analyzing new information systems.
D. Using information from customer complaints.
D. Using information from customer complaints
97
Which of the following is usually considered an Existing control activity?
A. Segregating duties of employees.
B. Processing entity transactions.
C. Analyzing new information systems.
D. Using information from customer complaints
A. Segregating duties of employees
Ensure that management directives are carried out and steps to address risk are taken
98
Which of the following situations is most directly related to the monitoring component of internal controls?
A. The warehouse manager limits access to inventory to authorized individuals.
B. The human resources manager creates a plan to evaluate, promote, and compensate employees.
C. An internal auditor evaluates the timeliness of bank reconciliations.
D. The individual who reconciles cash is not the same individual who has custody of the cash.
C. An internal auditor evaluates the timeliness of bank reconciliations
99
Which of the following is a management control that most likely could improve management's ability to supervise company activities effectively?
A. Supporting employees with the resources necessary to discharge their responsibilities.
B. Establishing budgets and forecasts to identify variances from expectations.
C. Limiting direct access to assets by physical segregation and protective devices.
D. Monitoring compliance with control requirements imposed by regulatory bodies.
B. Establishing budgets and forecasts to identify variances from expectations
Variances from budgets serve as signals to managers that a potential problem exists
100
Segregation of duties is a control that should be applied to all categories of business processes. Segregation of duties policies and procedures should ensure functions are segregated from one another. From a control perspective, which of the following processes does not need to be segregated from the others?
A. Record keeping
B. Custody of assets
C. Marketing
D. Authorization
C. Marketing
Marketing is one function that does not require segregation of duties. The only functions that require it are custody of assets, record keeping, and authorization (Choice A, B and D)
101
An organization has installed an uninterrupted power supply at its facility. This can most accurately be categorized as what type of control?
A. General control
B. Logical control
C. Information-processing control
D. Physical control
D. Physical control
Physical controls monitory and control the environment of the workplace and computing facilities
102
What type of controls are designed to ensure that an organization’s control environment is stable and well-managed?
A. General control
B. Logical control
C. Information-processing control
D. Physical control
A. General control
103
What type of controls use software and data to monitory and control access to information and computing systems?
A. General control
B. Logical control
C. Information-processing control
D. Physical control
B. Logical control
104
What type of controls can be auto-mated or manual, and apply to the processing of information and transations to help ensure transactions occurred, are authorized and are accurately processed and reported?
A. General control
B. Logical control
C. Information-processing control
D. Physical control
C. Information-processing control
105
Which member of the audit team has the primary responsibility of the audit?
A) engagement supervisor
B) HR manager
C) engagement partner
D) senior in-charge
C) engagement partner
They are responsibility for planning the audit, supervising the work of team members and compliance with relevant auditing standards
106
At what point should the auditor seek to obtain an understanding of the client’s industry and business?
A) before accepting the engagement
B) after accepting the engagement, before commencing the audit
C) at end of the audit
D) one week after obtaining client prepared trial balance
B) after accepting the engagement, before commencing the audit
Doing so provides information regarding events and transactions that may affect the client’s financial statements
107
The senior auditor most likely would have a supervisory responsibility to explain to the staff assistants:
A. That fraud is not to be reported to those charged with governance.
B. Why certain documents are being transferred from the current file to the permanent file.
C. How the results of various auditing procedures performed by the assistants should be evaluated.
D. What benefits may be attained by the assistants' adherence to established time budgets.
C. How the results of various auditing procedures performed by the assistants should be evaluated
108
Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff?
A. The size and complexity of the company.
B. The fee to be paid by the client.
C. The risk of material misstatement in the audit.
D. The knowledge, skill, and ability of each engagement team member.
B. The fee to be paid by the client
109
Joe Smith has been promoted to audit supervisor prior to an upcoming audit of a large existing client. Assuming that Smith is assigned five assistants for the client audit, his supervisory duties may include all of the following, except for:
A. Reviewing the work performed by his assistants to determine adequacy and whether the audit objectives were met.
B. Communicating to his assistants the susceptibility of the client’s financial statements to material misstatement due to error or fraud.
C. Staying informed with his assistants regarding audit issues or difficulties encountered with the client.
D. Assuming primary responsibility for all phases of the client audit
D. Assuming primary responsibility for all phases of the client audit
Engagement partner, not supervisor, would have primary responsibility for the client audit
110
The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter's resolution, the CPA firm's procedures should enable the assistant to:
A. Report the disagreement to an impartial peer review monitoring team.
B. Document the details of the disagreement with the conclusion reached.
C. Refer the disagreement to the AICPA's Auditing Standards Board.
D. Discuss the disagreement with the entity's management or its audit committee
B. Document the details of the disagreement with the conclusion reached
111
During the end of a client audit, one member of the audit engagement team does not agree with the conclusion reached by the remaining audit team members on a key client accounting issue. Under this scenario, the dissenting auditor may take any of the following actions, except for:
A. Disassociating from the audit conclusion in the event there is not an adequate resolution to the dispute.
B. Requesting that his or her dissenting opinion be documented.
C. Consulting with the engagement partner on the matter.
D. Accepting the engagement team’s conclusion despite reservation after orally discussing the concern with the audit supervisor.
D. Accepting the engagement team’s conclusion despite reservation after orally discussing the concern with the audit supervisor
112
An auditor is required to obtain an understanding of the entity's business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?
A. To enable the auditor to accurately identify significant deficiencies.
B. To allow the auditor to more accurately perform tests of controls.
C. To decide whether it will be necessary to perform analytical procedures.
D. To assist the auditor to accurately interpret information obtained during an audit.
D. To assist the auditor to accurately interpret information obtained during an audit
113
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
A. Obtaining a written representation letter from the client's management.
B. Examining documents to detect any noncompliance with laws and regulations having a material effect on the financial statements.
C. Considering whether the client's accounting estimates are reasonable in the circumstances.
D. Determining the extent of involvement of the client's internal auditors.
D. Determining the extent of involvement of the client's internal auditors
Several factors that are considered are planning the nature, timing and extent of auditing procedures. One of these factors is finding out the involvement of internal auditors
114
Which of the following procedures would an auditor most likely perform in the planning stage of an audit?
A. Confirm a sample of the entity's accounts payable with known creditors.
B. Obtain written representations from management that there are no unrecorded transactions.
C. Make a preliminary judgment about materiality.
D. Communicate management's initial selection of accounting policies to the audit committee.
C. Make a preliminary judgment about materiality
115
Which of the following would not be a primary function of an audit strategy?
A. Provide a preliminary assessment of materiality and tolerable misstatement.
B. Outline reporting objectives.
C. Provide the scope of the audit.
D. Outline the nature, extent and timing of audit procedures.
D. Outline the nature, extent and timing of audit procedures
Choice D is something that would be done during an AUDIT PLAN, NOT AUDIT Strategy
116
In establishing the overall audit strategy for an audit of a nonissuer, an auditor should:
A. Perform an internal control walk-through of the nonissuer to determine the type of audit procedures required.
B. Plan the timing of the audit and the nature of the communications required based on the engagement's reporting objectives.
C. Form a conclusion on compliance with independence requirements that apply to the audit engagement.
D. Assess the risk of material misstatement and develop substantive procedures to mitigate the risk.
B. Plan the timing of the audit and the nature of the communications required based on the engagement's reporting objectives
117
The audit plan usually cannot be finalized until the:
A. Significant deficiencies in internal control have been communicated to those charged with governance.
B. Search for unrecorded liabilities has been performed and documented.
C. Representation letter has been signed by the client.
D. Consideration of the entity's system of internal control has been completed.
D. Consideration of the entity's system of internal control has been completed
118
Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
A. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.
B. An internal control questionnaire identifying controls that assure specific objectives will be achieved.
C. An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives.
D. A flowchart or narrative of the information system relevant to financial reporting describing the recording and classification of transactions for financial reporting.
C. An audit plan setting forth in detail the procedures necessary to accomplish the engagement's objectives
According to GAAS, auditor MUST document the audit plan, setting forth procedures necessary to accomplish the engagement objectives
119
The engagement partner is in the process of creating an audit plan, which includes outlining which audit procedures to be performed in the current audit. In order to detect material misstatements, the auditor would use which of the following audit procedures?
A. Risk assessment procedures.
B. Other GAAS-related audit procedures.
C. Substantive procedures.
D. Test of controls.
C. Substantive procedures
Think detect material misstatement to do substantive testing to test details and analytical procedures
120
The engagement partner is in the process of creating an audit plan, which includes outlining which audit procedures to be performed in the current audit. In order to evaluate he operating effectiveness of existing controls in preventing or detecting material misstatements, the auditor would use which of the following audit procedures?
A. Risk assessment procedures.
B. Other GAAS-related audit procedures.
C. Substantive procedures.
D. Test of controls
D. Test of controls
121
The engagement partner is in the process of creating an audit plan, which includes outlining which audit procedures to be performed in the current audit. In order to obtain an understanding of the client and its environment, the auditor would use which of the following audit procedures?
A. Risk assessment procedures.
B. Other GAAS-related audit procedures.
C. Substantive procedures.
D. Test of controls
A. Risk assessment procedures
122
Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to:
A. Decrease the extent of auditing procedures to be applied to the class of transactions.
B. Apply the planned substantive tests prior to the balance sheet date.
C. Increase the assessed level of control risk for relevant financial statement assertions.
D. Perform the planned auditing procedures closer to the balance sheet date.
D. Perform the planned auditing procedures closer to the balance sheet date
Decrease in amount of misstatements that an auditor can tolerate = increase extent of auditing procedures = perform procedures closer to balance sheet date
123
An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:
A. Should be especially considered when there are rapidly changing economic conditions.
B. Presumes that the auditor will reperform the tests as of the balance sheet date.
C. Eliminates the use of certain statistical sampling methods that would otherwise be available.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected.
D. Potentially increases the risk that errors that exist at the balance sheet date will not be detected
Errors will more likely occur between interim date and balance sheet date
124
Before applying principal substantive tests to an entity's accounts receivable at an interim date, an auditor should:
A. Consider the likelihood of assessing the risk of incorrect rejection too low.
B. Project sampling risk at the maximum for tests covering the remaining period.
C. Ascertain that accounts receivable are immaterial to the financial statements.
D. Assess the difficulty in controlling the incremental audit risk
D. Assess the difficulty in controlling the incremental audit risk
125
Which of the following accounts would an auditor most likely test prior to the balance sheet date?
A. Short-term debt.
B. Interest receivable.
C. Maintenance and repairs expense.
D. Accrued liabilities.
. C. Maintenance and repairs expense
Choice C is a income statement account, which is reported on a PERIOD OF TIME that includes transactions that took place during the full period
Choice A, B and D are balance sheet accounts, which is reported on POINT IN TIME, where the component of the ending balance would be unknown prior to balance sheet date
126
In an audit of a nonissuer, the auditor plans to recalculate the nonissuer's year-end employee vacation accrual using a management-provided list of employees' salaries and banked vacation hours. In order to validate the completeness of the employees' information, the auditor would most appropriately:
A. Use the payroll system to validate a sample of employee salaries.
B. Agree the number of employees included in the vacation-accrual calculation to the final payroll register.
C. Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation.
D. Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department.
B. Agree the number of employees included in the vacation-accrual calculation to the final payroll register
Verification that employees are included in calculation
127
In an audit of a nonissuer, the auditor plans to recalculate the nonissuer's year-end employee vacation accrual using a management-provided list of employees' salaries and banked vacation hours. In order to validate the accuracy of the employees' information, the auditor would most appropriately:
A. Use the payroll system to validate a sample of employee salaries.
B. Agree the number of employees included in the vacation-accrual calculation to the final payroll register.
C. Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation.
D. Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department
A. Use the payroll system to validate a sample of employee salaries
OR
D. Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department
128
In an audit of a nonissuer, the auditor plans to recalculate the nonissuer's year-end employee vacation accrual using a management-provided list of employees' salaries and banked vacation hours. In order to validate the existence of the employees' information, the auditor would most appropriately:
A. Use the payroll system to validate a sample of employee salaries.
B. Agree the number of employees included in the vacation-accrual calculation to the final payroll register.
C. Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation.
D. Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department
C. Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation
To ensure employees that were removed or excluded from calculation would be existence assertion
129
Which type of audit procedures would an auditor use to test a client’s financial statement assertions at the account, transaction, or disclosure level?
A. Substantive procedures (only).
B. Test of controls (only).
C. Analytical procedures (only).
D. Substantive procedures and test of controls.
D. Substantive procedures and test of controls
130
In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the:
A. Timing of audit procedures.
B. Cost-benefit of gathering evidence.
C. Selected audit techniques.
D. Financial statement assertions.
D. Financial statement assertions
131
Which of the following persons would not qualify as a specialist?
A) internal auditor
B) actuaries
C) attorney
D) engineer
A) internal auditor
Specialist is a person/firm with special skills in a field other than accounting or auditing that assist in obtaining sufficient appropriate audit evidence, or to prepare the financial statements
132
For effects on the auditors report, if specialist findings indicate that the FS are not in conformity with GAAP, which opinion would be expressed?
A) qualified or adverse
B) unqualified
C) qualified or disclaimer
D) withdraw from engagement
A) qualified or adverse
133
For effects on the auditors report, if there is an unresolved difference between specialist findings and the FS or unresolved disagreement between auditor and the specialist, which opinion would be expressed?
A) qualified or adverse
B) unqualified
C) qualified or disclaimer
D) withdraw from engagement
C) qualified or disclaimer
Due to a scope limitation
134
For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective?
Assessment of inherent risk - YES / NO
Assessment of control risk - YES / NO
Evaluation of significant accounting estimates - YES / NO
Materiality of misstatements - YES / NO
Assessment of inherent risk - NO
Assessment of control risk - NO
Evaluation of significant accounting estimates - NO
Materiality of misstatements - NO
Independent auditors are to not share any responsibility involving judgements and risk assessments with internal auditors because they are NOT INDEPENDENT
135
The auditor decides to use the client’s internal audit staff in the current audit. Which of the following is a false statement regarding the external auditor’s responsibilities when using internal auditors to assist in a client audit?
A. The external auditor should determine the objectivity of the internal audit function by determining to whom the department reports in the organization.
B. During the planning phase, the external auditor should obtain an understanding of the scope of the internal auditors’ activities, audit procedures used, and their access to the client’s records.
C. The external auditor should supervise and review all the work (papers) completed by the internal auditors.
D. For routine audit procedures, the external auditor may rely on the professional judgment of the internal audit manager.
D. For routine audit procedures, the external auditor may rely on the professional judgment of the internal audit manager
Internal auditor, including internal managers, cannot be utilized to make judgment calls. Instead, all judgment calls must be made by external independent auditor
136
Which of the following statements regarding the use of an internal auditor is correct?
A. The auditor can rely on the work of an internal auditor in limited circumstances, as long as they are not making decisions with a high degree of subjectivity, or decisions that require judgment and assessment.
B. The use of internal auditors can only be allowed if the audit firm is contracting with and reimbursing the internal auditors.
C. The auditor cannot rely on the work of an internal auditor, because they are not independent of the client, their employer.
D. The auditor can rely on the work of an internal auditor for any decision because internal auditors are required to report to the audit committee of the Board of Directors, thus they are independent of the client.
A. The auditor can rely on the work of an internal auditor in limited circumstances, as long as they are not making decisions with a high degree of subjectivity, or decisions that require judgment and assessment
137
The work of internal auditors may affect the independent auditor's:
I. Procedures performed in obtaining an understanding of the system of internal control.
II. Procedures performed in assessing the risk of material misstatement.
III. Substantive procedures performed in gathering direct evidence.
A. I and III only.
B. I and II only.
C. II and Ill only.
D. I, II, and III.
D. I, II, and III
Internal auditor may affect nature, timing and extent of the audit, including choices I, II and III above
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:
A. Existence of fixed asset additions.
B. Valuation of related party transactions.
C. Existence of contingencies.
D. Valuation of intangible assets.
A. Existence of fixed asset additions
Answer that is needed is one that has low subjectivity (how much judgment estimation or interpretation is involved in testing an assertion)
Low subjectivity = more factual and verifiable with more evidence. This allows independent auditor to rely on internal auditor work more
High subjectivity = less clear cut and more open to interpretation. This requires the auditor to rely less on internal auditor, and to have the independent auditor perform the testing instead
139
In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:
A. Internal auditor's compliance with professional internal auditing standards.
B. Results of ratio analysis that may identify unusual transactions and events.
C. Evidence supporting a low assessed level of control risk.
D. Client's policies that limit the internal auditor's access to management salary data.
A. Internal auditor's compliance with professional internal auditing standards
140
In assessing the competence of internal auditors, an independent CPA most likely would obtain information about the:
A. Policies limiting internal auditors from communicating with the audit committee.
B. Influence of management on the scope of the internal auditors' duties.
C. Quality of the internal auditors' working paper documentation.
D. Entity's ability to continue as a going concern for a reasonable period of time.
C. Quality of the internal auditors' working paper documentation
COMPETENCE = THINK CERTIFICATION, EXPERIENCE AND PERFORMANCE
141
When assessing an internal auditor's objectivity, an independent auditor should:
A. Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions.
B. Review the internal auditor's reports to verify that the conclusions reached are consistent with the procedures performed.
C. Analyze the risk factors that relate to misstatements arising from the misappropriation of assets.
D. Perform tests of controls to determine whether significant internal activities are properly maintained.
A. Consider the policies that prohibit the internal auditor from auditing areas where relatives are employed in key management positions
OBJECTIVITY = THINK POLICIES, OR ORGANIZATION LEVELS AND MANAGEMENT POSITIONS
142
Which of the following statements best describes how a detailed audit plan of a CPA who is engaged to audit the financial statements of a large publicly held company compares with the audit client's comprehensive internal audit program?
A. The comprehensive internal audit plan is substantially identical to the audit plan used by the CPA because both cover substantially identical areas.
B. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.
C. The comprehensive internal audit plan is less detailed and covers fewer areas than would normally be covered by the CPA.
D. The comprehensive internal audit plan is more detailed although it covers fewer areas than would normally be covered by the CPA.
B. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA
Internal audits would cover more areas in greater depth than those of the "independent auditors," whose concerns are limited to areas materially affecting the "financial statements taken as a whole."
143
The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:
A. Not assign any task to the internal auditor because of the internal auditor's lack of independence.
B. Allow the internal auditor to perform analytical procedures, but not be involved with any tests of details.
C. Allow the internal auditor to audit a major subsidiary of the company.
D. Allow the internal auditor to perform tests of internal controls.
D. Allow the internal auditor to perform tests of internal controls
Internal auditor’s involvement should generally be limited to testing of internal controls
144
While working on a current audit for an insurance company, the auditor discovers that the client uses an actuary to assist in technical matters related to the preparation of the company’s financial statements. The actuary above would best be described as a(n):
A. External accounting expert.
B. Auditor’s specialist.
C. General specialist.
D. Management specialist.
D. Management specialist
145
Which of the following statements is correct concerning an auditor's use of the work of a specialist?
A. If an auditor believes that the determinations made by a specialist are unreasonable, only a qualified opinion may be issued.
B. An auditor may not use a specialist in the determination of physical characteristics relating to inventories.
C. If there is a material difference between a specialist's findings and the assertions in the financial statements, only an adverse opinion may be issued.
D. The work of a specialist who is related to the client may be acceptable under certain circumstances.
D. The work of a specialist who is related to the client may be acceptable under certain circumstances
146
Which of the following is true about the auditor's use of an internal auditor and a specialist?
A. The auditor may share responsibility for the audit report with an internal auditor who is deemed to be both objective and competent, but may not share such responsibility with a specialist.
B. The auditor must assess the competency of both the internal auditor and the specialist.
C. The auditor may share responsibility for the audit report with a specialist who is deemed to be both objective and competent, but may not share such responsibility with an internal auditor.
D. A specialist may be related to the client, but an internal auditor may not.
B. The auditor must assess the competency of both the internal auditor and the specialist
147
An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances, the auditor:
A. Should communicate this matter to those charged with governance as a significant deficiency in internal control.
B. Should assess the risk that the actuary's objectivity might be impaired.
C. Is not permitted to rely on the actuary because of a lack of independence.
D. Is required to disclose the contractual relationship in the auditor's report.
B. Should assess the risk that the actuary's objectivity might be impaired
Specialist that is related to the client is acceptable in certain circumstances. With this, auditor would most likely perform additional procedures to verify objectivity
148
An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the:
A. Auditor believes that the specialist's findings are reasonable in the circumstances.
B. Specialist's findings provide the auditor with greater assurance of reliability about management's representations.
C. Auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset.
D. Specialist's findings support the related assertions in the financial statements.
C. Auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset
ONLY MENTION SPECIALIST IF A MODIFIED OPINION
IF UNMODIFIED OPINION, DO NOT MENTION SPECIALIST IN AUDIT REPORT
149
An auditor of a nonissuer intends to reference the work of an auditor's external specialist in the audit report because the reference was relevant to understanding a modification to the auditor's opinion. In this case, the auditor should indicate in the report that:
A. The specialist had been employed by the client.
B. The specialist was responsible for evaluating an item material to the financial statements.
C. The auditor planned and evaluated the adequacy of the specialist's work.
D. The reference to the auditor's external specialist does not reduce the auditor's responsibility for that opinion.
D. The reference to the auditor's external specialist does not reduce the auditor's responsibility for that opinion
If auditor references to specialist, the report DOES NOT need to include description of how auditor planned or communicated the specialist work. This such reference is typically found in Basis for Opinion paragraph
150
In a group audit engagement of a nonissuer, which of the following items is not required to be communicated by the group auditor to the component auditor?
A. The ethical requirements relevant to the group audit, including the independence requirements
B. A request that the component auditor communicate on a timely basis newly identified related parties to the group audit team
C. An acknowledgment that the group auditor will have unrestricted access to those charged with governance of the group and the component
D. A request that the component auditor confirm that the component auditor will cooperate with the group audit team
C. An acknowledgment that the group auditor will have unrestricted access to those charged with governance of the group and the component
No communication is needed regarding the access that the group auditor will have with those charged with governance
151
For materiality, which factors must be considered with setting materiality for the financial statements as a whole?
A) qualitative factors, only
B) quantitative factors, only
C) both qualitative and quantitative factors
D) error or fraud factors
C) both qualitative and quantitative factors
152
Component performance materiality should be ___________ than performance materiality for the group financial statements as a whole
A) higher
B) equal
C) lower
D) twice
C) lower
153
Which of the following statements is not correct about materiality?
A. An auditor's consideration of materiality is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements.
B. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
C. The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important.
D. An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
D. An auditor considers materiality for the financial statements as a whole in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements
This is not true. Corrected response, auditor would consider materiality for FS as a whole in terms of the smallest aggregate level of misstatements
154
While planning the audit strategy for the current audit, the auditor establishes the materiality for the client’s financial statements taken as a whole. Which of the following is incorrect regarding the process in which the auditor actually determines the level of materiality for the financial statements taken as a whole?
A. No specific dollar amount of materiality threshold is required to be established.
B. Both quantitative and qualitative factors are considered.
C. The auditor uses his or her professional judgment when assessing materiality.
D. Materiality is based on the smallest level of misstatement for any one financial statement.
A. No specific dollar amount of materiality threshold is required to be established
This is false, corrected statement says that the auditor needs to determine an actual materiality threshold amount for the client’s audit
155
As part of developing an audit strategy for an existing client, the auditor may determine a materiality level for all the following, with the exception of:
A. Financial statements as a whole.
B. Transaction cycles with misstatements in the prior year’s audit.
C. Performance materiality.
D. Certain classes of transactions.
B. Transaction cycles with misstatements in the prior year’s audit
156
Which of the following statements is correct with regard to the consideration of materiality when an auditor is planning and performing a financial statement audit of an issuer?
A. When the reevaluation of materiality results in a significantly lower amount than initially established, an auditor would generally not modify audit procedures.
B. When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods.
C. An auditor does not need to express materiality as a specified, quantitative amount.
D. An auditor should determine a tolerable misstatement threshold at the overall financial statement level, but not at the account or disclosure level.
B. When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods
157
An auditor of an issuer should determine the amount of tolerable misstatement for assessing risks of material misstatement at which of the following levels?
A. Total assets
B. Financial statements as a whole
C. Total revenue
D. Account
D. Account
This would help to properly assess risk of material misstatement for particular population
158
Tracy, senior accountant at JFM CPA Firm, is determining the performance materiality for her client in Year 2. Tracy expects that there will be a high likelihood of uncorrected and undetected misstatements.
JFM CPA Firm's materiality guidelines advise the auditor to set performance materiality in the range of 50 percent to 70 percent of overall materiality based on the likelihood of misstatement. Tracy has calculated overall materiality at $140,000.
Tracy will most likely set performance materiality closest to:
A. $140,000
B. $98,000
C. $70,000
D. $168,000
C. $70,000
Performance materiality = overall materiality * high likelihood of uncorrected misstatements (LOWER %)
140,000 * .50 = 70,000
159
When there is a group audit, the group engagement team should make a preliminary assessment of materiality. Which of the following is not an accurate statement of the engagement team’s responsibilities when assessing materiality?
A. Ascertain materiality levels for specific classes of transactions, balances, or disclosures for group financial statements for which misstatements of lesser amounts than the group financial statements taken as a whole could influence user’s economic decisions.
B. Develop a threshold at which anything above would not be considered trivial to the group financial statements.
C. Assess materiality for the group financial statements as a whole, without an assessment of performance materiality.
D. Determine component materiality for those components on which the group engagement team will perform an audit.
C. Assess materiality for the group financial statements as a whole, without an assessment of performance materiality
160
In order to reduce the risk that the aggregate of undetected misstatements in the group financial statements of a nonissuer exceeds the materiality for the group financial statements as a whole, an auditor should establish a:
A. Materiality for the group financial statement that exceeds prior-year materiality for the group financial statements.
B. Materiality for the group financial statements that is lower than the component materiality.
C. Component materiality that is lower than the materiality for the group financial statements.
D. Component materiality that is equal to the materiality for the group financial statements.
C. Component materiality that is lower than the materiality for the group financial statements
161
An auditor determined materiality for planning purposes before year-end based on a nonissuer entity's prior-year financial statements. During the audit, the auditor learns that the actual financial results are significantly different from those of the prior year because of a merger. The auditor's most appropriate response would be to:
A. Reperform audit procedures completed before year-end.
B. Reassess the risk of material misstatement to determine whether detection risk remains appropriate.
C. Reevaluate the sufficiency of audit procedures performed in the prior-year audit.
D. Revise materiality for the financial statements as a whole.
D. Revise materiality for the financial statements as a whole
162
For audit risk formula = risk of material misstatement * detection risk, if RMM is high, what should the level of detection risk be at?
A) high
B) low
B) low
Risk of material misstatement and detection risk have an inverse relationship!
If RMM is low, detection risk should be high
163
Inherent risk and control risk differ from detection risk in that they:
A. Can be changed at the auditor's discretion.
B. Exist independently of the financial statement audit.
C. May be assessed in either quantitative or nonquantitative terms.
D. Arise from the misapplication of auditing procedures.
B. Exist independently of the financial statement audit
164
Detection risk differs from inherent risk and control risk in that they:
A. Can be changed at the auditor's discretion.
B. Exist independently of the financial statement audit.
C. May be assessed in either quantitative or nonquantitative terms.
D. Arise from the misapplication of auditing procedures
A. Can be changed at the auditor's discretion
Detection risk is the only risk that can be changed at auditor’s discretion
165
On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:
A. Decrease detection risk.
B. Decrease substantive testing.
C. Increase inherent risk.
D. Increase materiality levels.
A. Decrease detection risk
Risk of Material misstatement is inversely related to Detection risk
166
The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor:
A. Obtains reasonable assurance about whether the financial statements are free of material misstatement.
B. Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.
C. Assesses the accounting principles used and also evaluates the overall financial statement presentation.
D. Realizes some matters, either individually or in the aggregate, are important while other matters are not important
A. Obtains reasonable assurance about whether the financial statements are free of material misstatement
Reasonable instead of absolute assurance is the reason why audit risk exists, and also the reason why it will never be 0%
167
In a financial statement audit of a nonissuer, an auditor would consider a judgmental misstatement to be a misstatement that:
A. Arises from a routine calculation.
B. Arises from a flaw in the accounting system.
C. Exists because of nonstatistical sampling performed by the auditor.
D. Involves an estimate.
D. Involves an estimate
Judgemental misstatements would be differences between management and auditors judgement on estimates
168
Which of the following best describes a type of factual misstatement?
A. A difference between the classification of a reported financial statement element and the classification according to generally accepted accounting principles.
B. An inaccuracy in processing data.
C. Differences between management and the auditor's judgment regarding estimates.
D. A clerical error that resulted in an amount recorded as $5,000 that should have been recorded as $500
Choice A, B, or D are examples of factual
Choice C is an example of judgmental misstatement
169
Risks of material misstatement may be greater from matters arising from:
A. Nonroutine related party transactions.
B. Routine transactions subject to a high level of systematic processing.
C. A significant increase in fixed asset purchases.
D. Minimal management intervention to specify the accounting treatment.
.
A. Nonroutine related party transactions
170
In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
A. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion.
B. The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee.
C. The risk that the internal control system will not detect a material misstatement of a financial statement assertion.
D. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.
D. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls
171
Which of the following statements regarding the risk of material misstatement is correct?
A. Only factual misstatements should be considered when making the assessment of risk and the determination of any adjustments that may need to be made.
B. Detection risk is the risk that a material misstatement will not be detected by the entity’s controls.
C. The risk that a material misstatement may occur due to complex calculations, faulty estimates, or high volume transactions is known as control risk.
D. The risk of material misstatement includes the auditor’s assessment of inherent risk as well as control risk.
D. The risk of material misstatement includes the auditor’s assessment of inherent risk as well as control risk
Choice B correct response should be control risk
Choice C correct response should be inherent risk
172
Which of the following is a definition of control risk?
A. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's system of internal control.
B. The risk that the auditor will not detect a material misstatement.
C. The risk that the auditor's assessment of internal controls will be at less than the maximum level.
D. The susceptibility of material misstatement assuming there are no related internal control, policies, or procedures.
A. The risk that a material misstatement will not be prevented or detected on a timely basis by the client's system of internal control
173
Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?
A. Equipment is often sold at a loss before being fully depreciated.
B. Bank reconciliations usually include in-transit deposits.
C. Employees who handle cash receipts are not bonded.
D. The entity's industry is experiencing declining customer demand.
D. The entity's industry is experiencing declining customer demand
This choice situation would mostly threaten financial stability or profitability, which would then be an incentive to fraudulently misstate the financial statements
174
Which of the following is an example of an inherent risk that an auditor should consider?
A. An incorrect formula in a worksheet used to calculate a LIFO inventory reserve.
B. Technological developments that may render inventory obsolete.
C. Posting of unauthorized journal entries.
D. Inaccurate physical inventory count.
B. Technological developments that may render inventory obsolete
This is an error due to a factor other than failure of a control
Choice A, C and D are all failures of controls, therefore being examples of control risk
175
The acceptable level of detection risk is inversely related to the:
A. Risk of failing to discover material misstatements.
B. Risk of misapplying auditing procedures.
C. Preliminary judgment about materiality levels.
D. Assurance provided by substantive tests.
D. Assurance provided by substantive tests
If level of DR decreases, more assurance is required for substantive testing
If level of DR increases, less assurance is required for substantive testing
176
Which of the following is true?
A. If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk.
B. Audit risk and fraud risk are synonymous terms.
C. If fraud risk is assessed at a minimum level, audit risk will also be minimal.
D. Fraud risk is comprised of the risk of material misstatement and detection risk.
A. If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk
Fraud risk affects the risk of material misstatement, so the auditor adjusts detection risk to maintain the audit risk
177
When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the:
A. Extent of tests of controls.
B. Level of detection risk.
C. Level of inherent risk.
D. Extent of tests of details.
D. Extent of tests of details
If assessed control risk is increased, detection risk must be decreased. Once that happens, extent of tests of details must be increased
178
As the acceptable level of detection risk increases, an auditor may change the:
A. Assessed level of control risk from low to high.
B. Nature of substantive tests from a less effective to a more effective procedure.
C. Timing of substantive tests from year-end to an interim date.
D. Assurance provided by tests of controls by using a larger sample size than planned.
C. Timing of substantive tests from year-end to an interim date
Higher DR means assurance from substantive testing can decrease. Therefore timing of testing can go from Year end to interim date
179
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?
A. The acceptable level of detection risk increases, and the extent of substantive procedures decreases.
B. The acceptable level of detection risk decreases, and the extent of substantive procedures decreases.
C. The acceptable level of detection risk increases, and the extent of substantive procedures increases.
D. The acceptable level of detection risk decreases, and the extent of substantive procedures increases.
D. The acceptable level of detection risk decreases, and the extent of substantive procedures increases
As RMM is increased, this will encourage decrease in DR, which would cause substantive testing to increase
180
As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?
A. The sample size would be unaffected.
B. The sample size would be higher.
C. The sample size would be irrelevant.
D. The sample size would be lower
D. The sample size would be lower
Control risk and substantive testing moves directly with each other. Control risk moves inversely with detection risk, making this statement true
Low CR = High DR = low Substantive testing (small sample size)
181
Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
A) when combined assessed level of inherent and control risk over the sale is moderate
B) when assessed level of control risk over the sale is low
C) when assessed level of detection risk over the sale is high
D) when combined assessed level of inherent and control risk over the sale is high
D) when combined assessed level of inherent and control risk over the sale is high
RMM is high (IR and CR high) = DR will be low = more substantive testing necessary
182
Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?
A) increase test of controls
B) select more effective substantive tests
C) perform substantive tests as of interim date
D) use smaller, rather than larger, sample sizes
CORRECT
B) select more effective substantive tests
Choice A would apply IF Substantive testing alone are insufficient to detect risk of material misstatement
183
Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?
A. Inherent.
B. Detection.
C. Sampling.
D. Control.
B. Detection.
184
An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?
A. Review the client’s control procedures over the safeguarding of inventory, and perform physical inventory counts throughout the current year.
B. Review the client’s control procedures over the safeguarding of inventory, but do not modify substantive procedures over inventory.
C. Review the client’s control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.
D. Review the client’s control procedures over the safeguarding of inventory, incorporate the use of substantive analytical procedures, and develop an expectation.
C. Review the client’s control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.
Performing testing at the end of the year is more persuasive evidence
185
In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?
A. Determine the effectiveness of general controls over classes of transactions characterized by high transaction volume.
B. Discuss strategies to eliminate such risks with top management or those with equivalent authority and responsibility.
C. Consider whether risk assessment procedures are appropriate given preliminary levels of materiality and tolerable misstatement.
D. Perform substantive procedures for all relevant assertions related to each significant class of transactions.
D. Perform substantive procedures for all relevant assertions related to each significant class of transactions.
Substantive procedures will always be necessary
186
The auditor is in the process of assessing the risk of material misstatement for selected client transactions and account balances considered to be significant. If the auditor decides to change the level of detection risk based on new information pertaining to the risk of material misstatement, he or she may do all of the following, except for:
A. Eliminating the use of substantive procedures for certain relevant assertions if the assessed risk of material misstatements sufficiently declines.
B. Modifying the timing of the substantive tests by including year-end testing.
C. Changing the sample size used in the related substantive procedures.
D. Changing the nature of testing by using more or less effective substantive audit procedures.
A. Eliminating the use of substantive procedures for certain relevant assertions if the assessed risk of material misstatements sufficiently declines.
Eliminating substantive testing is not an option, even when assessed risk is at a very low level
187
188
Which of the following factors most likely would influence an auditor's determination of the auditability of an entity's financial statements?
A. The complexity of the information system relevant to financial reporting.
B. The adequacy of the accounting records.
C. The operating effectiveness of controls.
D. The existence of related party transactions.
B. The adequacy of the accounting records
189
Whose responsibility is it to design and implement programs and controls to prevent, deter or detect fraud?
A) Auditor
B) Management
C) President
D) Compliance officer
B) Management
190
Who’s responsibility is it to plan and obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud
A) Auditor
B) Management
C) President
D) Compliance officer
A) Auditor
191
Fill in the blanks:
During planning, the auditor is specifically required to perform analytical procedures relating to ___________, in order to identify unusual relationships that might be indicative of fraud
A) professional fees
B) accounts receivable
C) accounts payable
D) revenue
D) revenue
192
Which of the following statements best describes an auditor's responsibility to detect errors and fraud?
A. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.
B. An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
C. An auditor has a responsibility to detect material errors, but has no responsibility to detect fraud that is concealed through employee collusion or management override of internal control.
D. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee.
B. An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements
193
Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?
A. Inability to borrow necessary capital without granting debt covenants.
B. Large amounts of liquid assets that are easily convertible into cash.
C. Management's lack of interest in increasing the entity's stock trend.
D. Inability to generate cash flows from operations while reporting substantial earnings growth.
D. Inability to generate cash flows from operations while reporting substantial earnings growth
194
Which of the following factors most likely would heighten an auditor's concern about the risk of misappropriation of assets?
A. Inability to borrow necessary capital without granting debt covenants.
B. Large amounts of liquid assets that are easily convertible into cash.
C. Management's lack of interest in increasing the entity's stock trend.
D. Inability to generate cash flows from operations while reporting substantial earnings growth
B. Large amounts of liquid assets that are easily convertible into cash
195
Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
A. A lack of independent checks.
B. A high turnover of senior management.
C. An inability to generate cash flow from operations.
D. A strained relationship between management and the predecessor auditor.
A. A lack of independent checks
A control where a separate person checks the accuracy or completeness of transactions is not done, leading to misappropriation of assets, b/c that same person can catch irregularities
196
A CFO assigned inflated salvage values and extended the useful lives of the company's equipment in order to decrease depreciation expenses. Which of the following has occurred as a result of this action?
A. Fraud
B. Embezzlement
C. Collusion
D. Error
A. Fraud
This act by this CFO was intentional, therefore it is fraud
197
Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement due to fraud?
A. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.
B. The auditor didn't consider factors influencing audit risk for account balances that have effects pervasive to financial statements taken as a whole.
C. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion.
D. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material misstatement due to fraud.
C. Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion
198
Which of the following is a false statement as it relates to the auditor’s or management’s responsibility for fraud (risk assessment)?
A. During the planning phase, the auditor must assess the risk of material misstatements to the financial statements due to fraud and design the audit procedures accordingly.
B. The auditor is responsible for performing an audit that will obtain reasonable assurance that the client’s financial statements are free from misstatements caused by error or fraud.
C. The auditor performs fraud risk assessment only during the planning and fieldworks phases of an audit.
D. Management is responsible for the prevention and detection of fraud within their organization.
C. The auditor performs fraud risk assessment only during the planning and fieldworks phases of an audit
This is false statement because assessing risk is an ongoing process performed by auditor
199
Which of the following groups within an entity is typically in the best position to perpetrate a material fraud?
A. Entry-level personnel.
B. Customers.
C. Directors.
D. Management.
D. Management
Management is in the best position to perpetrate because they have the chance to override and manipulate controls
200
During a new audit engagement, the auditor notices that the client has had three external audit firms perform their annual audits over the past five years due primarily to increases in audit fees. The auditor also notes that the client has been twice downgraded by several of the major credit rating agencies over the past two years and that its current issuer credit rating is at the lowest investment grade level by both Standard & Poor’s and Moody’s Investors Service. Which (if any) of the following fraud risk factors would be most concerning to the auditor?
A. Opportunity.
B. Rationalization/Attitude.
C. Incentives/Pressures.
D. No fraud risk factor exists.
C. Incentives/Pressures
Due to being downgraded twice for having junk status, there is pressure to improve on performance for the company
201
The risk that an auditor of a nonissuer will fail to detect a material misstatement in the financial statements is usually greatest in which of the following situations?
A. Employee fraud
B. Fraud committed by vendors and service providers
C. Management fraud
D. Fraud committed by customers
C. Management fraud
202
Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud?
A. Discussion among engagement personnel regarding the risk of material misstatement due to fraud is recommended but not required.
B. All key members of the audit team should be brought to a single location to facilitate communication.
C. The discussion should occur only during the planning stage of the audit.
D. Audit documentation must include a description of the discussion.
D. Audit documentation must include a description of the discussion
203
Which statement is true regarding the three fraud risk factors (incentives/pressures, opportunity, and rationalization/attitude)?
A. The auditor should determine whether and to what extent fraud risk factors are present as part of the final overall review stage of the audit.
B. Lack of observation of all three fraud risk factors indicates that fraud has not occurred.
C. The fraud risk factors should be discussed by engagement personnel during planning.
D. The existence of all three fraud risk factors indicates that fraud has occurred.
C. The fraud risk factors should be discussed by engagement personnel during planning
204
Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mind-set that the audit team should maintain during this discussion?
A. Judgmental.
B. Questioning.
C. Criticizing.
D. Presumptive.
B. Questioning
205
What is the primary objective of the fraud brainstorming session?
A. Identify whether analytical procedures should be applied to the revenue accounts.
B. Determine whether the planned procedures in the audit program will satisfy the general audit objectives.
C. Assess the potential for material misstatement due to fraud.
D. Determine audit risk and materiality.
C. Assess the potential for material misstatement due to fraud
206
While performing a preliminary assessment for a new client audit, the auditor determines that the client has had excessive growth over the past several years due to recent acquisitions and internal expansion. Through discussions with management, the auditor concludes that the company’s operational staff is too lean and that controls in several operational functions may be currently insufficient to accommodate this rapid growth. Which of the following fraud risk factors related to the client would the auditor have the greatest concern?
A. Opportunity.
B. Incentives/pressures.
C. Inadequate organizational structure.
D. Rationalization/attitude.
A. Opportunity
207
Each of the following questions is appropriate to ask internal audit personnel, except:
A. What procedures did you perform to identify or detect fraud during the year?
B. Has management responded satisfactorily to any findings from the fraud-related procedures you performed?
C. Do you have knowledge of any fraud or suspected fraud affecting the entity?
D. How did you communicate to employees your views on business practices and ethical behavior?
D. How did you communicate to employees your views on business practices and ethical behavior
208
Which of the following journal entries would the auditor least likely examine in an effort to address the risk of management override of controls?
A. A journal entry made by an individual who does not typically make journal entries.
B. A journal entry recorded as a post-closing entry that has no explanation or description.
C. A journal entry made to record recurring periodic accounting estimates.
D. A journal entry made to a seldom-used account.
C. A journal entry made to record recurring periodic accounting estimates
209
Which of the following statements is correct with respect to fraud encountered during an audit engagement of a nonissuer?
A. It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles.
B. The distinguishing factor between fraud and error is the materiality of the transaction involved.
C. An auditor who initially detects fraud ultimately makes the legal determination of whether fraud has actually occurred.
D. Fraudulent financial reporting can include the unintentional misstatement of amounts or disclosures in financial statements.
A. It is often difficult to detect fraudulent intent in matters involving accounting estimates and the application of accounting principles
210
Which of the following audit procedures would not specifically address the risk of management overriding internal controls during an audit of an issuer?
A. Reviewing accounting estimates for biases that could result in material misstatement due to fraud
B. Performing walkthroughs of significant processes to determine the adequacy of management's controls
C. Examining journal entries and other adjustments for evidence of possible material misstatement due to fraud
D. Evaluating the business rationale for significant unusual transactions
B. Performing walkthroughs of significant processes to determine the adequacy of management's controls
This would not address risk of management override because walkthrough testing helps on design of controls instead.
211
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?
A. Reevaluate the risk of fraud, and design alternate tests for the related transactions.
B. Increase randomly the number of items in the substantive test to increase the reliance that may be placed on the overall test.
C. Increase testing by agreeing more of the payments to this particular vendor to the photocopies of its invoices.
D. Count the missing original documents as misstatements, and project the total amount of the error based on the size of the population and the dollar amount of the errors.
A. Reevaluate the risk of fraud, and design alternate tests for the related transactions
212
An entity has failed to provide documentation for a newly acquired material asset and informs its auditors that the documentation is lost. According to generally accepted government auditing standards, what would this situation typically indicate to the auditors?
A. A heightened risk of fraud.
B. Fraudulent activity.
C. Abusive activity.
D. Misappropriation of assets.
A. A heightened risk of fraud
213
Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk?
A. The audit committee.
B. The client's legal counsel.
C. An appropriate level of management.
D. The client's internal auditor.
C. An appropriate level of management
214
During the course of an audit, an auditor finds evidence that an officer has entered fraudulent transactions in the financial statements. The fraudulent transactions can be adjusted so the statements are not materially misstated. What should the auditor do?
A. Report the matters to regulatory authorities.
B. Communicate the matter to those charged with governance.
C. Consider the fraud a scope limitation and disclaim an opinion.
D. Immediately withdraw from the engagement.
B. Communicate the matter to those charged with governance
215
During an audit, an auditor discovers a fraudulent expense reimbursement for a low-level manager. The auditor determines that this transaction is inconsequential and several similar transactions would not be material to the financial statements in the aggregate. Which of the following statements best describes the auditor's required response to the discovery?
A. The auditor should fully investigate other transactions related to this manager to determine if fraud exists.
B. The auditor should bring the transaction to the attention of an appropriate level of management.
C. The auditor's responsibility is satisfied by documenting that the single transaction is inconsequential.
D. The auditor should report this finding to those charged with governance.
B. The auditor should bring the transaction to the attention of an appropriate level of management
216
According to COSO, each of the following is a principle relating to the risk assessment component of internal control, except:
A. The organization specifies objectives with sufficient clarity to enable the identification and assessment of risks relating to objectives.
B. The organization identifies and assesses changes that could significantly impact the system of internal control.
C. The organization selects and develops activities contributing to the mitigation of risks to the achievement of objectives to acceptable levels.
D. The organization considers the potential for fraud in assessing risks to the achievement of objectives.
C. The organization selects and develops activities contributing to the mitigation of risks to the achievement of objectives to acceptable levels
Selecting and developing activities is more related to EXISTING CONTROL ACTIVITIES principle
217
According to COSO, the proper tone at the top helps a company to do each of the following, except:
A. Create a compliance-supporting culture that is committed to enterprise risk management.
B. Promote a willingness to seek assistance and report problems before it is too late for corrective action.
C. Adhere to fiscal budgets and goals as outlined by the internal audit committee and board of directors.
D. Navigate gray areas where no specific compliance rules or guidelines exist.
C. Adhere to fiscal budgets and goals as outlined by the internal audit committee and board of directors
218
All of the following professional associations are part of the Committee on Sponsoring Organizations (COSO), except for the:
A. Institute of Management Accountants (IMA)
B. American Institute of Certified Public Accountants (AICPA)
C. Professional Accounting Society of America (PASA)
D. Institute of Internal Auditors (IIA)
C. Professional Accounting Society of America (PASA)
Choice C is NOT one of them!
The five professional associations which compose COSO are:
Institute of Management Accountants (IMA)
American Institute of Certified Public Accountants (AICPA)
Institute of Internal Auditors (IIA)
Financial Executives Institute (FEI)
American Accounting Association (AAA)
219
The five professional associations which compose COSO are:
Institute of Management Accountants (IMA)
American Institute of Certified Public Accountants (AICPA)
Institute of Internal Auditors (IIA)
Financial Executives Institute (FEI)
American Accounting Association (AAA)
220
An entity's recording and reporting processes are highly automated, and the information system produces much of the information used for monitoring controls. Which of the following statements is correct regarding the entity's monitoring of controls?
A. Effective monitoring of information-processing controls over specific applications of the information system can overcome deficiencies in the design of general controls.
B. Management will likely be unable to monitor system controls effectively in such a highly automated environment.
C. Any errors in the information provided by the system could lead management to incorrect conclusions regarding controls.
D. Because the processes are automated, management can be sure that controls are processed in a correct manner.
C. Any errors in the information provided by the system could lead management to incorrect conclusions regarding controls.
Just because information is coming from automated fashion does not mean it’s free of error. These specific errors could draw incorrect conclusions
221
In assessing the need for a stronger system of internal controls, management will most likely use the Internal Control—Integrated Framework to do all of the following, except:
A. Apply controls throughout all levels of the organization.
B. Eliminate inefficient and ineffective controls.
C. Identify and analyze risks and risk mitigation strategies.
D. Define rules that must be followed throughout the organization.
D. Define rules that must be followed throughout the organization
Integrated Framework is most on “Principles based” rather than “rules-based”, which allows for more judgment and flexibility in applying internal controls
222
All of the following fundamental concepts are reflected in the definition of internal control, except that controls are:
A. Affected by people and their actions.
B. Adaptable to the structure of the entity.
C. Established to provide reasonable (not absolute) assurance.
D. Geared toward achieving strategic, operations, and compliance objectives.
D. Geared toward achieving strategic, operations, and compliance objectives
Internal controls are not geared toward strategic objectives. Instead it is geared on operations, reporting and compliance objectives
223
As part of the information and communication component of the Integrated Framework, a company must:
A. Identify and assess the effect of entity changes on internal controls.
B. Deploy policies and procedures in a timely manner.
C. Communicate internal control deficiencies to responsible parties who have the ability to correct them.
D. Ensure that external auditors are aware of significant internal control issues.
D. Ensure that external auditors are aware of significant internal control issues
224
As part of the risk assessment component of the Integrated Framework, a company must:
A. Identify and assess the effect of entity changes on internal controls.
B. Deploy policies and procedures in a timely manner.
C. Communicate internal control deficiencies to responsible parties who have the ability to correct them.
D. Ensure that external auditors are aware of significant internal control issues
A. Identify and assess the effect of entity changes on internal controls
225
As part of the Existing control activities component of the Integrated Framework, a company must:
A. Identify and assess the effect of entity changes on internal controls.
B. Deploy policies and procedures in a timely manner.
C. Communicate internal control deficiencies to responsible parties who have the ability to correct them.
D. Ensure that external auditors are aware of significant internal control issues
B. Deploy policies and procedures in a timely manner
226
As part of the monitoring component of the Integrated Framework, a company must:
A. Identify and assess the effect of entity changes on internal controls.
B. Deploy policies and procedures in a timely manner.
C. Communicate internal control deficiencies to responsible parties who have the ability to correct them.
D. Ensure that external auditors are aware of significant internal control issues
C. Communicate internal control deficiencies to responsible parties who have the ability to correct them
227
Which of the following factors most likely would heighten an auditor's concern about the risk of material misstatement arising from the misappropriation of assets?
A. There is a potential for bias in the preparation of accounting estimates.
B. The entity recently experienced rapid growth in revenue.
C. The entity's fixed assets lack ownership identification.
D. Management recently adopted new accounting principles.
C. The entity's fixed assets lack ownership identification
Comparison of serial number to ID plate on fixed asset is a good control that fixed asset exists. If there are no ID’s to trace them, this is more susceptible for theft/stealing of the physical asset
228
During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing:
Tests of controls - YES / NO
Substantive tests - YES / NO
Tests of controls - YES
Substantive tests - YES
Internal auditor can assist external auditor in the following:
-obtaining understanding of internal control
-assessing risk
-performing test of controls
-performing substantive testing
229
An audit firm is in the process of planning for an upcoming audit and would like to use the client’s internal auditors’ staff to assist in completing the audit. Which of the following should not be done by the client’s internal auditors?
A. Performing substantive audit procedures.
B. Providing their assessment of risks to the auditor to facilitate the auditor’s initial understanding.
C. Assisting in the external auditor’s understanding of the client’s internal control.
D. Assessing the adequacy of accounting estimates used by the client.
D. Assessing the adequacy of accounting estimates used by the client
External should NOT have internal auditor involved with judgments, audit decisions or assessment pertaining to accounting estimates
230
Which of the following statements is correct regarding an independent auditor's reliance on a client's internal audit staff?
A. An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers.
B. An independent auditor should not reduce the amount of audit testing based on the work of internal auditors.
C. An independent auditor should use internal audit workpapers when available.
D. An independent auditor should assess the organizational status of the director of internal audit.
D. An independent auditor should assess the organizational status of the director of internal audit
231
Which of the following should an auditor do when control risk is assessed at the maximum level?
A. Perform more tests of controls.
B. Document the control structure more extensively.
C. Perform fewer substantive tests of details.
D. Document the assessment.
D. Document the assessment
232
Which of the following factors would the independent auditor most likely consider in assessing the objectivity of an internal auditor?
A. The internal auditor was previously an employee of the auditor's public accounting firm.
B. The internal auditor has obtained the Certified Internal Auditor designation.
C. The audit committee reviews employment decisions related to the director of internal auditing.
D. The internal auditor attends a number of comprehensive continuing professional education courses each year.
C. The audit committee reviews employment decisions related to the director of internal auditing
Choice A, B, and D are for assessing competence
233
A 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:
A. Maintaining personnel files containing documentation related to the evaluation of personnel.
B. Evaluating prospective and continuing client relationships.
C. Reviewing audit documentation and engagement reports.
D. Requiring personnel to adhere to the applicable independence rules
C. Reviewing audit documentation and engagement reports
234
Which of the following is a component of a CPA firm's quality management system applicable to the firm's accounting and auditing practice?
A. Professional skepticism.
B. Engagement performance.
C. Technology selection.
D. Information processing.
B. Engagement performance
REAL MICE nemonic
R: Resources
E: Engagement performance
A: Assessment for risk process
L: Leadership and governance
M: Monitoring and remediation
I: Information and communication
C: Continuance and acceptance of client relationships and specific engagements
E: Ethical requirements
235
In assessing the need for a stronger system of internal controls, management will most likely use the Internal Control—Integrated Framework to do all of the following, except:
A. Apply controls throughout all levels of the organization.
B. Eliminate inefficient and ineffective controls.
C. Identify and analyze risks and risk mitigation strategies.
D. Define rules that must be followed throughout the organization.
D. Define rules that must be followed throughout the organization
Integrated framework is built on principles based, NOT rules based
236
During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing:
Tests of controls - YES / NO
Substantive tests - YES / NO
Tests of controls - YES
Substantive tests - YES
237
Which of the following statements is correct regarding an independent auditor's reliance on a client's internal audit staff?
A. An internal auditor should provide direct assistance to the independent auditor during preparation of audit workpapers.
B. An independent auditor should use internal audit workpapers when available.
C. An independent auditor should not reduce the amount of audit testing based on the work of internal auditors.
D. An independent auditor should assess the organizational status of the director of internal audit.
D. An independent auditor should assess the organizational status of the director of internal audit
238
Which of the following should an auditor do when control risk is assessed at the maximum level?
A. Perform fewer substantive tests of details.
B. Perform more tests of controls.
C. Document the assessment.
D. Document the control structure more extensively.
C. Document the assessment
239
Which of the following statements is correct concerning an auditor's responsibility to report fraud?
A. The disclosure of material management fraud to principal stockholders is required when both senior management and the board of directors fail to acknowledge the fraudulent activities.
B. The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility.
C. The auditor is required to communicate to those charged with governance all minor fraudulent act perpetrated by low-level employees, even if the amounts involved are inconsequential.
D. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC.
B. The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility
240
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 activities relevant to assertions.
B. Material misstatements may exist in the financial statements.
C. Specific internal control activities are not operating as designed.
D. The collective effect of the control environment may not achieve the control objectives.
B. Material misstatements may exist in the financial statements
241
Which of the following circumstances would permit an independent auditor to accept an engagement after the close of the fiscal year?
A. Receipt of an assertion from the preceding auditor that the entity will be able to continue as a going concern.
B. Issuance of a disclaimer of opinion as a result of inability to conduct certain tests required by generally accepted auditing standards due to the timing of acceptance of the engagement.
C. Assessment of control risk below the maximum level.
D. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory.
D. Remedy of limitations resulting from accepting the engagement after the close of the end of the year, such as those relating to the existence of physical inventory
Waiting until the end of the period allowed the auditor to perform acceptable procedures sufficient to support year end balance
242
Which of the following situations represents a risk factor that relates to misstatements arising from misappropriation of assets?
A. A high turnover of senior management.
B. A strained relationship between management and the predecessor auditor.
C. An inability to generate cash flow from operations.
D. A lack of independent checks.
D. A lack of independent checks
Independent checks are controls where someone who did not perform a task reviews or verifies that work to ensure accuracy to prevent errors or fraud. This helps to prevent misappropriation because it reduces the opportunity for concealing fraud
243
Which of the following sets of duties would not be performed by a single individual in a company with the most effective segregation of duties in place?
A. Approving sales returns on customers' accounts and depositing customers' checks in the bank.
B. Having custody of signed checks yet to be mailed and maintaining depreciation schedules.
C. Posting accounts payable transactions and entering additions and terminations to payroll.
D. Preparing monthly customer statements and maintaining the accounts payable subsidiary ledger.
A. Approving sales returns on customers' accounts and depositing customers' checks in the bank
Approving sales incorrectly affects Revenue and handling of cash affects cash balances
244
In planning an audit, an auditor should document in the working papers the auditor's risk assessment of a material misstatement of the financial statements due to fraud. Which of the following should be included in workpaper documentation if risk factors are identified as being present?
A. Discussion of the risk factor with the client.
B. Investigation of the risk factor.
C. A copy of the report of the risk factor to the company's legal counsel.
D. Those risk factors identified.
D. Those risk factors identified
245
Which of the following is an effective electronic access control for an on-line-real-time hotel reservation computer system?
I. Restricted access to the hotel's front desk area.
II. The existence of a hot site to be used in the event of disaster recovery being required.
III. A system of passwords to allow access to the system (passwords are changed on a regular basis).
IV. A firewall that prevents unauthorized access to the network.
A. I and III only.
B. III and IV only.
C. II, III, and IV only.
D. II and III only.
B. III and IV only
Out of all of the answer choices, passwords and firewalls are the best electronic access controls that are listed. These are examples of logical access controls
Restricted access to hotel is a physical access control, and hot site is part of disaster recovery plan
246
Which of the following statements best describes how a detailed audit plan of a CPA who is engaged to audit the financial statements of a large publicly held company compares with the audit client's comprehensive internal audit program?
A. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA.
B. The comprehensive internal audit plan is more detailed although it covers fewer areas than would normally be covered by the CPA.
C. The comprehensive internal audit plan is less detailed and covers fewer areas than would normally be covered by the CPA.
D. The comprehensive internal audit plan is substantially identical to the audit plan used by the CPA because both cover substantially identical areas.
A. The comprehensive internal audit plan is more detailed and covers areas that would normally not be covered by the CPA
Internal auditors are part of the internal control system. Comprehensive internal audit plans would cover more areas greater in depth than those of independent auditors [main concern is materiality affecting FS taken as a whole]
247
Regardless of the assessed level of control risk, an auditor would perform some:
A. Tests of controls to determine the effectiveness of internal control.
B. Analytical procedures to verify the design of internal control.
C. Substantive tests to restrict detection risk for significant transaction classes.
D. Dual purpose tests to evaluate both the risk of material misstatement and preliminary control risk.
C. Substantive tests to restrict detection risk for significant transaction classes
248
During the initial planning phase of an audit, the auditor most likely would:
A. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.
B. Identify specific internal control activities that are likely to prevent fraud.
C. Evaluate the reasonableness of the client's accounting estimates.
D. Discuss the timing of the audit procedures with the client's management.
D. Discuss the timing of the audit procedures with the client's management
Choice A, B, and C are done later in the audit process
249
Financial statement assertions include:
A. Understandability of presentation and classification; independence, integrity, and objectivity; and rights and obligations.
B. Valuation, allocation, and accuracy; completeness; and understandability of presentation and classification.
C. Completeness; existence; occurrence; and risk assessment.
D. Information and communication; rights and obligations; existence; and occurrence.
B. Valuation, allocation, and accuracy; completeness; and understandability of presentation and classification
250
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
A. The details of most recorded transactions are not available after a specified period of time.
B. Management has a reputation for consulting with several accounting firms about significant accounting issues.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements.
D. Internal control activities requiring the segregation of duties are subject to management override.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements
This is due to the reason of not being able to render an opinion on the FS
251
Which of the following correctly matches a factor with the related internal control component?
A. Recording the proper monetary value of transactions is part of control activities.
B. Participation of the audit committee is part of monitoring.
C. Human resource policies and practices are part of control activities.
D. The internal audit function is part of monitoring.
D. The internal audit function is part of monitoring
252
Which of the following statements is correct with regard to the consideration of materiality when an auditor is planning and performing a financial statement audit of an issuer?
A. When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods.
B. An auditor should determine a tolerable misstatement threshold at the overall financial statement level, but not at the account or disclosure level.
C. An auditor does not need to express materiality as a specified, quantitative amount.
D. When the reevaluation of materiality results in a significantly lower amount than initially established, an auditor would generally not modify audit procedures.
A. When determining a tolerable misstatement threshold, an auditor should take into account the amount of misstatements that were accumulated in prior periods
253
When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:
A. Extent of tests of controls.
B. Extent of tests of details.
C. Level of detection risk.
D. Level of inherent risk.
B. Extent of tests of details
Increasing assessed level of control risk means risk of material misstatement has also increased, which requires decrease in detection risk. This triggers increase in test of details
*This DOES NOT increase test of controls. Since control activities were determined to be ineffective, there’s no need to test controls if that’s the case
254
An entity has an internal audit staff that the independent auditor assessed to be both competent and objective. Which of the following statements is correct about the independent auditor's use of the internal auditors to provide direct assistance in performing tests of controls?
A. The internal auditors should not be performing any audit procedures that the auditor is able to perform.
B. The auditor should supervise, review, evaluate, and test the work performed by the internal auditors.
C. The auditor can use internal auditors to assess control risk, but cannot rely on their tests of controls.
D. The auditor cannot rely on any of the work of the internal auditors.
B. The auditor should supervise, review, evaluate, and test the work performed by the internal auditors
Internal auditors can do substantive testing, ONLY in low risk areas
Internal auditors can do test of controls as well
Auditors CANNOT rely on assessments or judgment or decisions about the results from internal auditor
255
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses the dissemination of information regarding control objectives and responsibilities?
A. Control activities.
B. Risk assessment.
C. Information and communication.
D. Control environment.
C. Information and communication
Dissemination of information, obtaining and using information
256
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses deployment of policies and procedures and the selection and development of controls around IT?
A. Control activities.
B. Risk assessment.
C. Information and communication.
D. Control environment.
A. Control activities
257
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses identifying and analyzing risk and identifying and assessing changes in controls?
A. Control activities.
B. Risk assessment.
C. Information and communication.
D. Control environment.
B. Risk assessment
258
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses board independence and oversight, accountability and organizational structure?
A. Control activities.
B. Risk assessment.
C. Information and communication.
D. Control environment.
D. Control environment
259
An auditor determined materiality for planning purposes before year-end based on a nonissuer entity's prior-year financial statements. During the audit, the auditor learns that the actual financial results are significantly different from those of the prior year because of a merger. The auditor's most appropriate response would be to:
A. Reevaluate the sufficiency of audit procedures performed in the prior-year audit.
B. Reperform audit procedures completed before year-end.
C. Revise materiality for the financial statements as a whole.
D. Reassess the risk of material misstatement to determine whether detection risk remains appropriate
C. Revise materiality for the financial statements as a whole
Materiality is a planning benchmark set early in the audit based on the use of PY financial data. Now that the news of a merger is brought up, the original materiality set may no longer be appropriate
It is NOT a reassessment of risk because risk is separate from materiality
260
Which of the following would not be a primary function of an audit strategy?
A. Provide a preliminary assessment of materiality and tolerable misstatement.
B. Outline reporting objectives.
C. Provide the scope of the audit.
D. Outline the nature, extent and timing of audit procedures.
D. Outline the nature, extent and timing of audit procedures
This procedure is part of the AUDIT PLAN, not the AUDIT STRATEGY
261
Controls are likely to fail for any of the following reasons, except:
A. They are designed and implemented properly, but their operation changes in some way.
B. They are designed and implemented properly, and their design changes as processes change.
C. They are designed and implemented properly as static controls, but the environment in which they operate changes.
D. They are not designed and implemented properly at the outset.
B. They are designed and implemented properly, and their design changes as processes change
This has the lowest chance of failure because they are able to adapt to new change with controls that are designed and implemented.
However, if operations are changed in some way, failing environment, or if controls are not designed or implemented at all, controls are MOST LIKELY to fail
262
Which of the following statements is correct concerning an auditor's responsibility to report fraud?
A. The disclosure of material management fraud to principal stockholders is required when both senior management and the board of directors fail to acknowledge the fraudulent activities.
B. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC.
C. The auditor is required to communicate to those charged with governance all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved are inconsequential.
D. The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility.
D. The disclosure of fraudulent activities to parties other than the client's senior management and those charged with governance is not ordinarily part of the auditor's responsibility
Fraud that causes a material misstatement of the FS or fraud involving senior management should be reported to those charged with governance
263
Control activities over safeguarding of assets may include controls relating to:
Financial Reporting Objectives - YES / NO
Operations Objectives - YES / NO
Compliance Objectives - YES / NO
Financial Reporting Objectives - YES [relates to using a lockbox system or passwords to limit access to files]
Operations Objectives - YES [include controls to prevent excess use of materials in production]
Compliance Objectives - NO [safeguarding of assets has no relation with laws and regulations]
264
According to COSO, each of the following is an example of an appropriate ongoing monitoring activity, except:
A. Comparisons of information from various sources within the company.
B. Follow-up of customer and vendor complaints regarding amounts due and owed.
C. Periodic analysis of variances between expectations and actual results.
D. Approval of high-dollar transactions by supervisors.
D. Approval of high-dollar transactions by supervisors
Monitoring activities under COSO involves ongoing or separate evaluations to determine whether components of internal control are present and functioning properly as well as reporting/correcting deficiencies
265
Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when:
A. Management is dominated by one individual who is also a shareholder.
B. External policies established by parties outside the entity affect its accounting practices.
C. Internal auditors have direct access to those charged with governance.
D. The audit committee is active in overseeing the entity's financial reporting policies
A. Management is dominated by one individual who is also a shareholder
266
Detection risk differs from both control risk and inherent risk in that detection risk:
A. Can be changed at the auditor's discretion.
B. Exists independently of the financial statement audit.
C. Should be assessed in nonquantitative terms.
D. Arises from risk factors relating to fraud.
A. Can be changed at the auditors discretion
Detection risk is a function of the effectiveness of audit procedures and of the
267
Detection risk differs from both control risk and inherent risk in that inherent & control risk:
A. Can be changed at the auditor's discretion.
B. Exists independently of the financial statement audit.
C. Should be assessed in nonquantitative terms.
D. Arises from risk factors relating to fraud.
B. Exists independently of the financial statement audit
In addition, IR and CR cannot be changed by the auditor
268
In an audit of a nonissuer, the auditor plans to recalculate the nonissuer's year-end employee vacation accrual using a management-provided list of employees' salaries and banked vacation hours. In order to validate the completeness of the employees' information, the auditor would most appropriately:
A. Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation.
B. Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department.
C. Use the payroll system to validate a sample of employee salaries.
D. Agree the number of employees included in the vacation-accrual calculation to the final payroll register.
D. Agree the number of employees included in the vacation-accrual calculation to the final payroll register
This answer choice would best verify that all active employees are included in the calculation. Confirming that no employees are excluded tests completeness of employees
In other words, you want to make sure that everything that should be recorded is included.
C.S.AR = Completeness.Source.Accounting Records
Source is Payroll register
Accounting records is Vacation accrual calculation
269
A 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:
A. Reviewing audit documentation and engagement reports.
B. Maintaining personnel files containing documentation related to the evaluation of personnel.
C. Evaluating prospective and continuing client relationships.
D. Requiring personnel to adhere to the applicable independence rules.
A. Reviewing audit documentation and engagement reports
This ensures that work performed meets the firms quality standards. This relates to the quality management component of engagement performance
270
An auditor of an issuer should determine the amount of tolerable misstatement for assessing risks of material misstatement at which of the following levels?
A. Financial statements as a whole
B. Account
C. Total assets
D. Total revenue
B. Account
Other answer choices, A, C and D are too broad of a level to determine tolerable misstatement, as it wouldn’t allow for proper risk assessment
271
An auditor of a nonissuer intends to reference the work of an auditor's external specialist in the audit report because the reference was relevant to understanding a modification to the auditor's opinion. In this case, the auditor should indicate in the report that:
A. The specialist had been employed by the client.
B. The reference to the auditor's external specialist does not reduce the auditor's responsibility for that opinion.
C. The auditor planned and evaluated the adequacy of the specialist's work.
D. The specialist was responsible for evaluating an item material to the financial statements.
B. The reference to the auditor's external specialist does not reduce the auditor's responsibility for that opinion
272
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:
A. Valuation of intangible assets.
B. Existence of contingencies.
C. Valuation of related party transactions.
D. Existence of fixed asset additions.
D. Existence of fixed asset additions
In making judgments about the effect of internal auditors work, the auditor would consider:
-materiality of FS amounts
-risk of material misstatement
-degree of subjectivity involved with audit evidence gathered in support of the assertions
Existence of fixed assets has little subjectivity [rely more on judgment, opinions or estimates than clear verifiable facts] and is more appropriate for internal auditor
Choice A, B and C have high subjectivity [requires more judgment, opinion, or estimate] and that is more appropriate for independent CPA, NOT internal auditor
273
Which of the following statements best characterizes the function of a physical access control?
A. Separates unauthorized individuals from computer resources.
B. Provides authentication of users attempting to log into the system.
C. Protects systems from the transmission of Trojan horses.
D. Minimizes the risk of incurring a power or hardware failure
A. Separates unauthorized individuals from computer resources
Examples of physical access controls are locks on doors
274
Which of the following is least likely to aid the auditor in evaluating the risk of improper revenue recognition due to fraud?
A. Analysis of sales commissions over the most recent five-year period.
B. Comparison of sales volume, as determined from recorded revenue amounts, with production capacity.
C. Trend analysis of revenues and sales returns by month.
D. Comparison of revenue reported by month and by product line for the current and prior years.
A. Analysis of sales commissions over the most recent five-year period
275
Under which of the following circumstances, if any, can an auditor who is not independent perform an audit engagement of a nonissuer?
A. The auditor is required by law to accept the engagement and report on the financial statements.
B. The auditor's lack of independence is not due to financial reasons.
C. The auditor is precluded from accepting the engagement and reporting on the financial statements under any circumstances.
D. The auditor has performed the financial statement audit in multiple prior years.
A. The auditor is required by law to accept the engagement and report on the financial statements
This is an exception to the rule of being independent, when required by law/regulation to accept the engagement
276
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
A. Turnover of senior accounting personnel is low.
B. Insiders recently purchased additional shares of the entity's stock.
C. Management places substantial emphasis on meeting earnings projections.
D. The rate of change in the entity's industry is slow.
C. Management places substantial emphasis on meeting earnings projections.
This puts excessive pressure on management to meet financial targets, hence being named as one of the fraud risk indicators:
-Incentives/pressures
-opportunities
-rationalization/attitudes
CPA - AUD Flashcard Deck
flashcards
Decks in class (16)
# Cards
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A1 - Audit Reports132
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A2 - Engagement Quality And Acceptance, Planning And Internal Control199
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A3 - Risk, Evidence And Sampling249
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A4 - Performing Further Procedures, Forming Conclusions, And Communications264
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A5 - Integrating Audits, Attestation Engagements, Compliance, And Gov’t Audits157
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A6 - Accounting And Review Service Engagements, Interim Reviews And Ethics And Professional…205
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AUD A1 - A6 TB Simulations (ONLY)36
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AUD - Simulation Exam Questions 1-6 MCQ + SIMS35
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A1 - MCQ183
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A2 - MCQ276
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A3 - MCQ368
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A4 - MCQ384
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A5 - MCQ228
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A6 - MCQ241
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A1 - A6 SIMS91
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A1 - A6 Simulated Exams MCQ And SIMS122
