Certified Public Accountant CPA Questions + Answers Part 28
Posted: Tue Feb 22, 2022 6:37 pm
QUESTION 348
The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:
A. Giveguidancetothestaffregardingbothtechnicalandpersonnelaspectsoftheaudit.
B. Discussstaffsuggestionsconcerningtheestablishmentandmaintenanceoftimebudgets. C. Establish the need for using the work of specialists and internal auditors.
D. Provide an opportunity to document staff disagreements regarding technical issues.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. Pre-audit planning meetings are typically held to plan technical and personnel aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Choice "b" is incorrect. While staff suggestions regarding time budgets may be discussed, this is not typically the primary reason for the meeting.
Choice "c" is incorrect. Establishing the need for specialists and internal auditors may be discussed, but this is not the primary reason for the meeting. Choice "d" is incorrect. Disagreements about technical issues arise and are resolved after testing begins, not during the pre-audit conference.
QUESTION 349
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:
A. Influencethedesignofinternalcontrol.
B. Affecttheauditor'spreliminaryjudgmentaboutmaterialitylevels. C. Assist in evaluating the planned audit objectives.
D. Determine the auditor's acceptable level of audit risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures.
Choice "b" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor's perceptions of the needs of a reasonable person. It would not be affected by the methods used to process accounting information.
Choice "c" is incorrect. The auditor develops specific audit objectives based on financial statement assertions. The methods used to process accounting information would not be relevant to the development of objectives.
Choice "d" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to modify the opinion on financial statements that are materially misstated. The acceptable level of audit risk is a matter of auditor judgment, but it would not be affected by the methods used to process accounting information.
QUESTION 350
The existence of audit risk is recognized by the statement in the auditor's standard report that the:
A. Auditorisresponsibleforexpressinganopiniononthefinancialstatements,whicharetheresponsibilityofmanagement. B. Financialstatementsarepresentedfairly,inallmaterialrespects,inconformitywithGAAP.
C. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. The existence of audit risk is recognized by the statement in the standard report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. Choice "a" is incorrect. This statement defines the distinction between the responsibility of the auditor and that of management.
Choice "b" is incorrect. The purpose of this section is to note that fair presentation is not necessarily impacted by immaterial errors.
Choice "c" is incorrect. This statement explains the nature of an audit.
QUESTION 351
Which of the following statements is not correct about materiality?
A. TheconceptofmaterialityrecognizesthatsomemattersareimportantforfairpresentationoffinancialstatementsinconformitywithGAAP,whileothermatters are not important.
B. Anauditorconsidersmaterialityforplanningpurposesintermsofthelargestaggregatelevelofmisstatementsthatcouldbematerialtoanyoneofthefinancial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
D. Anauditor'sconsiderationofmaterialityisinfluencedbytheauditor'sperceptionoftheneedsofareasonablepersonwhowillrelyonthefinancialstatements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. Choice "a" is incorrect. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with GAAP, while other matters are not important. Choice "c" is incorrect. Materiality judgments are made in light of the surrounding circumstances and necessarily involve both quantitative and qualitative considerations. Choice "d" is incorrect. The auditor's consideration of materiality is influenced by his or her perception of the needs of a reasonable person relying on the financial statements.
QUESTION 352
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
A. Awrittenauditplansettingforththeproceduresnecessarytoaccomplishtheaudit'sobjectives.
B. Anindicationthattheaccountingrecordsagreeorreconcilewiththefinancialstatements.
C. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.
D. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. The auditor is not required to evaluate operating effectiveness as part of obtaining an understanding of internal control, and therefore need not document the basis for this decision.
Choice "a" is incorrect. The auditor is required to prepare a written audit plan. Choice "b" is incorrect. Audit documentation should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "c" is incorrect. Establishing an understanding with the client is required by GAAS, and an engagement letter is a presumptively mandatory requirement.
QUESTION 353
When assessing the internal auditors' competence, the independent CPA should obtain information about the:
A. Organizationalleveltowhichtheinternalauditorsreport.
B. Educationalbackgroundandprofessionalcertificationoftheinternalauditors.
C. Policies prohibiting the internal auditors from auditing areas where relatives are employed. D. Internal auditors' access to records and information that is considered sensitive.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B)
Explanation
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Choice "b" is correct. When assessing the internal auditors' competence, the auditor should obtain information about such factors as educational level, experience, professional certification, continuing education, supervision, review, and evaluation of performance. Choice "a" is incorrect. The organizational level to which the internal auditors report is related to their objectivity.
Choice "c" is incorrect. Policies prohibiting internal auditors from auditing areas where relatives are employed are related to objectivity.
Choice "d" is incorrect. Access to sensitive records and information is related to the overall objectives of the internal audit function, not to internal auditor competence.
QUESTION 354
Which of the following statements is correct about the auditor's use of the work of a specialist?
A. Thespecialistshouldnothaveanunderstandingoftheauditor'scorroborativeuseofthespecialist'sfindings. B. Theauditorisrequiredtoperformsubstantiveprocedurestoverifythespecialist'sassumptionsandfindings. C. The client should not have an understanding of the nature of the work to be performed by the specialist.
D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "a" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed. Choice "b" is incorrect. The auditor may consider performing substantive procedures to verify the specialist's findings if the specialist is related to the client, but is not required to do so. Choice "c" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed.
QUESTION 355
In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from:
A. Discussionswithmanagementpersonnel.
B. Externalqualityreviewsoftheinternalauditor'sactivities. C. Previous experience with the internal auditor.
D. The results of analytical procedures.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. Analytical procedures may be used to enhance the auditor's understanding of the client's business or to evaluate financial statement assertions, but generally would not be helpful in assessing the competence and objectivity of an entity's internal auditor. Choice "a" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from discussions with management personnel. Choice "b" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from external quality reviews of internal audit activities. Choice "c" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from previous experience with the internal audit function.
QUESTION 356
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
A. Opinionofanysubsequenteventsoccurringsincethepredecessor'sauditreportwasissued. B. Understandingastothereasonsforthechangeofauditors.
C. Awareness of the consistency in the application of GAAP between periods.
D. Evaluation of all matters of continuing accounting significance.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. Before accepting an engagement, the auditor should make specific inquiries of the predecessor auditor in order to assist the auditor in deciding whether or not to accept the engagement.
Inquiry should include the predecessor's understanding of the reasons for the change in auditors. Choice "a" is incorrect. The predecessor generally does not provide an opinion on events occurring subsequent to the issuance of the audit report. Choice "c" is incorrect. The successor (and not the predecessor) evaluates the consistency in the application of GAAP. This evaluation occurs after acceptance. Choice "d" is incorrect. The predecessor generally allows the successor to review audit documentation related to matters of continuing accounting significance, but this occurs subsequent to acceptance.
QUESTION 357
Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
A. Aninadequateunderstandingoftheentity'sinternalcontrol.
B. Thecloseproximitytotheendoftheentity'sfiscalyear.
C. Concluding that the entity's management probably lacks integrity.
D. Aninabilitytoperformpreliminaryanalyticalproceduresbeforeacceptingtheengagement.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "c" is correct. A conclusion that management lacks integrity would probably cause the auditor not to accept a new engagement.
Choice "a" is incorrect. Inadequate understanding of the client's internal control would not prevent the auditor from accepting the engagement, since that understanding could be obtained later.
Choice "b" is incorrect. Proximity to year-end would not prevent an auditor from accepting a new audit engagement.
Choice "d" is incorrect. While analytical procedures are required during planning, this generally occurs subsequent to accepting the engagement.
QUESTION 358
The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:
A. Auditor'ssystemofqualitycontrolhasbeenmaintainedatahighlevel.
B. Resultsareconsistentwiththeconclusionstobepresentedintheauditor'sreport.
C. Audit procedures performed are approved in the professional standards.
D. Audithasbeenperformedbypersonshavingadequatetechnicaltrainingandproficiencyasauditors.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. Review of assistants' work is necessary to determine whether it was performed in a satisfactory manner and to determine whether the work supports the conclusions presented in the auditor's report.
Choice "a" is incorrect. The responsibility of a firm to establish review procedures (a system of quality control) is distinct from the auditor's responsibility to adequately plan and supervise the work on a particular engagement. Quality control standards relate to the conduct of the firm's audit practice as a whole; GAAS relates to the conduct of individual audits. Choice "c" is incorrect. Specific audit procedures are performed based on the auditor's judgment and would not necessarily be approved in the professional standards. Choice "d" is incorrect. Review of an assistant's work would not necessarily be indicative of that assistant's technical training and proficiency. The review process is to determine whether the audit is being performed in a satisfactory manner.
QUESTION 359
An auditor obtains knowledge about a new client's business and its industry to:
A. Makeconstructivesuggestionsconcerningimprovementstotheclient'sinternalcontrol.
B. Developanattitudeofprofessionalskepticismconcerningmanagement'sfinancialstatementassertions.
C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Understand the events and transactions that may have an effect on the client's financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. The auditor should obtain knowledge of the client's business and its industry in order to determine the effect of transactions, events, and practices on the client's financial statements.
Choice "a" is incorrect. Constructive suggestions concerning improvements in the new client's internal control are generally made after the study and evaluation of the client's internal control, performed subsequent to planning. Knowledge about the new client's business and its industry is generally obtained during planning. Choice "b" is incorrect. The auditor should have an attitude of professional skepticism in conducting the engagement, but this attitude is not necessarily related to the auditor's knowledge of the new client's business and its industry.
Choice "c" is incorrect. The auditor should evaluate whether the aggregation of known misstatements materially affects the financial statements, but this is done near the audit's conclusion. Knowledge about the new client's business and its industry is generally obtained during planning.
QUESTION 360
The objective of performing analytical procedures in planning an audit is to identify the existence of:
A. Unusualtransactionsandevents.
B. Illegalactsthatwentundetectedbecauseofinternalcontrolweaknesses. C. Relatedpartytransactions.
D. Recorded transactions that were not properly authorized.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit.
Choice "b" is incorrect. Analytical procedures are not effective in identifying illegal acts that went undetected due to internal control weaknesses.
Choice "c" is incorrect. Analytical procedures are not effective in identifying related party transactions.
Choice "d" is incorrect. Analytical procedures are not effective as tests of controls to identify unauthorized transactions.
QUESTION 361
Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
A. Aflowchartornarrativeoftheinformationsystemrelevanttofinancialreportingdescribingtherecordingandclassificationoftransactionsforfinancialreporting. B. Anauditplansettingforthindetailtheproceduresnecessarytoaccomplishtheengagement'sobjectives.
C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.
D. An internal control questionnaire identifying controls that assure specific objectives will be achieved.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. In an audit conducted in accordance with GAAS, the auditor must document the audit plan, setting forth in detail the procedures necessary to accomplish the engagement's objectives.
Choice "a" is incorrect. Documentation of the auditor's understanding of the client's internal control is required, but may take different forms. A narrative, an internal control questionnaire, a flowchart, or simply a memorandum (for a small client) may be sufficient. Choice "c" is incorrect. A planning memo, while recommended, is not required under GAAS. Choice "d" is incorrect. Documentation of the auditor's understanding of the client's internal control is required, but may take different forms: narrative, internal control questionnaire, flowchart, or simply a memorandum (for a small client) may be sufficient. In addition, controls do not assure the achievement of objectives.
QUESTION 362
In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:
A. Clientisnotfamiliarwiththeprofessionalcertification,personalreputation,orparticularcompetenceofthespecialist.
B. Auditor,asaresultofthespecialist'sfindings,addsanexplanatoryparagraphemphasizingamatterregardingthefinancialstatements. C. Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements.
D. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. When expressing an unqualified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in an explanatory paragraph if such a reference will facilitate understanding of the explanatory paragraph or of the departure from an unqualified opinion. Choice "a" is incorrect. Lack of client familiarity with the specialist does not affect the auditor's report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist's qualifications.
Choice "c" is incorrect. The auditor must understand the form and content of the specialist's findings in relation to the representations in the financial statements to be able to review the specialist's work. However, this does not affect whether or not the auditor refers to the specialist in the auditor's report.
Choice "d" is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.
QUESTION 363
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. ReferthedisagreementtotheAICPA'sQualityReviewCommittee.
B. Documentthedetailsofthedisagreementwiththeconclusionreached.
C. Discuss the disagreement with the entity's management or its audit committee. D. Report the disagreement to an impartial peer review monitoring team.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. Each assistant has a professional responsibility to bring to the attention of appropriate individuals in the firm, disagreements or concerns the assistant might have with respect to accounting and auditing issues that he or she believes are of significance to the financial statements or auditor's report. In addition, each assistant should have a right to document his or her disagreement if he or she believes it is necessary to be disassociated from the resolution of the matter.
Choice "a" is incorrect. Quality control committees are primarily concerned with determining whether quality control policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements. Choice "c" is incorrect. Disagreements among an audit firm's staff would generally be handled internally.
Discussion of such matters with the client would be inappropriate. Choice "d" is incorrect. Impartial peer review teams are primarily concerned with determining whether quality control policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements.
QUESTION 364
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
A. $10,000 B. $15,000 C. $20,000 D. $30,000
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. Because the statements are interrelated, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements. Choices "b", "c", and "d" are incorrect, based on the above explanation.
QUESTION 365
Analytical procedures used in planning an audit should focus on:
A. Evaluatingtheadequacyofevidencegatheredconcerningunusualbalances. B. Testingindividualaccountbalancesthatdependonaccountingestimates.
C. Enhancing the auditor's understanding of the client's business.
D. Identifying material weaknesses in internal control.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "c" is correct. The purpose of applying analytical procedures in planning the audit is to assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions. To accomplish this, the analytical procedures used in planning the audit should focus on (a) enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date, and (b) identifying areas that may represent specific risks relevant to the audit. Choice "a" is incorrect. Analytical procedures to assess the adequacy of evidence would be used in the final review stage.
Choice "b" is incorrect. Testing individual account balances that depend on accounting estimates would be a substantive application of analytical procedures and would not be used in the planning stages of an audit.
Choice "d" is incorrect. Analytical procedures are generally not useful in detecting material weaknesses in the client's internal control.
QUESTION 366
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?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "c" is correct. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about assessments of risk, the materiality of misstatements, the sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters affecting the auditor's report should always be those of the auditor. Choices "a", "b", and "d" are incorrect, based on the above explanation.
QUESTION 367
Which of the following procedures would an auditor least likely perform in planning a financial statement audit?
A. Coordinatingtheassistanceofentitypersonnelindatapreparation.
B. Discussingmattersthatmayaffecttheauditwithfirmpersonnelresponsiblefornon-auditservicestotheentity. C. Selecting a sample of vendors' invoices for comparison to receiving reports.
D. Reading the current year's interim financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "c" is correct. Selecting a sample of vendors' invoices for comparison to receiving reports is performed during fieldwork. This is not part of the planning phase. Choice "a" is incorrect. Coordinating the assistance of entity personnel in data preparation is usually performed during the planning phase.
Choice "b" is incorrect. During the planning phase, matters that may affect the audit should be discussed with firm personnel responsible for non-audit services to the entity. Choice "d" is incorrect. During the planning phase, the auditor generally would read the current year's interim financial statements.
QUESTION 368
When assessing an internal auditor's competence, a CPA ordinarily obtains information about all of the following, except:
A. Qualityofauditdocumentation.
B. Educationallevelandprofessionalexperience. C. The audit plan and audit procedures.
D. Access to information about related parties.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. The degree of access the independent auditor has to information about related parties provides no information regarding an internal auditor's competence. Choice "a" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.
Choice "b" is incorrect. When considering the competence of internal auditors, the independent auditor should inquire about the qualifications of the internal audit staff, including for example, consideration of the client's practices for hiring, training, and supervising internal audit staff. This includes inquiries as to the internal auditor's educational level and professional experience. Choice "c" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.
QUESTION 369
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. Levelofdetectionrisk.
B. Extentoftestsofdetails. C. Level of inherent risk.
D. Extent of tests of controls.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "b" is correct. An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will result in a reduction in detection risk. Choice "a" is incorrect. Increasing detection risk would result in a corresponding increase in overall audit risk, which is the opposite of the desired response. Choice "c" is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature of the related assertion.
Choice "d" is incorrect. If the auditor has already determined that certain control activities are ineffective, increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to compensate for the increased level of risk in order to keep overall audit risk to a low level.
QUESTION 370
A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?
A. AICPAAccountingTrends&Techniques.
B. FASBTechnicalBulletins.
C. AICPA Audit and Accounting Manual.
D. FASB Statements of Financial Accounting Concepts.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports.
Choice "b" is incorrect. FASB Technical Bulletins are considered to be a source of established accounting principles that expand upon or further clarify GAAP. They do not provide information regarding how various companies comply with GAAP. Choice "c" is incorrect. AICPA Audit and Accounting Guides are interpretive publications that provide additional guidance regarding the application of auditing standards. They do not provide information regarding how various companies comply with GAAP. Choice "d" is incorrect. FASB Statements of Financial Accounting Concepts establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. They do not provide information regarding how various companies comply with GAAP.
QUESTION 371
An auditor's engagement letter most likely would include a statement regarding:
A. Management'sresponsibilitytoprovidecertainwrittenrepresentationstotheauditor.
B. Conditionsunderwhichtheauditormaymodifythepreliminaryjudgmentaboutmateriality. C. Internal control activities that would reduce the auditor's assessment of risk.
D. Materiality matters that could modify the auditor's preliminary assessment of fraud risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. The auditor is required to establish an understanding with the client, and this understanding should be documented in the form of an engagement letter. The understanding (and therefore the letter) should encompass management's responsibilities, which include providing the auditor with a representation letter at the conclusion of the engagement. Choices "b", "c", and "d" are incorrect. An understanding generally is not obtained with respect to specific audit procedures, and therefore these items would not be included in an engagement letter.
QUESTION 372
A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's:
A. Understandingofthereasonsforthechangeinauditors.
B. Methodologyusedinapplyingsamplingtechniques.
C. Opinion on subsequent events that have occurred since the balance sheet date. D. Perception of the competency and reliance on the client's internal audit function.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "a" is correct. The successor auditor is required to make inquiries of the predecessor auditor before accepting an engagement. These inquiries should include the predecessor's understanding as to the reasons for the change in auditors. Choice "b" is incorrect. The successor auditor would not typically inquire regarding audit methodology used during the prior audit.
Choices "c" and "d" are incorrect. The successor auditor is responsible for making his or her own judgments regarding the audit, and would not typically inquire regarding the predecessor auditor's judgments with respect to subsequent events or the internal audit function.
QUESTION 373
An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters?
A. Methodofsamplingtobeused.
B. Preliminaryjudgmentsaboutmaterialitylevels.
C. Nature of reports to be rendered.
D. Understanding the client's operations and business.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
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Choice "d" is correct. An auditor would review the client's accounting policies and procedures as part of obtaining an understanding of the client's operations and business. This understanding is important because it affects the design of internal control, which in turn impacts planned auditing procedures.
Choice "a" is incorrect. Although the auditor might consider the client's accounting policies and procedures when designing a sampling plan, this is not the primary reason for the auditor's review of the client's policies and procedures.
Choice "b" is incorrect. The client's accounting policies and procedures would not affect preliminary judgments about materiality, which are generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "c" is incorrect. The client's accounting policies and procedures would not affect the nature of reports to be rendered. The nature of reports to be rendered would be based on the type of engagement and the specific results of that engagement.
QUESTION 374
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. Toenabletheauditortoaccuratelyidentifysignificantdeficienciesininternalcontrol. B. Toassisttheauditorinaccuratelyinterpretinginformationobtainedduringanaudit. C. To allow the auditor to more accurately perform tests of controls.
D. To decide whether it will be necessary to perform analytical procedures.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
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Explanation:
Explanation
Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies in internal control. Also, such deficiencies are typically identified during the fieldwork stage of the audit, while obtaining an understanding of the entity's business typically occurs during planning. Choice "c" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc.
Choice "d" is incorrect. Analytical procedures are always required in an audit, during the planning and overall review stages.
QUESTION 375
A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:
A. IncreasethesampleofEDItransactionstobeselectedforcutofftests.
B. Performtestsseveraltimesduringtheyear,ratherthanonlyatyear-end.
C. Plan to make a 100% count of the entity's inventory at or near the year-end.
D. Decrease the assessed level of control risk for the existence or occurrence assertions.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, some accounting data and source documents may be available only in electronic form, or only at a certain point in time. The auditor would generally perform tests of controls several times during the year to compensate for this limitation. Choice "a" is incorrect. Increasing the sample size related to cutoff testing will not provide evidence about transactions occurring throughout the period under audit, since cutoff testing relates to year-end.
Choice "c" is incorrect. Auditing 100% of the year-end inventory does not provide evidence about transactions occurring throughout the period under audit. Choice "d" is incorrect. Failure to retain documentation for longer periods of time would not imply that control risk is reduced. If anything, this might lead to an increase in control risk, making it less likely that phony transactions would be detected after the fact.
QUESTION 376
An auditor assesses control risk because it:
A. Isrelevanttotheauditor'sunderstandingofthecontrolenvironment.
B. Providesassurancethattheauditor'smaterialitylevelsareappropriate. C. Indicates to the auditor where inherent risk may be the greatest.
D. Affects the level of detection risk that the auditor may accept.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions. Choice "a" is incorrect. The auditor assesses control risk after obtaining an understanding of internal control. Assessment is not required to obtain an understanding of the control environment or any of the other four components of internal control. Choice "b" is incorrect. Assessment of control risk is unrelated to assessments of materiality levels.
Choice "c" is incorrect. Inherent risk is assessed independently of any consideration of relevant controls.
Control risk does not affect inherent risk.
QUESTION 377
As the acceptable level of detection risk decreases, an auditor may:
A. Reducesubstantivetestingbyrelyingontheassessmentsofinherentriskandcontrolrisk. B. Postponetheplannedtimingofsubstantivetestsfrominterimdatestotheyear-end.
C. Eliminate the assessed level of inherent risk from consideration as a planning factor.
D. Lower the assessed level of control risk.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. As the acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. Consequently, the auditor should do one or more of the following: 1) change the nature of substantive tests from a less effective to a more effective procedure, 2) change the timing of the substantive tests, such as performing them at year-end rather than at an interim date, or 3) change the extent of substantive tests, such as using a larger sample
size.
Choice "a" is incorrect. As acceptable detection risk decreases, the extent of substantive tests should increase rather than decrease. The auditor cannot reassess inherent risk and control risk to compensate for the lower acceptable detection risk.
Choice "c" is incorrect. Inherent risk is an integral part of the risk of material misstatement and cannot be eliminated from the computation of acceptable detection risk. Choice "d" is incorrect. The auditor cannot lower the assessed level of control risk unless tests of controls support that assessment.
QUESTION 378
Control risk should be assessed in terms of:
A. Specificcontrols.
B. Typesofpotentialirregularities. C. Financial statement assertions. D. Control environment factors.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The auditor identifies internal controls relevant to specific financial statement assertions, and then performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions. Control risk should be assessed in terms of financial statement assertions.
Choice "a" is incorrect. Control risk is not assessed in terms of specific controls. Choice "b" is incorrect. Control risk is not assessed in terms of types of potential fraud. Choice "d" is incorrect. Control risk is not assessed in terms of control environment factors.
QUESTION 379
The acceptable level of detection risk is inversely related to the:
A. Assuranceprovidedbysubstantivetests.
B. Riskofmisapplyingauditingprocedures.
C. Preliminaryjudgmentaboutmaterialitylevels.
D. Risk of failing to discover material misstatements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests.
Choice "b" is incorrect. The acceptable level of detection risk is determined independently of the risk of misapplying auditing procedures (non-sampling risk). Choice "c" is incorrect. The acceptable level of detection risk is determined independently of the preliminary judgment about materiality levels (tolerable error). Choice "d" is incorrect. The acceptable level of detection risk is directly related to the risk of failing to discover material misstatements (audit risk).
QUESTION 380
Samples to test internal control are intended to provide a basis for an auditor to conclude whether:
A. Thecontrolactivitiesareoperatingeffectively.
B. Thefinancialstatementsaremateriallymisstated.
C. The risk of incorrect acceptance is too high.
D. Materiality for planning purposes is at a sufficiently low level.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively. Choice "b" is incorrect. Tests of controls may provide evidence regarding the likelihood of misstatement, but they do not provide a basis for concluding whether the financial statements are materially misstated.
Choice "c" is incorrect. The risk of incorrect acceptance is an aspect of sampling risk related to substantive tests, not tests of controls.
Choice "d" is incorrect. Samples to test controls do not provide evidence regarding materiality levels for planning purposes.
QUESTION 381
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
A. Therearesignificantrelatedpartytransactionsthatmanagementclaimsoccurredintheordinarycourseofbusiness. B. Internalcontrolactivitiesrequiringthesegregationofdutiesaresubjecttomanagementoverride.
C. Management continues to employ an inefficient system of information technology to record financial transactions.
D. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. If it is unlikely that sufficient appropriate audit evidence will be available to support an opinion on the financial statements, it would be pointless to conduct an audit. Choice "a" is incorrect. The existence of significant related party transactions would not prevent the auditor from accepting an audit engagement, regardless of the whether or not such transactions occurred in the ordinary course of business. The auditor would simply need to evaluate management's methods for identifying and disclosing related party transactions, and ultimately evaluate financial statement disclosure, as part of the audit. Choice "b" is incorrect. Internal control activities are often subject to management override, but this is no reason to reject a potential audit engagement. Rather, this risk should be assessed, and audit procedures should be designed only after taking into account the assessed level of risk. Choice "c" is incorrect. An inefficient system of information technology for recording financial transactions may not be optimal for the company, but as long as it is an effective system (i.e., as long as it provides reliable financial reporting), it will not affect the auditor's decision regarding acceptance of a new audit engagement.
QUESTION 382
Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time?
A. Thespecificmatterstobeincludedinthecommunicationwiththosechargedwithgovernance.
B. Theminimumamountofmisstatementsthatmaybeconsideredtobesignificantdeficienciesininternalcontrol. C. The schedules and analyses that the client's staff should prepare.
D. The effects that inadequate controls may have over the safeguarding of assets.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Prior to commencing field work, the auditor would likely discuss with management any assistance desired from client staff. This is part of establishing an understanding with the client.
Choice "a" is incorrect. Prior to commencing field work, the auditor likely would be unaware of the specific matters to be included in the communication to those charged with governance. Choice "b" is incorrect. While the auditor may set a preliminary measure of materiality, this is a matter of auditing judgment and would not typically be discussed with the client. In addition, significant internal control weaknesses are reported because they indicate a potential for material misstatement, regardless of whether any actual misstatements exceed a particular threshold. Choice "d" is incorrect. Prior to commencing field work, the auditor would be unlikely to have identified inadequate controls or evaluated their possible effects.
The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:
A. Giveguidancetothestaffregardingbothtechnicalandpersonnelaspectsoftheaudit.
B. Discussstaffsuggestionsconcerningtheestablishmentandmaintenanceoftimebudgets. C. Establish the need for using the work of specialists and internal auditors.
D. Provide an opportunity to document staff disagreements regarding technical issues.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Pre-audit planning meetings are typically held to plan technical and personnel aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Choice "b" is incorrect. While staff suggestions regarding time budgets may be discussed, this is not typically the primary reason for the meeting.
Choice "c" is incorrect. Establishing the need for specialists and internal auditors may be discussed, but this is not the primary reason for the meeting. Choice "d" is incorrect. Disagreements about technical issues arise and are resolved after testing begins, not during the pre-audit conference.
QUESTION 349
In planning an audit of a new client, an auditor most likely would consider the methods used to process accounting information because such methods:
A. Influencethedesignofinternalcontrol.
B. Affecttheauditor'spreliminaryjudgmentaboutmaterialitylevels. C. Assist in evaluating the planned audit objectives.
D. Determine the auditor's acceptable level of audit risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The auditor should consider the methods the entity uses to process accounting information in planning the audit because such methods influence the design of internal control. The extent to which computer processing is used in significant accounting applications, as well as the complexity of the processing, may also influence the nature, timing, and extent of audit procedures.
Choice "b" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor's perceptions of the needs of a reasonable person. It would not be affected by the methods used to process accounting information.
Choice "c" is incorrect. The auditor develops specific audit objectives based on financial statement assertions. The methods used to process accounting information would not be relevant to the development of objectives.
Choice "d" is incorrect. Audit risk is the risk that the auditor may unknowingly fail to modify the opinion on financial statements that are materially misstated. The acceptable level of audit risk is a matter of auditor judgment, but it would not be affected by the methods used to process accounting information.
QUESTION 350
The existence of audit risk is recognized by the statement in the auditor's standard report that the:
A. Auditorisresponsibleforexpressinganopiniononthefinancialstatements,whicharetheresponsibilityofmanagement. B. Financialstatementsarepresentedfairly,inallmaterialrespects,inconformitywithGAAP.
C. Audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. D. Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The existence of audit risk is recognized by the statement in the standard report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. Choice "a" is incorrect. This statement defines the distinction between the responsibility of the auditor and that of management.
Choice "b" is incorrect. The purpose of this section is to note that fair presentation is not necessarily impacted by immaterial errors.
Choice "c" is incorrect. This statement explains the nature of an audit.
QUESTION 351
Which of the following statements is not correct about materiality?
A. TheconceptofmaterialityrecognizesthatsomemattersareimportantforfairpresentationoffinancialstatementsinconformitywithGAAP,whileothermatters are not important.
B. Anauditorconsidersmaterialityforplanningpurposesintermsofthelargestaggregatelevelofmisstatementsthatcouldbematerialtoanyoneofthefinancial statements.
C. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments.
D. Anauditor'sconsiderationofmaterialityisinfluencedbytheauditor'sperceptionoftheneedsofareasonablepersonwhowillrelyonthefinancialstatements.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Materiality levels include an overall level for each statement; however, because the statements are interrelated, and for reasons of efficiency, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatements that could be considered material to any one of the financial statements. Choice "a" is incorrect. The concept of materiality recognizes that some matters, either individually or in the aggregate, are important for the fair presentation of financial statements in conformity with GAAP, while other matters are not important. Choice "c" is incorrect. Materiality judgments are made in light of the surrounding circumstances and necessarily involve both quantitative and qualitative considerations. Choice "d" is incorrect. The auditor's consideration of materiality is influenced by his or her perception of the needs of a reasonable person relying on the financial statements.
QUESTION 352
Which of the following documentation is not required for an audit in accordance with generally accepted auditing standards?
A. Awrittenauditplansettingforththeproceduresnecessarytoaccomplishtheaudit'sobjectives.
B. Anindicationthattheaccountingrecordsagreeorreconcilewiththefinancialstatements.
C. A client engagement letter that summarizes the timing and details of the auditor's planned fieldwork.
D. The basis for the auditor's decision not to perform tests of controls concurrently with obtaining an understanding of internal control.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor is not required to evaluate operating effectiveness as part of obtaining an understanding of internal control, and therefore need not document the basis for this decision.
Choice "a" is incorrect. The auditor is required to prepare a written audit plan. Choice "b" is incorrect. Audit documentation should be sufficient to show that the accounting records agree or reconcile with the financial statements. Choice "c" is incorrect. Establishing an understanding with the client is required by GAAS, and an engagement letter is a presumptively mandatory requirement.
QUESTION 353
When assessing the internal auditors' competence, the independent CPA should obtain information about the:
A. Organizationalleveltowhichtheinternalauditorsreport.
B. Educationalbackgroundandprofessionalcertificationoftheinternalauditors.
C. Policies prohibiting the internal auditors from auditing areas where relatives are employed. D. Internal auditors' access to records and information that is considered sensitive.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. When assessing the internal auditors' competence, the auditor should obtain information about such factors as educational level, experience, professional certification, continuing education, supervision, review, and evaluation of performance. Choice "a" is incorrect. The organizational level to which the internal auditors report is related to their objectivity.
Choice "c" is incorrect. Policies prohibiting internal auditors from auditing areas where relatives are employed are related to objectivity.
Choice "d" is incorrect. Access to sensitive records and information is related to the overall objectives of the internal audit function, not to internal auditor competence.
QUESTION 354
Which of the following statements is correct about the auditor's use of the work of a specialist?
A. Thespecialistshouldnothaveanunderstandingoftheauditor'scorroborativeuseofthespecialist'sfindings. B. Theauditorisrequiredtoperformsubstantiveprocedurestoverifythespecialist'sassumptionsandfindings. C. The client should not have an understanding of the nature of the work to be performed by the specialist.
D. The auditor should obtain an understanding of the methods and assumptions used by the specialist.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Although the appropriateness and reasonableness of methods or assumptions used and their application are the responsibility of the specialist, the auditor should obtain an understanding of the methods or assumptions used in order to determine whether the findings are suitable for corroborating the representations in the financial statements. Choice "a" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed. Choice "b" is incorrect. The auditor may consider performing substantive procedures to verify the specialist's findings if the specialist is related to the client, but is not required to do so. Choice "c" is incorrect. An understanding should exist among the auditor, the client, and the specialist as to the nature of the work to be performed.
QUESTION 355
In assessing the competence and objectivity of an entity's internal auditor, an independent auditor least likely would consider information obtained from:
A. Discussionswithmanagementpersonnel.
B. Externalqualityreviewsoftheinternalauditor'sactivities. C. Previous experience with the internal auditor.
D. The results of analytical procedures.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Analytical procedures may be used to enhance the auditor's understanding of the client's business or to evaluate financial statement assertions, but generally would not be helpful in assessing the competence and objectivity of an entity's internal auditor. Choice "a" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from discussions with management personnel. Choice "b" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from external quality reviews of internal audit activities. Choice "c" is incorrect. In assessing competence and objectivity, the auditor usually considers information obtained from previous experience with the internal audit function.
QUESTION 356
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor's:
A. Opinionofanysubsequenteventsoccurringsincethepredecessor'sauditreportwasissued. B. Understandingastothereasonsforthechangeofauditors.
C. Awareness of the consistency in the application of GAAP between periods.
D. Evaluation of all matters of continuing accounting significance.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Before accepting an engagement, the auditor should make specific inquiries of the predecessor auditor in order to assist the auditor in deciding whether or not to accept the engagement.
Inquiry should include the predecessor's understanding of the reasons for the change in auditors. Choice "a" is incorrect. The predecessor generally does not provide an opinion on events occurring subsequent to the issuance of the audit report. Choice "c" is incorrect. The successor (and not the predecessor) evaluates the consistency in the application of GAAP. This evaluation occurs after acceptance. Choice "d" is incorrect. The predecessor generally allows the successor to review audit documentation related to matters of continuing accounting significance, but this occurs subsequent to acceptance.
QUESTION 357
Which of the following factors most likely would cause an auditor not to accept a new audit engagement?
A. Aninadequateunderstandingoftheentity'sinternalcontrol.
B. Thecloseproximitytotheendoftheentity'sfiscalyear.
C. Concluding that the entity's management probably lacks integrity.
D. Aninabilitytoperformpreliminaryanalyticalproceduresbeforeacceptingtheengagement.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. A conclusion that management lacks integrity would probably cause the auditor not to accept a new engagement.
Choice "a" is incorrect. Inadequate understanding of the client's internal control would not prevent the auditor from accepting the engagement, since that understanding could be obtained later.
Choice "b" is incorrect. Proximity to year-end would not prevent an auditor from accepting a new audit engagement.
Choice "d" is incorrect. While analytical procedures are required during planning, this generally occurs subsequent to accepting the engagement.
QUESTION 358
The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the:
A. Auditor'ssystemofqualitycontrolhasbeenmaintainedatahighlevel.
B. Resultsareconsistentwiththeconclusionstobepresentedintheauditor'sreport.
C. Audit procedures performed are approved in the professional standards.
D. Audithasbeenperformedbypersonshavingadequatetechnicaltrainingandproficiencyasauditors.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Review of assistants' work is necessary to determine whether it was performed in a satisfactory manner and to determine whether the work supports the conclusions presented in the auditor's report.
Choice "a" is incorrect. The responsibility of a firm to establish review procedures (a system of quality control) is distinct from the auditor's responsibility to adequately plan and supervise the work on a particular engagement. Quality control standards relate to the conduct of the firm's audit practice as a whole; GAAS relates to the conduct of individual audits. Choice "c" is incorrect. Specific audit procedures are performed based on the auditor's judgment and would not necessarily be approved in the professional standards. Choice "d" is incorrect. Review of an assistant's work would not necessarily be indicative of that assistant's technical training and proficiency. The review process is to determine whether the audit is being performed in a satisfactory manner.
QUESTION 359
An auditor obtains knowledge about a new client's business and its industry to:
A. Makeconstructivesuggestionsconcerningimprovementstotheclient'sinternalcontrol.
B. Developanattitudeofprofessionalskepticismconcerningmanagement'sfinancialstatementassertions.
C. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. D. Understand the events and transactions that may have an effect on the client's financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor should obtain knowledge of the client's business and its industry in order to determine the effect of transactions, events, and practices on the client's financial statements.
Choice "a" is incorrect. Constructive suggestions concerning improvements in the new client's internal control are generally made after the study and evaluation of the client's internal control, performed subsequent to planning. Knowledge about the new client's business and its industry is generally obtained during planning. Choice "b" is incorrect. The auditor should have an attitude of professional skepticism in conducting the engagement, but this attitude is not necessarily related to the auditor's knowledge of the new client's business and its industry.
Choice "c" is incorrect. The auditor should evaluate whether the aggregation of known misstatements materially affects the financial statements, but this is done near the audit's conclusion. Knowledge about the new client's business and its industry is generally obtained during planning.
QUESTION 360
The objective of performing analytical procedures in planning an audit is to identify the existence of:
A. Unusualtransactionsandevents.
B. Illegalactsthatwentundetectedbecauseofinternalcontrolweaknesses. C. Relatedpartytransactions.
D. Recorded transactions that were not properly authorized.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation: Explanation
Choice "a" is correct. The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit.
Choice "b" is incorrect. Analytical procedures are not effective in identifying illegal acts that went undetected due to internal control weaknesses.
Choice "c" is incorrect. Analytical procedures are not effective in identifying related party transactions.
Choice "d" is incorrect. Analytical procedures are not effective as tests of controls to identify unauthorized transactions.
QUESTION 361
Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?
A. Aflowchartornarrativeoftheinformationsystemrelevanttofinancialreportingdescribingtherecordingandclassificationoftransactionsforfinancialreporting. B. Anauditplansettingforthindetailtheproceduresnecessarytoaccomplishtheengagement'sobjectives.
C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.
D. An internal control questionnaire identifying controls that assure specific objectives will be achieved.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. In an audit conducted in accordance with GAAS, the auditor must document the audit plan, setting forth in detail the procedures necessary to accomplish the engagement's objectives.
Choice "a" is incorrect. Documentation of the auditor's understanding of the client's internal control is required, but may take different forms. A narrative, an internal control questionnaire, a flowchart, or simply a memorandum (for a small client) may be sufficient. Choice "c" is incorrect. A planning memo, while recommended, is not required under GAAS. Choice "d" is incorrect. Documentation of the auditor's understanding of the client's internal control is required, but may take different forms: narrative, internal control questionnaire, flowchart, or simply a memorandum (for a small client) may be sufficient. In addition, controls do not assure the achievement of objectives.
QUESTION 362
In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:
A. Clientisnotfamiliarwiththeprofessionalcertification,personalreputation,orparticularcompetenceofthespecialist.
B. Auditor,asaresultofthespecialist'sfindings,addsanexplanatoryparagraphemphasizingamatterregardingthefinancialstatements. C. Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements.
D. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. When expressing an unqualified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in an explanatory paragraph if such a reference will facilitate understanding of the explanatory paragraph or of the departure from an unqualified opinion. Choice "a" is incorrect. Lack of client familiarity with the specialist does not affect the auditor's report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist's qualifications.
Choice "c" is incorrect. The auditor must understand the form and content of the specialist's findings in relation to the representations in the financial statements to be able to review the specialist's work. However, this does not affect whether or not the auditor refers to the specialist in the auditor's report.
Choice "d" is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.
QUESTION 363
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. ReferthedisagreementtotheAICPA'sQualityReviewCommittee.
B. Documentthedetailsofthedisagreementwiththeconclusionreached.
C. Discuss the disagreement with the entity's management or its audit committee. D. Report the disagreement to an impartial peer review monitoring team.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. Each assistant has a professional responsibility to bring to the attention of appropriate individuals in the firm, disagreements or concerns the assistant might have with respect to accounting and auditing issues that he or she believes are of significance to the financial statements or auditor's report. In addition, each assistant should have a right to document his or her disagreement if he or she believes it is necessary to be disassociated from the resolution of the matter.
Choice "a" is incorrect. Quality control committees are primarily concerned with determining whether quality control policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements. Choice "c" is incorrect. Disagreements among an audit firm's staff would generally be handled internally.
Discussion of such matters with the client would be inappropriate. Choice "d" is incorrect. Impartial peer review teams are primarily concerned with determining whether quality control policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements.
QUESTION 364
In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
A. $10,000 B. $15,000 C. $20,000 D. $30,000
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Because the statements are interrelated, the auditor ordinarily considers materiality for planning purposes in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements. Choices "b", "c", and "d" are incorrect, based on the above explanation.
QUESTION 365
Analytical procedures used in planning an audit should focus on:
A. Evaluatingtheadequacyofevidencegatheredconcerningunusualbalances. B. Testingindividualaccountbalancesthatdependonaccountingestimates.
C. Enhancing the auditor's understanding of the client's business.
D. Identifying material weaknesses in internal control.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The purpose of applying analytical procedures in planning the audit is to assist in planning the nature, timing, and extent of auditing procedures that will be used to obtain audit evidence for specific account balances or classes of transactions. To accomplish this, the analytical procedures used in planning the audit should focus on (a) enhancing the auditor's understanding of the client's business and the transactions and events that have occurred since the last audit date, and (b) identifying areas that may represent specific risks relevant to the audit. Choice "a" is incorrect. Analytical procedures to assess the adequacy of evidence would be used in the final review stage.
Choice "b" is incorrect. Testing individual account balances that depend on accounting estimates would be a substantive application of analytical procedures and would not be used in the planning stages of an audit.
Choice "d" is incorrect. Analytical procedures are generally not useful in detecting material weaknesses in the client's internal control.
QUESTION 366
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?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Because the auditor has the ultimate responsibility to express an opinion on the financial statements, judgments about assessments of risk, the materiality of misstatements, the sufficiency of tests performed, the evaluation of significant accounting estimates, and other matters affecting the auditor's report should always be those of the auditor. Choices "a", "b", and "d" are incorrect, based on the above explanation.
QUESTION 367
Which of the following procedures would an auditor least likely perform in planning a financial statement audit?
A. Coordinatingtheassistanceofentitypersonnelindatapreparation.
B. Discussingmattersthatmayaffecttheauditwithfirmpersonnelresponsiblefornon-auditservicestotheentity. C. Selecting a sample of vendors' invoices for comparison to receiving reports.
D. Reading the current year's interim financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Selecting a sample of vendors' invoices for comparison to receiving reports is performed during fieldwork. This is not part of the planning phase. Choice "a" is incorrect. Coordinating the assistance of entity personnel in data preparation is usually performed during the planning phase.
Choice "b" is incorrect. During the planning phase, matters that may affect the audit should be discussed with firm personnel responsible for non-audit services to the entity. Choice "d" is incorrect. During the planning phase, the auditor generally would read the current year's interim financial statements.
QUESTION 368
When assessing an internal auditor's competence, a CPA ordinarily obtains information about all of the following, except:
A. Qualityofauditdocumentation.
B. Educationallevelandprofessionalexperience. C. The audit plan and audit procedures.
D. Access to information about related parties.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The degree of access the independent auditor has to information about related parties provides no information regarding an internal auditor's competence. Choice "a" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.
Choice "b" is incorrect. When considering the competence of internal auditors, the independent auditor should inquire about the qualifications of the internal audit staff, including for example, consideration of the client's practices for hiring, training, and supervising internal audit staff. This includes inquiries as to the internal auditor's educational level and professional experience. Choice "c" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.
QUESTION 369
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. Levelofdetectionrisk.
B. Extentoftestsofdetails. C. Level of inherent risk.
D. Extent of tests of controls.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk. Increasing the extent of tests of details will result in a reduction in detection risk. Choice "a" is incorrect. Increasing detection risk would result in a corresponding increase in overall audit risk, which is the opposite of the desired response. Choice "c" is incorrect. The auditor cannot change the level of inherent risk, which is based on the nature of the related assertion.
Choice "d" is incorrect. If the auditor has already determined that certain control activities are ineffective, increasing the extent of those tests is not likely to be helpful. The auditor needs to find a way to compensate for the increased level of risk in order to keep overall audit risk to a low level.
QUESTION 370
A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements in a Statement of Financial Accounting Standards. Which of the following information sources would the CPA most likely consult for this information?
A. AICPAAccountingTrends&Techniques.
B. FASBTechnicalBulletins.
C. AICPA Audit and Accounting Manual.
D. FASB Statements of Financial Accounting Concepts.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports.
Choice "b" is incorrect. FASB Technical Bulletins are considered to be a source of established accounting principles that expand upon or further clarify GAAP. They do not provide information regarding how various companies comply with GAAP. Choice "c" is incorrect. AICPA Audit and Accounting Guides are interpretive publications that provide additional guidance regarding the application of auditing standards. They do not provide information regarding how various companies comply with GAAP. Choice "d" is incorrect. FASB Statements of Financial Accounting Concepts establish the objectives and concepts for use by the FASB in developing accounting and reporting standards. They do not provide information regarding how various companies comply with GAAP.
QUESTION 371
An auditor's engagement letter most likely would include a statement regarding:
A. Management'sresponsibilitytoprovidecertainwrittenrepresentationstotheauditor.
B. Conditionsunderwhichtheauditormaymodifythepreliminaryjudgmentaboutmateriality. C. Internal control activities that would reduce the auditor's assessment of risk.
D. Materiality matters that could modify the auditor's preliminary assessment of fraud risk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The auditor is required to establish an understanding with the client, and this understanding should be documented in the form of an engagement letter. The understanding (and therefore the letter) should encompass management's responsibilities, which include providing the auditor with a representation letter at the conclusion of the engagement. Choices "b", "c", and "d" are incorrect. An understanding generally is not obtained with respect to specific audit procedures, and therefore these items would not be included in an engagement letter.
QUESTION 372
A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor's:
A. Understandingofthereasonsforthechangeinauditors.
B. Methodologyusedinapplyingsamplingtechniques.
C. Opinion on subsequent events that have occurred since the balance sheet date. D. Perception of the competency and reliance on the client's internal audit function.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The successor auditor is required to make inquiries of the predecessor auditor before accepting an engagement. These inquiries should include the predecessor's understanding as to the reasons for the change in auditors. Choice "b" is incorrect. The successor auditor would not typically inquire regarding audit methodology used during the prior audit.
Choices "c" and "d" are incorrect. The successor auditor is responsible for making his or her own judgments regarding the audit, and would not typically inquire regarding the predecessor auditor's judgments with respect to subsequent events or the internal audit function.
QUESTION 373
An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters?
A. Methodofsamplingtobeused.
B. Preliminaryjudgmentsaboutmaterialitylevels.
C. Nature of reports to be rendered.
D. Understanding the client's operations and business.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. An auditor would review the client's accounting policies and procedures as part of obtaining an understanding of the client's operations and business. This understanding is important because it affects the design of internal control, which in turn impacts planned auditing procedures.
Choice "a" is incorrect. Although the auditor might consider the client's accounting policies and procedures when designing a sampling plan, this is not the primary reason for the auditor's review of the client's policies and procedures.
Choice "b" is incorrect. The client's accounting policies and procedures would not affect preliminary judgments about materiality, which are generally based on either annualized interim financial statements or annual financial statements from a prior period. Choice "c" is incorrect. The client's accounting policies and procedures would not affect the nature of reports to be rendered. The nature of reports to be rendered would be based on the type of engagement and the specific results of that engagement.
QUESTION 374
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. Toenabletheauditortoaccuratelyidentifysignificantdeficienciesininternalcontrol. B. Toassisttheauditorinaccuratelyinterpretinginformationobtainedduringanaudit. C. To allow the auditor to more accurately perform tests of controls.
D. To decide whether it will be necessary to perform analytical procedures.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. As part of audit planning, the auditor should obtain an understanding of the entity's business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests. Choice "a" is incorrect. Obtaining an understanding of the entity's business would not be particularly helpful in identifying significant deficiencies in internal control. Also, such deficiencies are typically identified during the fieldwork stage of the audit, while obtaining an understanding of the entity's business typically occurs during planning. Choice "c" is incorrect. Obtaining an understanding of the entity's business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc.
Choice "d" is incorrect. Analytical procedures are always required in an audit, during the planning and overall review stages.
QUESTION 375
A retail entity uses electronic data interchange (EDI) in executing and recording most of its purchase transactions. The entity's auditor recognizes that the documentation of the transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:
A. IncreasethesampleofEDItransactionstobeselectedforcutofftests.
B. Performtestsseveraltimesduringtheyear,ratherthanonlyatyear-end.
C. Plan to make a 100% count of the entity's inventory at or near the year-end.
D. Decrease the assessed level of control risk for the existence or occurrence assertions.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, some accounting data and source documents may be available only in electronic form, or only at a certain point in time. The auditor would generally perform tests of controls several times during the year to compensate for this limitation. Choice "a" is incorrect. Increasing the sample size related to cutoff testing will not provide evidence about transactions occurring throughout the period under audit, since cutoff testing relates to year-end.
Choice "c" is incorrect. Auditing 100% of the year-end inventory does not provide evidence about transactions occurring throughout the period under audit. Choice "d" is incorrect. Failure to retain documentation for longer periods of time would not imply that control risk is reduced. If anything, this might lead to an increase in control risk, making it less likely that phony transactions would be detected after the fact.
QUESTION 376
An auditor assesses control risk because it:
A. Isrelevanttotheauditor'sunderstandingofthecontrolenvironment.
B. Providesassurancethattheauditor'smaterialitylevelsareappropriate. C. Indicates to the auditor where inherent risk may be the greatest.
D. Affects the level of detection risk that the auditor may accept.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions. Choice "a" is incorrect. The auditor assesses control risk after obtaining an understanding of internal control. Assessment is not required to obtain an understanding of the control environment or any of the other four components of internal control. Choice "b" is incorrect. Assessment of control risk is unrelated to assessments of materiality levels.
Choice "c" is incorrect. Inherent risk is assessed independently of any consideration of relevant controls.
Control risk does not affect inherent risk.
QUESTION 377
As the acceptable level of detection risk decreases, an auditor may:
A. Reducesubstantivetestingbyrelyingontheassessmentsofinherentriskandcontrolrisk. B. Postponetheplannedtimingofsubstantivetestsfrominterimdatestotheyear-end.
C. Eliminate the assessed level of inherent risk from consideration as a planning factor.
D. Lower the assessed level of control risk.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. As the acceptable level of detection risk decreases, the assurance provided from substantive tests should increase. Consequently, the auditor should do one or more of the following: 1) change the nature of substantive tests from a less effective to a more effective procedure, 2) change the timing of the substantive tests, such as performing them at year-end rather than at an interim date, or 3) change the extent of substantive tests, such as using a larger sample
size.
Choice "a" is incorrect. As acceptable detection risk decreases, the extent of substantive tests should increase rather than decrease. The auditor cannot reassess inherent risk and control risk to compensate for the lower acceptable detection risk.
Choice "c" is incorrect. Inherent risk is an integral part of the risk of material misstatement and cannot be eliminated from the computation of acceptable detection risk. Choice "d" is incorrect. The auditor cannot lower the assessed level of control risk unless tests of controls support that assessment.
QUESTION 378
Control risk should be assessed in terms of:
A. Specificcontrols.
B. Typesofpotentialirregularities. C. Financial statement assertions. D. Control environment factors.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. The auditor identifies internal controls relevant to specific financial statement assertions, and then performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions. Control risk should be assessed in terms of financial statement assertions.
Choice "a" is incorrect. Control risk is not assessed in terms of specific controls. Choice "b" is incorrect. Control risk is not assessed in terms of types of potential fraud. Choice "d" is incorrect. Control risk is not assessed in terms of control environment factors.
QUESTION 379
The acceptable level of detection risk is inversely related to the:
A. Assuranceprovidedbysubstantivetests.
B. Riskofmisapplyingauditingprocedures.
C. Preliminaryjudgmentaboutmaterialitylevels.
D. Risk of failing to discover material misstatements.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests.
Choice "b" is incorrect. The acceptable level of detection risk is determined independently of the risk of misapplying auditing procedures (non-sampling risk). Choice "c" is incorrect. The acceptable level of detection risk is determined independently of the preliminary judgment about materiality levels (tolerable error). Choice "d" is incorrect. The acceptable level of detection risk is directly related to the risk of failing to discover material misstatements (audit risk).
QUESTION 380
Samples to test internal control are intended to provide a basis for an auditor to conclude whether:
A. Thecontrolactivitiesareoperatingeffectively.
B. Thefinancialstatementsaremateriallymisstated.
C. The risk of incorrect acceptance is too high.
D. Materiality for planning purposes is at a sufficiently low level.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Samples to test internal control are intended to provide a basis for an auditor to conclude whether the control activities are operating effectively. Choice "b" is incorrect. Tests of controls may provide evidence regarding the likelihood of misstatement, but they do not provide a basis for concluding whether the financial statements are materially misstated.
Choice "c" is incorrect. The risk of incorrect acceptance is an aspect of sampling risk related to substantive tests, not tests of controls.
Choice "d" is incorrect. Samples to test controls do not provide evidence regarding materiality levels for planning purposes.
QUESTION 381
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
A. Therearesignificantrelatedpartytransactionsthatmanagementclaimsoccurredintheordinarycourseofbusiness. B. Internalcontrolactivitiesrequiringthesegregationofdutiesaresubjecttomanagementoverride.
C. Management continues to employ an inefficient system of information technology to record financial transactions.
D. It is unlikely that sufficient appropriate audit evidence is available to support an opinion on the financial statements.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. If it is unlikely that sufficient appropriate audit evidence will be available to support an opinion on the financial statements, it would be pointless to conduct an audit. Choice "a" is incorrect. The existence of significant related party transactions would not prevent the auditor from accepting an audit engagement, regardless of the whether or not such transactions occurred in the ordinary course of business. The auditor would simply need to evaluate management's methods for identifying and disclosing related party transactions, and ultimately evaluate financial statement disclosure, as part of the audit. Choice "b" is incorrect. Internal control activities are often subject to management override, but this is no reason to reject a potential audit engagement. Rather, this risk should be assessed, and audit procedures should be designed only after taking into account the assessed level of risk. Choice "c" is incorrect. An inefficient system of information technology for recording financial transactions may not be optimal for the company, but as long as it is an effective system (i.e., as long as it provides reliable financial reporting), it will not affect the auditor's decision regarding acceptance of a new audit engagement.
QUESTION 382
Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time?
A. Thespecificmatterstobeincludedinthecommunicationwiththosechargedwithgovernance.
B. Theminimumamountofmisstatementsthatmaybeconsideredtobesignificantdeficienciesininternalcontrol. C. The schedules and analyses that the client's staff should prepare.
D. The effects that inadequate controls may have over the safeguarding of assets.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. Prior to commencing field work, the auditor would likely discuss with management any assistance desired from client staff. This is part of establishing an understanding with the client.
Choice "a" is incorrect. Prior to commencing field work, the auditor likely would be unaware of the specific matters to be included in the communication to those charged with governance. Choice "b" is incorrect. While the auditor may set a preliminary measure of materiality, this is a matter of auditing judgment and would not typically be discussed with the client. In addition, significant internal control weaknesses are reported because they indicate a potential for material misstatement, regardless of whether any actual misstatements exceed a particular threshold. Choice "d" is incorrect. Prior to commencing field work, the auditor would be unlikely to have identified inadequate controls or evaluated their possible effects.