Certified Public Accountant CPA Questions + Answers Part 34
Posted: Tue Feb 22, 2022 6:41 pm
QUESTION 557
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
A. Merchandisereceivedisnotpromptlyreconciledtotheoutstandingpurchaseorderfile.
B. Obsoleteitemsincludedininventorybalancesarerarelyreducedtothelowerofcostormarketvalue.
C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of writing off receivables. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by writing off the related receivable balance. Choice "a" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to the purchase and receipt of goods. Choice "b" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory valuation.
Choice "d" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.
QUESTION 558
An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors. Choice "a" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and
classification.
Choice "b" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and classification, but does provide evidence regarding the existence of receivables.
Choice "d" is incorrect. Follow up of errors in monthly statements does provide evidence regarding the existence of receivables, since customers will be likely to report discrepancies.
QUESTION 559
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?
A. FASBTechnicalBulletins.
B. AICP A Accounting Interpretations.
C. FASB Statements of Financial Accounting Concepts.
D. AICPA Technical Practice Aids.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In accordance with the GAAP hierarchy, FASB Technical Bulletins are considered the most authoritative of the sources listed in the question. Choice "b" is incorrect. Of the sources listed, AICPA Accounting Interpretations would be considered the second most authoritative.
Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are among the least authoritative sources of GAAP available to auditors. Choice "d" is incorrect. AICPA Technical Practice Aids are among the least authoritative sources of GAAP available to auditors.
QUESTION 560
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
A. Performtestsofcontrolstosupportalowerlevelofassessedcontrolrisk. B. Increasethesamplesizetoreducesamplingriskanddetectionrisk.
C. Adjustthematerialitylevelandconsidertheeffectoninherentrisk.
D. Applyanalyticalproceduresandconsidertheeffectoncontrolrisk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed.
Choices "b", "c", and "d" are incorrect. Certain factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone.
In such cases, tests of controls should be performed to address the increased potential for unauthorized access, the risks of insufficient paper-based audit evidence, and the fact that the appropriateness and sufficiency of evidence may be dependent to some extent on computerized controls. Simply expanding the sample size, adjusting materiality levels, or applying analytical procedures will not address these concerns.
QUESTION 561
Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?
A. Theentityannouncedthattheinternalauditfunctionwouldbeeliminatedafterthebalancesheetdate. B. Theauditcommitteechairpersonunexpectedlyresignedduringtheyearunderaudit.
C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.
D. The frequency of accounts payable check runs was changed from biweekly to weekly.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Vouchers should be approved before payment occurs. Overriding this control to expedite payment may result in unauthorized payments being made. The auditor would need to consider this change in evaluating current controls and determining the nature, timing, and extent of testing.
Choice "a" is incorrect. If the internal audit function is being eliminated after the balance sheet date, there would be little effect on the current year's audit. Choice "b" is incorrect. Resignation of the audit committee chairperson would not imply that internal controls are less adequate than in the past, as long as a new, competent person steps up to become chair.
Choice "d" is incorrect. Changing the frequency of the accounts payable check runs from biweekly to weekly would not automatically imply that controls are inadequate. The auditor would need to review the new procedures to determine whether adequate controls were still in place.
QUESTION 562
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion? A. Theauditordidnotobservetheentity'sphysicalinventoryandisunabletobecomesatisfiedastoitsbalancebyotherauditingprocedures.
B. Thefinancialstatementsfailtodiscloseinformationthatisrequiredbygenerallyacceptedaccountingprinciples.
C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP.
Departures from GAAP result in a qualified or an adverse opinion. Choice "a" is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion. Choice "c" is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unqualified opinion. Choice "d" is incorrect. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (after the opinion paragraph in the unqualified report) to reflect that conclusion.
QUESTION 563
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:
A. Salesorderfile.
B. Customerorderfile.
C. Shipping document file. D. Sales invoice file.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Shipping documents provide evidence that a sale occurred, and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale.
Choices "a" and "b" are incorrect. The existence of customer orders and sales orders does not necessarily imply that a sale occurred. For example, the particular item requested may be out of stock.
In such cases, there would properly be no sales invoice. Choice "d" is incorrect. Since the weakness the auditor is concerned about involves missing sales invoices, selecting from a sample of existing sales invoices would not identify this problem.
QUESTION 564
Which of the following best describes what is meant by the term generally accepted auditing standards?
A. Rulesacknowledgedbytheaccountingprofessionbecauseoftheiruniversalapplication. B. PronouncementsissuedbytheAuditingStandardsBoard.
C. Measures of the quality of the auditor's performance.
D. Procedures to be used to gather evidence to support financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the auditor's performance.
Choice "a" is incorrect. GAAS are not "rules," nor are they universally applicable. GAAS are measures of the quality of an auditor's performance. Choice "b" is incorrect. The Auditing Standards Board (ASB) issues many types of pronouncements, including (but not limited to) "Statements on Auditing Standards" (SASs). While SASs are considered to be interpretations of GAAS, not all ASB pronouncements relate to audits. Therefore, just because something is issued by the ASB does not make it GAAS. Choice "d" is incorrect. Auditing standards differ from auditing procedures in that procedures relate to acts to be performed, whereas standards deal with the quality of the performance of those acts.
QUESTION 565
The third general standard states that due care is to be exercised in the performance of an audit. This standard is ordinarily interpreted to require:
A. Thoroughreviewoftheexistingsafeguardsoveraccesstoassetsandrecords.
B. Limitedreviewoftheindicationsofemployeefraudandillegalacts.
C. Objective review of the adequacy of the technical training and proficiency of firm personnel. D. Critical review of the judgment exercised at every level of supervision.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The third general standard of due care is ordinarily interpreted to require critical review of the judgment exercised at every level of
supervision, and the judgment exercised by those assisting in the audit.
Choice "a" is incorrect. The third general standard of due care does not require a thorough review of the existing safeguards over access to assets and records. Choice "b" is incorrect. The standard of due care does not specifically require a limited review of the indications of employee fraud and illegal acts.
Choice "c" is incorrect. The standard of due care does not require a review of audit staff training and proficiency.
QUESTION 566
Before accepting an engagement to audit a new client, an auditor is required to:
A. Makeinquiriesofthepredecessorauditorafterobtainingtheconsentoftheprospectiveclient.
B. Obtainanunderstandingoftheentityanditsenvironment,includingitsinternalcontrol.
C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client's audit committee.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Prior to acceptance of a new engagement, an auditor must attempt to communicate with the predecessor auditor. Inquiry is important because the predecessor auditor may provide information critical to the acceptance decision. Under the Rules of the Code of Professional Conduct, the auditor must first request the client's permission. Choice "b" is incorrect. Although the auditor is required to obtain an understanding of the entity and its environment, including its internal control, this typically happens after the engagement is accepted, not before.
Choice "c" is incorrect. A planning memo setting forth staff requirements and documenting the preliminary audit plan is usually prepared after accepting an engagement. Choice "d" is incorrect. A management representation letter is usually obtained at the conclusion of the audit and is dated as of the date of auditor's report.
QUESTION 567
In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:
A. Notreportontheclient'sincomestatement.
B. Notrefertoconsistencyintheauditor'sreport.
C. State that the consistency standard does not apply.
D. State that the accounting principles have been applied consistently.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods.
Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report.
Choice "a" is incorrect. If the auditor is able to obtain sufficient evidence about consistency, the auditor may report on the entity's financial statements. Choice "c" is incorrect. The consistency standard is one of the ten GAAS, and it does apply to this audit.
Choice "d" is incorrect. If the auditor is able to obtain sufficient evidence about consistency, no mention of consistency need be made. Consistency is implied in the standard report.
QUESTION 568
An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?
A. Requestthattheclientrevisetheletteroftransmittal.
B. Includeanexplanatoryparagraphintheauditor'sreport.
C. Consider withdrawing from the engagement.
D. Request a client representation letter acknowledging the inconsistency.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When information accompanies audited financial statements in a client- prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and the financial statements do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised.
Choice "b" is incorrect. The auditor would only revise the report to include discussion of the material inconsistency if the client were unwilling to revise the transmittal letter appropriately. Choice "c" is incorrect. The auditor would only consider withdrawing from the engagement if the client were unwilling to revise the transmittal letter appropriately. Choice "d" is incorrect. The auditor would not request a client representation letter acknowledging the inconsistency, as correction (and not simply acknowledgment) of the error is desired.
QUESTION 569
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Determinethatchangesinemployeepayratesafteryear-endwereproperlyauthorized.
B. Recomputedepreciationchargesforplantassetssoldafteryear-end.
C. Inquire about payroll checks that were recorded before year-end but cashed after year-end. D. Investigate changes in long-term debt occurring after year-end.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In obtaining evidence about subsequent events, an auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year. In addition, subsequent sales of LT debt require footnote disclosure.
Choice "a" is incorrect. Changes in employee pay rates occurring after year-end would have no effect on the year under audit.
Choice "b" is incorrect. Plant assets sold after the end of the year (that were not related to a current year transaction such as a discontinued operation) have no impact on the current year's financial statements.
Choice "c" is incorrect.
Following up on payroll checks that were cashed after year-end is generally not the most effective way to audit accrued payroll and would provide little evidence about subsequent events.
QUESTION 570
Which of the following provides the most authoritative guidance for an auditor?
A. AnAICPAauditandaccountingguidethatprovidesspecificguidancewithrespecttotheaccountingpracticesintheclient'sindustry. B. AJournalofAccountancyarticlediscussingimplementationofanewstandard.
C. General guidance provided by a Statement on Auditing Standards.
D. Specific guidance provided by an interpretation of a Statement on Auditing Standards.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. General guidance provided by a Statement on Auditing Standards is the most authoritative of level of auditing guidance. Auditors are required to comply with SASs, and should be prepared to justify any departures therefrom. Choices "a" and "d" are incorrect. AICPA audit and accounting guides and SAS interpretations are interpretive publications that provide guidance regarding how SASs should be applied in specific situations. They are not as authoritative as SASs. Choice "b" is incorrect. Journal of Accountancy articles have no authoritative status but may be helpful to the auditor.
QUESTION 571
For an entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should:
A. Beappliedonabasisconsistentwiththosefollowedintheprioryear.
B. BeapprovedbytheAuditingStandardsBoardortheappropriateindustrysubcommittee.
C. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. D. Match the principles used by most other entities within the entity's particular industry.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Financial statements are presented fairly in conformity with GAAP when there are no material misstatements included therein. The fact that there may occasionally be immaterial misstatements means that the financial statements are correct "within a range of acceptable limits."
Choice "a" is incorrect. Accounting principles may change from year to year. As long as such changes are properly accounted for, the financial statements are still in conformity with GAAP. Choice "b" is incorrect. The AICPA and the FASB determine GAAP, not the Auditing Standards Board.
Choice "d" is incorrect. There is no requirement that an entity's financial statements be prepared in accordance with prevalent industry practices in order to be in conformity with GAAP.
QUESTION 572
An auditor uses the assessed level of control risk to:
A. Evaluatetheeffectivenessoftheentity'sinternalcontrol.
B. Identifytransactionsandaccountbalanceswhereinherentriskisatthemaximum.
C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D. Determine the acceptable level of detection risk for financial statement assertions.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. An auditor uses the assessed level of control risk to determine the risk of material misstatement, which in turn determines the acceptable level of detection risk for financial statement assertions. Detection risk should bear an inverse relationship to control risk. For example, the less control risk an auditor believes exists, the greater the level of detection risk he or she can accept.
Choice "a" is incorrect. The auditor's evaluation of the effectiveness of the entity's internal control is what the auditor uses to assess control risk, not vice versa. Choice "b" is incorrect. Inherent risk, which is the susceptibility of an assertion to a material misstatement based upon the nature of the account balance or transaction class, exists independently from and bears no direct relationship to control risk. Choice "c" is incorrect. Materiality thresholds for planning and evaluation purposes are based upon measurements of financial criteria, not the assessed level of control risk.
QUESTION 573
When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that:
A. Describesthelimitationsontheusefulnessofthepresentation.
B. ProvidesanExplanation:ofthedifferencesbetweenanexaminationandanaudit.
C. States that the accountant is responsible for events and circumstances up to one year after the report's date. D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The accountant's standard report on an examination of projected financial statements should include a caveat that the projected results may not be achieveD. This is included in a separate paragraph that describes the limitations on the usefulness of the presentation: "...there will usually be differences between the forecasted and actual results...
[that] may be material."
Choice "b" is incorrect. The accountant's report on the examination of projected financial statements would not include an Explanation: of the differences between an examination and an audit.
Choice "c" is incorrect. A statement is included which specifically states that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.
Choice "d" is incorrect. The accountant does express an opinion that "the underlying assumptions provide a reasonable basis for management's forecast."
QUESTION 574
A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
A. Specializedaccountingprinciplesoftheclient'sindustry.
B. Thecompetencyoftheclient'sinternalauditstaff.
C. The uncertainty inherent in applying sampling procedures. D. Disagreements with management as to auditing procedures.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Inquiries should include specific questions regarding, among other things, facts that might bear on the integrity of management; disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; communications with those charged with governance regarding fraud, illegal acts, and matters relating to internal control; and the predecessor's understanding as to the reasons for the change of auditors. Choice "a" is incorrect. Specialized industry accounting principles might be discussed; however, the successor would be more likely to inquire about items specific to the client. Choice "b" is incorrect. The competency of the client's internal audit staff might be discussed; however, inquiries of the predecessor auditor regarding the staff are not required. Choice "c" is incorrect. The uncertainty in applying sampling procedures is not something that is typically discussed with the predecessor auditor.
QUESTION 575
Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's financial statements, and illegal acts that have a material, but indirect effect on the financial statements will be detected?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The auditor should design the audit to provide reasonable assurance that direct effect illegal acts are detected. Because of the nature of illegalities having an indirect effect on the financial statements, the auditor provides no assurance that such acts will be detected.
Choices "b", "c", and "d" are incorrect, based on the above explanation.
QUESTION 576
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be no comparison of the scope of a review to an audit in the second (scope) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Incorrect. There is and should be a comparison between a review and an audit in the scope paragraph.
QUESTION 577
Which of the following accurately depicts the auditor's responsibility with respect to Statements on Auditing Standards?
A. TheauditorisrequiredtofollowtheguidanceprovidedbytheStandards,withoutexception.
B. TheauditorisgenerallyrequiredtofollowtheguidanceprovidedbyStandardswithwhichheorsheisfamiliar,butwillnotbeheldresponsiblefordepartingfrom provisions of which he or she was unaware.
C. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost- effective.
D. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures. Choice "a" is incorrect. On rare occasions, the auditor may depart from the guidance provided by the SASs, but he or she must justify such departures. Choice "b" is incorrect. Lack of familiarity with a SAS is not a valid reason for departing from its guidance.
The auditor is expected to have sufficient knowledge of the SASs to identify those that are applicable to a given audit engagement.
Choice "c" is incorrect. The cost associated with following the guidance provided by a SAS is not an acceptable reason for departing from its guidance.
QUESTION 578
The concept of materiality would be least important to an auditor when considering the:
A. Adequacyofdisclosureofaclient'sillegalact.
B. Discoveryofweaknessesinaclient'sinternalcontrol.
C. Effects of a direct financial interest in the client on the CPA's independence.
D. Decision whether to use positive or negative confirmations of accounts receivable.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Any direct financial interest in a client impairs independence, even if it is immaterial.
Choice "a" is incorrect. A material illegal act may require disclosure in or adjustment to the financial statements, whereas an immaterial illegal act may not require
disclosure. Choice "b" is incorrect. A material weakness in internal control will affect the nature, timing, and extent of audit procedures, whereas an immaterial weakness in internal control may have little impact on the audit.
Choice "d" is incorrect. An auditor is likely to use positive confirmations for material accounts receivable, but may consider negative confirmations for immaterial receivable balances.
QUESTION 579
An auditor of a nonpublic company must conduct the audit in accordance with:
A. ASBstandards.
II. PCAOB standards.
B. I.
C. Both I and II.
D. Either I or II, but not both.
E. II.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor of a nonpublic company must conduct the audit in accordance with ASB standards.
Choice "b" is incorrect. An auditor of a nonpublic company is not required to conduct the audit in accordance with PCAOB standards.
Choice "c" is incorrect. While an auditor is only required to conduct the audit in accordance with ASB standards, the auditor may choose to follow PCAOB standards as well. Choice "d" is incorrect. An auditor of a nonpublic company is not required to conduct the audit in accordance with PCAOB standards.
QUESTION 580
Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:
A. Objectivejudgment.
B. Independentintegrity. C. Professional skepticism. D. Impartial conservatism.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor should plan and perform the audit with an attitude of professional skepticism. This attitude includes a questioning mind and a critical assessment of audit evidence.
Choices "a", "b", and "d" are incorrect. Objectivity, independence, integrity, and impartiality are basic ethical characteristics and professional qualities embodied in the general standards.
QUESTION 581
Which of the following is not an example of the application of professional skepticism?
A. Designingadditionalauditingprocedurestoobtainmorereliableevidenceinsupportofaparticularfinancialstatementassertion. B. Obtainingcorroborationofmanagement'sExplanation:sthroughconsultationwithaspecialist.
C. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.
D. Using third party confirmations to provide support for management's representations.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management's honesty and integrity performed during the previous year would not necessarily be relevant to the current year's audit. Choice "a" is incorrect. An auditor might apply professional skepticism by performing additional audit procedures designed to improve the reliability of evidence. Choice "b" is incorrect. Corroborating management's Explanation: s is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the Explanation: as given.
Choice "d" is incorrect. Using third party confirmations to provide support for management's representations is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the Explanation: as given.
QUESTION 582
Which of the following categories is included in generally accepted auditing standards?
A. Standardsofreview. B. Standardsofplanning. C. Standards of fieldwork. D. Standards of evidence.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Generally accepted auditing standards include three categories: general standards, standards of fieldwork, and standards of reporting. Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
Reports on Audited Financial Statements
QUESTION 583
Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?
A. Obtainrepresentationsfrommanagementregardingtheavailabilityofallfinancialrecords.
B. Communicatewiththosechargedwithgovernanceconcerningtheprioryear'sauditadjustments. C. Make inquiries of the client's attorney regarding pending and threatened litigation and assessments. D. Compare recorded financial information with anticipated results from budgets and forecasts.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The planning process should include application of analytical procedures, such as comparison of the financial statements with budgeted or anticipated results. Choice "a" is incorrect. Management representations are typically obtained at the end of the audit, not during the planning stage.
Choice "b" is incorrect. Assuming all of those charged with governance are not also involved with managing the entity, the auditor is required to communicate with those charged with governance concerning adjustments arising from the current year's audit, not adjustments from the previous year.
Choice "c" is incorrect. Inquiries are typically made of the client's attorney during the fieldwork stage of the audit, not during the planning stage.
QUESTION 584
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
A. Theauditor'sresponsibilityfordeterminingthepreliminaryjudgmentsaboutmaterialityandauditriskfactors.
B. Management'sresponsibilityforidentifyingmitigatingfactorswhentheauditorhasdoubtabouttheentity'sabilitytocontinueasagoingconcern.
C. The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the
auditor's attention.
D. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. An understanding between the auditor and the client generally includes the auditor's responsibilities. One of the auditor's responsibilities is to ensure that those charged with governance (e.g., the audit committee) are aware of any significant deficiencies in internal control that come to the auditor's attention.
Choice "a" is incorrect. An understanding between the auditor and the client generally would not include the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors, as an understanding generally is not obtained with respect to audit procedures or specific audit assessments. Choice "b" is incorrect. Management is not responsible for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. The auditor, however, would look for and evaluate mitigating factors to determine if such factors alleviate doubt about the entity's ability to continue as a going concern. Choice "d" is incorrect. Management is not responsible for providing the auditor with an assessment of the risk of material misstatement due to fraud. The auditor, however, is responsible for making such an assessment.
Fraud and Illegal Acts
QUESTION 585
Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud?
A. Discussionamongengagementpersonnelregardingtheriskofmaterialmisstatementduetofraudisrecommendedbutnotrequired. B. Allkeymembersoftheauditteamshouldbebroughttoasinglelocationtofacilitatecommunication.
C. The discussion should occur only during the planning stage of the audit.
D. Audit documentation must include a description of the discussion.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Audit documentation is required to include a description of the discussion among engagement personnel regarding the risk of material misstatement due to fraud. Choice "a" is incorrect. Discussion among engagement personnel regarding the risk of material misstatement due to fraud is required. Choice "b" is incorrect. The discussion should include all key members of the audit team, but if an audit involves more than one location, there could be multiple
discussions with team members in different locations.
Choice "c" is incorrect. Communication among audit team members about the risks of material misstatement due to fraud should continue throughout the audit.
QUESTION 586
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
A. Thedetailsofmostrecordedtransactionsarenotavailableafteraspecifiedperiodoftime.
B. Internalcontrolactivitiesrequiringthesegregationofdutiesaresubjecttomanagementoverride.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. A CPA cannot render an opinion on financial statements unless he or she has obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to be available, the CPA would most likely reject the potential audit engagement. Choice "a" is incorrect. The auditor takes the availability of information into account when planning the audit, and would need to perform testing throughout the period, but this would not be cause for rejecting a potential audit engagement. Choice "b" is incorrect. The risk of management override is considered during planning and would not be cause for rejecting a potential audit engagement. Choice "d" is incorrect. Management may consult with several accounting firms, and this would not be cause for rejecting a potential audit engagement.
QUESTION 587
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A. TheCPA'slackofunderstandingoftheprospectiveclient'sinternalauditor'scomputer-assistedaudittechniques.
B. Management'sdisregardofitsresponsibilitytomaintainanadequateinternalcontrolenvironment.
C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions.
D. Management's refusal to permit the CPA to perform substantive tests before the year-end.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The control environment is the foundation for all other components of internal control. Management's disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk of misrepresentation in the financial statements is great enough that an audit should not be conducted. Choice "a" is incorrect. The CPA does not need to understand the internal auditor's techniques in order to accept a new audit engagement.
Choice "c" is incorrect. Related party transactions (by definition) are not considered to be arm's- length transactions, and evaluation of such transactions does not affect the CPA's decision regarding acceptance of new clients.
Choice "d" is incorrect. Substantive tests are generally performed after year-end, since prior to that time the financial statements have not been finalized.
QUESTION 588
Which of the following matters generally is included in an auditor's engagement letter?
A. Management'sresponsibilityfortheentity'scompliancewithlawsandregulations. B. Thefactorstobeconsideredinsettingpreliminaryjudgmentsaboutmateriality. C. Management's vicarious liability for illegal acts committed by its employees.
D. The auditor's responsibility to search for significant internal control deficiencies.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. An understanding with the client should be established regarding management's responsibilities, which include identifying and ensuring that the entity complies with applicable laws and regulations. The understanding should be documented through a written communication, such as an engagement letter.
Choice "b" is incorrect. Judgments about materiality are the auditor's responsibility and would not be included in an engagement letter.
Choice "c" is incorrect. Management would not necessarily be responsible for illegal acts committed by employees.
Choice "d" is incorrect. The auditor is not responsible for searching for significant internal control deficiencies.
Auditing and Attestation (II) QUESTION 1
Which best describes the documentation completion date?
A. Forty-fivedaysfromthereportreleasedate,basedonPCAOBstandards. B. Sixtydaysfromthereportreleasedate,basedonPCAOBstandards.
C. Seven years from the report release date, based on auditing standards. D. Five years from the report release date, based on auditing standards.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. According to PCAOB standards, the documentation completion date is forty-five days following the report release date.
Choice "b" is incorrect. According to auditing standards, the documentation completion date is sixty days following the report release date.
Choices "c" and "d" are incorrect. Seven years and five years refer to the required retention period under PCAOB standards and auditing standards, respectively.
QUESTION 2
An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?
A. Checklists.
B. Workingpapers.
C. Analyticalprocedures. D. Financial statements.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Audit documentation, or working papers, comprises the principal record of audit procedures performed, evidence obtained, and conclusions reacheD. Reviewing the working papers allows a supervisor to understand the work performed and the evidence obtained, and to evaluate whether the audit was adequately performed.
Choice "a" is incorrect. Checklists might be used within the audit documentation, but checklists alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached.
Choice "c" is incorrect. Analytical procedures might be documented within the working papers, but such procedures alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached.
Choice "d" is incorrect. Reviewing the financial statements would provide no information regarding the audit procedures performed, the evidence obtained, or conclusions reached, and therefore would provide no basis on which to review the work performed by the staff.
Audit Evidence
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
A. Merchandisereceivedisnotpromptlyreconciledtotheoutstandingpurchaseorderfile.
B. Obsoleteitemsincludedininventorybalancesarerarelyreducedtothelowerofcostormarketvalue.
C. The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
D. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C)
Explanation Explanation/Reference:
Explanation:
Choice "c" is correct. The function of cash receipts is part of the treasurer's department and should be separate from the role of writing off receivables. Failure to separate the recordkeeping function from the custodial function allows an individual to misappropriate cash and then cover up the theft by writing off the related receivable balance. Choice "a" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to the purchase and receipt of goods. Choice "b" is incorrect. Internal controls in the revenue cycle typically relate to sales, receivables, and cash, not to inventory valuation.
Choice "d" is incorrect. If fictitious transactions in the revenue cycle are recorded, then the impact on revenues and receivables would be the same; either both would be overstated (the most likely case) or both would be understated.
QUESTION 558
An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In testing the existence or occurrence assertion, the auditor is concerned that fictitious or overstated receivables may have been recorded. Observing the mailing of monthly statements and reviewing evidence of follow-up on errors reported by customers provides evidence that procedures are in place to identify and correct such errors. Choice "a" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and
classification.
Choice "b" is incorrect. Follow up of errors in monthly statements does not provide any evidence to support understandability and classification, but does provide evidence regarding the existence of receivables.
Choice "d" is incorrect. Follow up of errors in monthly statements does provide evidence regarding the existence of receivables, since customers will be likely to report discrepancies.
QUESTION 559
Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?
A. FASBTechnicalBulletins.
B. AICP A Accounting Interpretations.
C. FASB Statements of Financial Accounting Concepts.
D. AICPA Technical Practice Aids.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In accordance with the GAAP hierarchy, FASB Technical Bulletins are considered the most authoritative of the sources listed in the question. Choice "b" is incorrect. Of the sources listed, AICPA Accounting Interpretations would be considered the second most authoritative.
Choice "c" is incorrect. FASB Statements of Financial Accounting Concepts are among the least authoritative sources of GAAP available to auditors. Choice "d" is incorrect. AICPA Technical Practice Aids are among the least authoritative sources of GAAP available to auditors.
QUESTION 560
In an environment that is highly automated, an auditor determines that it is not possible to reduce detection risk solely by substantive tests of transactions. Under these circumstances, the auditor most likely would:
A. Performtestsofcontrolstosupportalowerlevelofassessedcontrolrisk. B. Increasethesamplesizetoreducesamplingriskanddetectionrisk.
C. Adjustthematerialitylevelandconsidertheeffectoninherentrisk.
D. Applyanalyticalproceduresandconsidertheeffectoncontrolrisk.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. When an entity transmits, processes, maintains, or accesses significant information electronically, factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone. In such cases, tests of controls should be performed.
Choices "b", "c", and "d" are incorrect. Certain factors unique to electronic processing may make it impractical or impossible to reduce detection risk to an acceptable level through substantive testing alone.
In such cases, tests of controls should be performed to address the increased potential for unauthorized access, the risks of insufficient paper-based audit evidence, and the fact that the appropriateness and sufficiency of evidence may be dependent to some extent on computerized controls. Simply expanding the sample size, adjusting materiality levels, or applying analytical procedures will not address these concerns.
QUESTION 561
Which of the following events occurring in the year under audit would most likely indicate that internal controls utilized in previous years may be inadequate in the year under audit?
A. Theentityannouncedthattheinternalauditfunctionwouldbeeliminatedafterthebalancesheetdate. B. Theauditcommitteechairpersonunexpectedlyresignedduringtheyearunderaudit.
C. The chief financial officer waived approvals on all checks to one vendor to expedite payment.
D. The frequency of accounts payable check runs was changed from biweekly to weekly.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Vouchers should be approved before payment occurs. Overriding this control to expedite payment may result in unauthorized payments being made. The auditor would need to consider this change in evaluating current controls and determining the nature, timing, and extent of testing.
Choice "a" is incorrect. If the internal audit function is being eliminated after the balance sheet date, there would be little effect on the current year's audit. Choice "b" is incorrect. Resignation of the audit committee chairperson would not imply that internal controls are less adequate than in the past, as long as a new, competent person steps up to become chair.
Choice "d" is incorrect. Changing the frequency of the accounts payable check runs from biweekly to weekly would not automatically imply that controls are inadequate. The auditor would need to review the new procedures to determine whether adequate controls were still in place.
QUESTION 562
In which of the following situations would an auditor ordinarily choose between expressing an "except for" qualified opinion or an adverse opinion? A. Theauditordidnotobservetheentity'sphysicalinventoryandisunabletobecomesatisfiedastoitsbalancebyotherauditingprocedures.
B. Thefinancialstatementsfailtodiscloseinformationthatisrequiredbygenerallyacceptedaccountingprinciples.
C. The auditor is asked to report only on the entity's balance sheet and not on the other basic financial statements.
D. Events disclosed in the financial statements cause the auditor to have substantial doubt about the entity's ability to continue as a going concern.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Failure to disclose information that is required by GAAP is a departure from GAAP.
Departures from GAAP result in a qualified or an adverse opinion. Choice "a" is incorrect. If the auditor is unable to observe physical inventory and is unable to become satisfied through alternative means, that is a scope limitation. Scope limitations result in either a qualified opinion or a disclaimer of opinion. Choice "c" is incorrect. The auditor can report on one financial statement and not the others. This does not preclude issuance of an unqualified opinion. Choice "d" is incorrect. If, after considering identified conditions and events and management's plans, the auditor concludes that substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time remains, the audit report should include an explanatory paragraph (after the opinion paragraph in the unqualified report) to reflect that conclusion.
QUESTION 563
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:
A. Salesorderfile.
B. Customerorderfile.
C. Shipping document file. D. Sales invoice file.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Shipping documents provide evidence that a sale occurred, and therefore selecting from a population of shipping documents allows the auditor to test whether corresponding invoices exist for each sale.
Choices "a" and "b" are incorrect. The existence of customer orders and sales orders does not necessarily imply that a sale occurred. For example, the particular item requested may be out of stock.
In such cases, there would properly be no sales invoice. Choice "d" is incorrect. Since the weakness the auditor is concerned about involves missing sales invoices, selecting from a sample of existing sales invoices would not identify this problem.
QUESTION 564
Which of the following best describes what is meant by the term generally accepted auditing standards?
A. Rulesacknowledgedbytheaccountingprofessionbecauseoftheiruniversalapplication. B. PronouncementsissuedbytheAuditingStandardsBoard.
C. Measures of the quality of the auditor's performance.
D. Procedures to be used to gather evidence to support financial statements.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Generally accepted auditing standards ("GAAS") are measures of the quality of the auditor's performance.
Choice "a" is incorrect. GAAS are not "rules," nor are they universally applicable. GAAS are measures of the quality of an auditor's performance. Choice "b" is incorrect. The Auditing Standards Board (ASB) issues many types of pronouncements, including (but not limited to) "Statements on Auditing Standards" (SASs). While SASs are considered to be interpretations of GAAS, not all ASB pronouncements relate to audits. Therefore, just because something is issued by the ASB does not make it GAAS. Choice "d" is incorrect. Auditing standards differ from auditing procedures in that procedures relate to acts to be performed, whereas standards deal with the quality of the performance of those acts.
QUESTION 565
The third general standard states that due care is to be exercised in the performance of an audit. This standard is ordinarily interpreted to require:
A. Thoroughreviewoftheexistingsafeguardsoveraccesstoassetsandrecords.
B. Limitedreviewoftheindicationsofemployeefraudandillegalacts.
C. Objective review of the adequacy of the technical training and proficiency of firm personnel. D. Critical review of the judgment exercised at every level of supervision.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The third general standard of due care is ordinarily interpreted to require critical review of the judgment exercised at every level of
supervision, and the judgment exercised by those assisting in the audit.
Choice "a" is incorrect. The third general standard of due care does not require a thorough review of the existing safeguards over access to assets and records. Choice "b" is incorrect. The standard of due care does not specifically require a limited review of the indications of employee fraud and illegal acts.
Choice "c" is incorrect. The standard of due care does not require a review of audit staff training and proficiency.
QUESTION 566
Before accepting an engagement to audit a new client, an auditor is required to:
A. Makeinquiriesofthepredecessorauditorafterobtainingtheconsentoftheprospectiveclient.
B. Obtainanunderstandingoftheentityanditsenvironment,includingitsinternalcontrol.
C. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan. D. Discuss the management representation letter with the prospective client's audit committee.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. Prior to acceptance of a new engagement, an auditor must attempt to communicate with the predecessor auditor. Inquiry is important because the predecessor auditor may provide information critical to the acceptance decision. Under the Rules of the Code of Professional Conduct, the auditor must first request the client's permission. Choice "b" is incorrect. Although the auditor is required to obtain an understanding of the entity and its environment, including its internal control, this typically happens after the engagement is accepted, not before.
Choice "c" is incorrect. A planning memo setting forth staff requirements and documenting the preliminary audit plan is usually prepared after accepting an engagement. Choice "d" is incorrect. A management representation letter is usually obtained at the conclusion of the audit and is dated as of the date of auditor's report.
QUESTION 567
In the first audit of a new client, an auditor was able to extend auditing procedures to gather sufficient evidence about consistency. Under these circumstances, the auditor should:
A. Notreportontheclient'sincomestatement.
B. Notrefertoconsistencyintheauditor'sreport.
C. State that the consistency standard does not apply.
D. State that the accounting principles have been applied consistently.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The auditor's standard report implies that the auditor is satisfied that the comparability of financial statements between periods has not been materially affected by changes in accounting principles and that such principles have been consistently applied between or among periods.
Since the auditor has gathered sufficient evidence about consistency, no reference need be made in the report.
Choice "a" is incorrect. If the auditor is able to obtain sufficient evidence about consistency, the auditor may report on the entity's financial statements. Choice "c" is incorrect. The consistency standard is one of the ten GAAS, and it does apply to this audit.
Choice "d" is incorrect. If the auditor is able to obtain sufficient evidence about consistency, no mention of consistency need be made. Consistency is implied in the standard report.
QUESTION 568
An auditor reads the letter of transmittal accompanying a county's comprehensive annual financial report and identifies a material inconsistency with the financial statements. The auditor determines that the financial statements do not require revision. Which of the following actions should the auditor take?
A. Requestthattheclientrevisetheletteroftransmittal.
B. Includeanexplanatoryparagraphintheauditor'sreport.
C. Consider withdrawing from the engagement.
D. Request a client representation letter acknowledging the inconsistency.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When information accompanies audited financial statements in a client- prepared document, the auditor is required to read the information. If such information is materially inconsistent with the financial statements and the financial statements do not require revision, the auditor should request that the information (in this case the letter of transmittal) be revised.
Choice "b" is incorrect. The auditor would only revise the report to include discussion of the material inconsistency if the client were unwilling to revise the transmittal letter appropriately. Choice "c" is incorrect. The auditor would only consider withdrawing from the engagement if the client were unwilling to revise the transmittal letter appropriately. Choice "d" is incorrect. The auditor would not request a client representation letter acknowledging the inconsistency, as correction (and not simply acknowledgment) of the error is desired.
QUESTION 569
Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? A. Determinethatchangesinemployeepayratesafteryear-endwereproperlyauthorized.
B. Recomputedepreciationchargesforplantassetssoldafteryear-end.
C. Inquire about payroll checks that were recorded before year-end but cashed after year-end. D. Investigate changes in long-term debt occurring after year-end.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. In obtaining evidence about subsequent events, an auditor would investigate changes in long-term debt occurring after year-end to determine if there was an unrecorded liability as of the end of the year. In addition, subsequent sales of LT debt require footnote disclosure.
Choice "a" is incorrect. Changes in employee pay rates occurring after year-end would have no effect on the year under audit.
Choice "b" is incorrect. Plant assets sold after the end of the year (that were not related to a current year transaction such as a discontinued operation) have no impact on the current year's financial statements.
Choice "c" is incorrect.
Following up on payroll checks that were cashed after year-end is generally not the most effective way to audit accrued payroll and would provide little evidence about subsequent events.
QUESTION 570
Which of the following provides the most authoritative guidance for an auditor?
A. AnAICPAauditandaccountingguidethatprovidesspecificguidancewithrespecttotheaccountingpracticesintheclient'sindustry. B. AJournalofAccountancyarticlediscussingimplementationofanewstandard.
C. General guidance provided by a Statement on Auditing Standards.
D. Specific guidance provided by an interpretation of a Statement on Auditing Standards.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. General guidance provided by a Statement on Auditing Standards is the most authoritative of level of auditing guidance. Auditors are required to comply with SASs, and should be prepared to justify any departures therefrom. Choices "a" and "d" are incorrect. AICPA audit and accounting guides and SAS interpretations are interpretive publications that provide guidance regarding how SASs should be applied in specific situations. They are not as authoritative as SASs. Choice "b" is incorrect. Journal of Accountancy articles have no authoritative status but may be helpful to the auditor.
QUESTION 571
For an entity's financial statements to be presented fairly in conformity with generally accepted accounting principles, the principles selected should:
A. Beappliedonabasisconsistentwiththosefollowedintheprioryear.
B. BeapprovedbytheAuditingStandardsBoardortheappropriateindustrysubcommittee.
C. Reflect transactions in a manner that presents the financial statements within a range of acceptable limits. D. Match the principles used by most other entities within the entity's particular industry.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Financial statements are presented fairly in conformity with GAAP when there are no material misstatements included therein. The fact that there may occasionally be immaterial misstatements means that the financial statements are correct "within a range of acceptable limits."
Choice "a" is incorrect. Accounting principles may change from year to year. As long as such changes are properly accounted for, the financial statements are still in conformity with GAAP. Choice "b" is incorrect. The AICPA and the FASB determine GAAP, not the Auditing Standards Board.
Choice "d" is incorrect. There is no requirement that an entity's financial statements be prepared in accordance with prevalent industry practices in order to be in conformity with GAAP.
QUESTION 572
An auditor uses the assessed level of control risk to:
A. Evaluatetheeffectivenessoftheentity'sinternalcontrol.
B. Identifytransactionsandaccountbalanceswhereinherentriskisatthemaximum.
C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high. D. Determine the acceptable level of detection risk for financial statement assertions.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. An auditor uses the assessed level of control risk to determine the risk of material misstatement, which in turn determines the acceptable level of detection risk for financial statement assertions. Detection risk should bear an inverse relationship to control risk. For example, the less control risk an auditor believes exists, the greater the level of detection risk he or she can accept.
Choice "a" is incorrect. The auditor's evaluation of the effectiveness of the entity's internal control is what the auditor uses to assess control risk, not vice versa. Choice "b" is incorrect. Inherent risk, which is the susceptibility of an assertion to a material misstatement based upon the nature of the account balance or transaction class, exists independently from and bears no direct relationship to control risk. Choice "c" is incorrect. Materiality thresholds for planning and evaluation purposes are based upon measurements of financial criteria, not the assessed level of control risk.
QUESTION 573
When an accountant examines projected financial statements, the accountant's report should include a separate paragraph that:
A. Describesthelimitationsontheusefulnessofthepresentation.
B. ProvidesanExplanation:ofthedifferencesbetweenanexaminationandanaudit.
C. States that the accountant is responsible for events and circumstances up to one year after the report's date. D. Disclaims an opinion on whether the assumptions provide a reasonable basis for the projection.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The accountant's standard report on an examination of projected financial statements should include a caveat that the projected results may not be achieveD. This is included in a separate paragraph that describes the limitations on the usefulness of the presentation: "...there will usually be differences between the forecasted and actual results...
[that] may be material."
Choice "b" is incorrect. The accountant's report on the examination of projected financial statements would not include an Explanation: of the differences between an examination and an audit.
Choice "c" is incorrect. A statement is included which specifically states that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.
Choice "d" is incorrect. The accountant does express an opinion that "the underlying assumptions provide a reasonable basis for management's forecast."
QUESTION 574
A successor auditor most likely would make specific inquiries of the predecessor auditor regarding:
A. Specializedaccountingprinciplesoftheclient'sindustry.
B. Thecompetencyoftheclient'sinternalauditstaff.
C. The uncertainty inherent in applying sampling procedures. D. Disagreements with management as to auditing procedures.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C)
Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Inquiries should include specific questions regarding, among other things, facts that might bear on the integrity of management; disagreements with management as to accounting principles, auditing procedures, or other similarly significant matters; communications with those charged with governance regarding fraud, illegal acts, and matters relating to internal control; and the predecessor's understanding as to the reasons for the change of auditors. Choice "a" is incorrect. Specialized industry accounting principles might be discussed; however, the successor would be more likely to inquire about items specific to the client. Choice "b" is incorrect. The competency of the client's internal audit staff might be discussed; however, inquiries of the predecessor auditor regarding the staff are not required. Choice "c" is incorrect. The uncertainty in applying sampling procedures is not something that is typically discussed with the predecessor auditor.
QUESTION 575
Jones, CPA, is auditing the financial statements of XYZ Retailing, Inc. What assurance does Jones provide that direct effect illegal acts that are material to XYZ's financial statements, and illegal acts that have a material, but indirect effect on the financial statements will be detected?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. The auditor should design the audit to provide reasonable assurance that direct effect illegal acts are detected. Because of the nature of illegalities having an indirect effect on the financial statements, the auditor provides no assurance that such acts will be detected.
Choices "b", "c", and "d" are incorrect, based on the above explanation.
QUESTION 576
This question consists of an item pertaining to possible deficiencies in an accountant's review report. Jordan & Stone, CPAs, audited the financial statements of Tech Co., a nonissuer, for the year ended December 31, 20X1, and expressed an unqualified opinion. For the year ended December 31, 20X2, Tech issued comparative financial statements. Jordan & Stone reviewed Tech's 20X2 financial statements and Kent, an assistant on the engagement, drafted the accountants' review report below.
Land, the engagement supervisor, decided not to reissue the prior year's auditors' report, but instructed Kent to include a separate paragraph in the current year's review report describing the responsibility assumed for the prior year's audited financial statements. This is an appropriate reporting procedure.
Land reviewed Kent's draft and indicated in the Supervisor's Review Notes below that there were several deficiencies in Kent's draft.
Accountant's Review Report
We have reviewed and audited the accompanying balance sheets of Tech Co. as of December 31, 20X2 and 20X1, and the related statements of income, retained earnings, and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants and generally accepted auditing standards. All information included in these financial statements is the representation of the management of Tech Co.
A review consists principally of inquiries of company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements. Because of the inherent limitations of a review engagement, this report is intended for the information of management and should not be used for any other purpose.
The financial statements for the year ended December 31, 20X1, were audited by us and our report was dated March 2, 20X2. We have no responsibility for updating that report for events and circumstances occurring after that date.
Jordan and Stone, CPAs March 1, 20X3
Supervisor's Review Notes
There should be no comparison of the scope of a review to an audit in the second (scope) paragraph.
A. Correct B. Incorrect
Correct Answer: B
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Incorrect. There is and should be a comparison between a review and an audit in the scope paragraph.
QUESTION 577
Which of the following accurately depicts the auditor's responsibility with respect to Statements on Auditing Standards?
A. TheauditorisrequiredtofollowtheguidanceprovidedbytheStandards,withoutexception.
B. TheauditorisgenerallyrequiredtofollowtheguidanceprovidedbyStandardswithwhichheorsheisfamiliar,butwillnotbeheldresponsiblefordepartingfrom provisions of which he or she was unaware.
C. The auditor is generally required to follow the guidance provided by the Standards, unless following such guidance would result in an audit that is not cost- effective.
D. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The auditor is generally required to follow the guidance provided by the Standards, and should be able to justify any departures. Choice "a" is incorrect. On rare occasions, the auditor may depart from the guidance provided by the SASs, but he or she must justify such departures. Choice "b" is incorrect. Lack of familiarity with a SAS is not a valid reason for departing from its guidance.
The auditor is expected to have sufficient knowledge of the SASs to identify those that are applicable to a given audit engagement.
Choice "c" is incorrect. The cost associated with following the guidance provided by a SAS is not an acceptable reason for departing from its guidance.
QUESTION 578
The concept of materiality would be least important to an auditor when considering the:
A. Adequacyofdisclosureofaclient'sillegalact.
B. Discoveryofweaknessesinaclient'sinternalcontrol.
C. Effects of a direct financial interest in the client on the CPA's independence.
D. Decision whether to use positive or negative confirmations of accounts receivable.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Any direct financial interest in a client impairs independence, even if it is immaterial.
Choice "a" is incorrect. A material illegal act may require disclosure in or adjustment to the financial statements, whereas an immaterial illegal act may not require
disclosure. Choice "b" is incorrect. A material weakness in internal control will affect the nature, timing, and extent of audit procedures, whereas an immaterial weakness in internal control may have little impact on the audit.
Choice "d" is incorrect. An auditor is likely to use positive confirmations for material accounts receivable, but may consider negative confirmations for immaterial receivable balances.
QUESTION 579
An auditor of a nonpublic company must conduct the audit in accordance with:
A. ASBstandards.
II. PCAOB standards.
B. I.
C. Both I and II.
D. Either I or II, but not both.
E. II.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor of a nonpublic company must conduct the audit in accordance with ASB standards.
Choice "b" is incorrect. An auditor of a nonpublic company is not required to conduct the audit in accordance with PCAOB standards.
Choice "c" is incorrect. While an auditor is only required to conduct the audit in accordance with ASB standards, the auditor may choose to follow PCAOB standards as well. Choice "d" is incorrect. An auditor of a nonpublic company is not required to conduct the audit in accordance with PCAOB standards.
QUESTION 580
Because of the risk of material misstatement, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of:
A. Objectivejudgment.
B. Independentintegrity. C. Professional skepticism. D. Impartial conservatism.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor should plan and perform the audit with an attitude of professional skepticism. This attitude includes a questioning mind and a critical assessment of audit evidence.
Choices "a", "b", and "d" are incorrect. Objectivity, independence, integrity, and impartiality are basic ethical characteristics and professional qualities embodied in the general standards.
QUESTION 581
Which of the following is not an example of the application of professional skepticism?
A. Designingadditionalauditingprocedurestoobtainmorereliableevidenceinsupportofaparticularfinancialstatementassertion. B. Obtainingcorroborationofmanagement'sExplanation:sthroughconsultationwithaspecialist.
C. Inquiring of prior year engagement personnel regarding their assessment of management's honesty and integrity.
D. Using third party confirmations to provide support for management's representations.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. The auditor should consider that fraud might occur regardless of any past experience with the entity. An assessment of management's honesty and integrity performed during the previous year would not necessarily be relevant to the current year's audit. Choice "a" is incorrect. An auditor might apply professional skepticism by performing additional audit procedures designed to improve the reliability of evidence. Choice "b" is incorrect. Corroborating management's Explanation: s is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the Explanation: as given.
Choice "d" is incorrect. Using third party confirmations to provide support for management's representations is an example of the application of professional skepticism, since the auditor is obtaining additional support rather than simply accepting the Explanation: as given.
QUESTION 582
Which of the following categories is included in generally accepted auditing standards?
A. Standardsofreview. B. Standardsofplanning. C. Standards of fieldwork. D. Standards of evidence.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume A) Audited Financial Statements - The Basics Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Generally accepted auditing standards include three categories: general standards, standards of fieldwork, and standards of reporting. Choices "a", "b", and "d" are incorrect, based on the above Explanation: .
Reports on Audited Financial Statements
QUESTION 583
Which of the following procedures would a CPA most likely perform in the planning stage of a financial statement audit?
A. Obtainrepresentationsfrommanagementregardingtheavailabilityofallfinancialrecords.
B. Communicatewiththosechargedwithgovernanceconcerningtheprioryear'sauditadjustments. C. Make inquiries of the client's attorney regarding pending and threatened litigation and assessments. D. Compare recorded financial information with anticipated results from budgets and forecasts.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. The planning process should include application of analytical procedures, such as comparison of the financial statements with budgeted or anticipated results. Choice "a" is incorrect. Management representations are typically obtained at the end of the audit, not during the planning stage.
Choice "b" is incorrect. Assuming all of those charged with governance are not also involved with managing the entity, the auditor is required to communicate with those charged with governance concerning adjustments arising from the current year's audit, not adjustments from the previous year.
Choice "c" is incorrect. Inquiries are typically made of the client's attorney during the fieldwork stage of the audit, not during the planning stage.
QUESTION 584
An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes:
A. Theauditor'sresponsibilityfordeterminingthepreliminaryjudgmentsaboutmaterialityandauditriskfactors.
B. Management'sresponsibilityforidentifyingmitigatingfactorswhentheauditorhasdoubtabouttheentity'sabilitytocontinueasagoingconcern.
C. The auditor's responsibility for ensuring that those charged with governance are aware of any significant deficiencies in internal control that come to the
auditor's attention.
D. Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. An understanding between the auditor and the client generally includes the auditor's responsibilities. One of the auditor's responsibilities is to ensure that those charged with governance (e.g., the audit committee) are aware of any significant deficiencies in internal control that come to the auditor's attention.
Choice "a" is incorrect. An understanding between the auditor and the client generally would not include the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors, as an understanding generally is not obtained with respect to audit procedures or specific audit assessments. Choice "b" is incorrect. Management is not responsible for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern. The auditor, however, would look for and evaluate mitigating factors to determine if such factors alleviate doubt about the entity's ability to continue as a going concern. Choice "d" is incorrect. Management is not responsible for providing the auditor with an assessment of the risk of material misstatement due to fraud. The auditor, however, is responsible for making such an assessment.
Fraud and Illegal Acts
QUESTION 585
Which statement is true with respect to discussion among engagement personnel regarding the risk of material misstatement due to fraud?
A. Discussionamongengagementpersonnelregardingtheriskofmaterialmisstatementduetofraudisrecommendedbutnotrequired. B. Allkeymembersoftheauditteamshouldbebroughttoasinglelocationtofacilitatecommunication.
C. The discussion should occur only during the planning stage of the audit.
D. Audit documentation must include a description of the discussion.
Correct Answer: D
Section: Auditing and Attestation (I) (Volume C) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "d" is correct. Audit documentation is required to include a description of the discussion among engagement personnel regarding the risk of material misstatement due to fraud. Choice "a" is incorrect. Discussion among engagement personnel regarding the risk of material misstatement due to fraud is required. Choice "b" is incorrect. The discussion should include all key members of the audit team, but if an audit involves more than one location, there could be multiple
discussions with team members in different locations.
Choice "c" is incorrect. Communication among audit team members about the risks of material misstatement due to fraud should continue throughout the audit.
QUESTION 586
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
A. Thedetailsofmostrecordedtransactionsarenotavailableafteraspecifiedperiodoftime.
B. Internalcontrolactivitiesrequiringthesegregationofdutiesaresubjecttomanagementoverride.
C. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. D. Management has a reputation for consulting with several accounting firms about significant accounting issues.
Correct Answer: C
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "c" is correct. A CPA cannot render an opinion on financial statements unless he or she has obtained sufficient appropriate audit evidence supporting that opinion. If such evidence were unlikely to be available, the CPA would most likely reject the potential audit engagement. Choice "a" is incorrect. The auditor takes the availability of information into account when planning the audit, and would need to perform testing throughout the period, but this would not be cause for rejecting a potential audit engagement. Choice "b" is incorrect. The risk of management override is considered during planning and would not be cause for rejecting a potential audit engagement. Choice "d" is incorrect. Management may consult with several accounting firms, and this would not be cause for rejecting a potential audit engagement.
QUESTION 587
Which of the following factors most likely would cause a CPA to decide not to accept a new audit engagement?
A. TheCPA'slackofunderstandingoftheprospectiveclient'sinternalauditor'scomputer-assistedaudittechniques.
B. Management'sdisregardofitsresponsibilitytomaintainanadequateinternalcontrolenvironment.
C. The CPA's inability to determine whether related party transactions were consummated on terms equivalent to arm's-length transactions.
D. Management's refusal to permit the CPA to perform substantive tests before the year-end.
Correct Answer: B
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "b" is correct. The control environment is the foundation for all other components of internal control. Management's disregard of its responsibility to maintain an adequate internal control environment therefore compromises its ability to provide reasonable assurance regarding reliable financial reporting. The auditor may conclude that the risk of misrepresentation in the financial statements is great enough that an audit should not be conducted. Choice "a" is incorrect. The CPA does not need to understand the internal auditor's techniques in order to accept a new audit engagement.
Choice "c" is incorrect. Related party transactions (by definition) are not considered to be arm's- length transactions, and evaluation of such transactions does not affect the CPA's decision regarding acceptance of new clients.
Choice "d" is incorrect. Substantive tests are generally performed after year-end, since prior to that time the financial statements have not been finalized.
QUESTION 588
Which of the following matters generally is included in an auditor's engagement letter?
A. Management'sresponsibilityfortheentity'scompliancewithlawsandregulations. B. Thefactorstobeconsideredinsettingpreliminaryjudgmentsaboutmateriality. C. Management's vicarious liability for illegal acts committed by its employees.
D. The auditor's responsibility to search for significant internal control deficiencies.
Correct Answer: A
Section: Auditing and Attestation (I) (Volume B) Explanation
Explanation/Reference:
Explanation:
Explanation
Choice "a" is correct. An understanding with the client should be established regarding management's responsibilities, which include identifying and ensuring that the entity complies with applicable laws and regulations. The understanding should be documented through a written communication, such as an engagement letter.
Choice "b" is incorrect. Judgments about materiality are the auditor's responsibility and would not be included in an engagement letter.
Choice "c" is incorrect. Management would not necessarily be responsible for illegal acts committed by employees.
Choice "d" is incorrect. The auditor is not responsible for searching for significant internal control deficiencies.
Auditing and Attestation (II) QUESTION 1
Which best describes the documentation completion date?
A. Forty-fivedaysfromthereportreleasedate,basedonPCAOBstandards. B. Sixtydaysfromthereportreleasedate,basedonPCAOBstandards.
C. Seven years from the report release date, based on auditing standards. D. Five years from the report release date, based on auditing standards.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. According to PCAOB standards, the documentation completion date is forty-five days following the report release date.
Choice "b" is incorrect. According to auditing standards, the documentation completion date is sixty days following the report release date.
Choices "c" and "d" are incorrect. Seven years and five years refer to the required retention period under PCAOB standards and auditing standards, respectively.
QUESTION 2
An audit supervisor reviewed the work performed by the staff to determine if the audit was adequately performed. The supervisor accomplished this by primarily reviewing which of the following?
A. Checklists.
B. Workingpapers.
C. Analyticalprocedures. D. Financial statements.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume D) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Audit documentation, or working papers, comprises the principal record of audit procedures performed, evidence obtained, and conclusions reacheD. Reviewing the working papers allows a supervisor to understand the work performed and the evidence obtained, and to evaluate whether the audit was adequately performed.
Choice "a" is incorrect. Checklists might be used within the audit documentation, but checklists alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached.
Choice "c" is incorrect. Analytical procedures might be documented within the working papers, but such procedures alone would not provide a comprehensive record of the audit procedures performed, the evidence obtained, and conclusions reached.
Choice "d" is incorrect. Reviewing the financial statements would provide no information regarding the audit procedures performed, the evidence obtained, or conclusions reached, and therefore would provide no basis on which to review the work performed by the staff.
Audit Evidence