Certified Public Accountant CPA Questions + Answers Part 45

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Certified Public Accountant CPA Questions + Answers Part 45

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QUESTION 360
To which of the following matters would an auditor not apply materiality limits when obtaining specific written client representations?
A. Disclosureofcompensatingbalancearrangementsinvolvingrestrictionsoncashbalances. B. Informationconcerningrelatedpartytransactionsandrelatedamountsreceivableorpayable. C. The absence of errors and unrecorded transactions in the financial statements.
D. Fraud involving employees with significant roles in the internal control structure.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When obtaining specific written client representations, an auditor would not apply materiality limits to fraud involving employees with significant roles in the internal control structure, because even fraud that causes an immaterial effect on the financial statements may have serious implications with respect to the integrity of the employees involved. Choice "a" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to disclosure of compensating balance arrangements involving restrictions on cash balances, because immaterial amounts need not be considered. Choice "b" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to information concerning related party transactions and related amounts receivable or payable, because immaterial amounts need not be considered. Choice "c" is incorrect. An auditor would apply materiality limits when obtaining specific written client representations pertaining to the absence of errors and unrecorded transactions in the financial statements, because immaterial amounts need not be considered.
QUESTION 361
"There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a:
A. Specialreport.
B. Managementrepresentationletter. C. Letter for an underwriter.
D. Report on internal controls.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:

Explanation:
Choice "b" is correct. In a management (client) representation letter, the client will generally confirm that there have been no communications from regulatory agencies concerning matters that could have a material effect on the financial statements.
Choice "a" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a special report.
Choice "c" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a letter for an underwriter (i.e., a comfort letter). Choice "d" is incorrect. A passage regarding communications from regulatory agencies generally will not be found in a report on internal controls.
QUESTION 362
To which of the following matters would materiality limits not apply when obtaining written client representations?
A. Lossesfromsalescommitments.
B. Unassertedclaimsandassessments.
C. Fraud involving management.
D. Noncompliance with contractual agreements.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Materiality limits would not apply when obtaining written client representations regarding irregularities involving management, because even immaterial instances of fraud may have serious implications with respect to management's integrity. Choices "a", "b", and "d" are incorrect. An auditor would apply materiality limits to matters that might affect recognition, measurement, and disclosure in the financial statements, including losses from sales commitments, unasserted claims and assessments, and noncompliance with contractual agreements.
QUESTION 363
A purpose of a management representation letter is to reduce:
A. Auditrisktoanaggregatelevelofmisstatementthatcouldbeconsideredmaterial.
B. Anauditor'sresponsibilitytodetectmaterialmisstatementsonlytotheextentthattheletterisreliedon.
C. The possibility of a misunderstanding concerning management's responsibility for the financial statements. D. The scope of an auditor's procedures concerning related party transactions and subsequent events.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
Choice "c" is correct. A purpose of a management representation letter is to reduce the possibility of a misunderstanding concerning management's responsibility for the financial statements. The first representation made in the letter states "we are responsible for the fair presentation in the financial statements of financial position, results of operations and cash flows in conformity with GAAP." Choice "a" is incorrect. The management representation letter confirms oral representations made by management but does not have an effect on audit risk.
Choice "b" is incorrect. The management letter is important audit evidence but it does not reduce the auditor's responsibility to detect material misstatements. Choice "d" is incorrect. The management letter is important audit evidence but it does not reduce the scope of an auditor's procedures concerning related party transactions and subsequent events (or any other generally accepted audit procedure).
QUESTION 364
Which of the following matters is an auditor required to communicate to those charged with governance?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Yes - Yes. Unless all of those charged with governance are also involved with managing the entity, the auditor is required to communicate significant audit adjustments. The auditor is always required to communicate changes in significant accounting policies. Choices "b", "c", and "d" are incorrect, based on the above Explanation: .

QUESTION 365
Should an auditor communicate the following matters to those charged with governance of a public entity?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Unless all of those charged with governance are also involved with managing the entity, significant audit adjustments and significant matters relating to consultation with other accountants should be communicated to those charged with governance. Choices "b", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 366
Which of the following statements is correct concerning an auditor's required communication with those charged with governance?
A. Thiscommunicationshouldincludedisagreementswithmanagementaboutsignificantauditadjustments,whetherornotsatisfactorilyresolved. B. Ifmattersarecommunicatedinwriting,thereportisappropriateforgeneraluse.
C. If matters are communicated in writing, the report is required to be distributed to both those charged with governance and management.
D. This communication is required to occur before the auditor's report on the financial statements is issued.

Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor is required to communicate certain matters to those charged with governance, including disagreements with management about significant audit adjustments, whether or not satisfactorily resolved.
Choice "b" is incorrect. Written communications should include a limitation on the use of the communication.
Choice "c" is incorrect. The auditor is not required to distribute the report to management, especially since certain matters might be inappropriate for discussion with management. Choice "d" is incorrect. The auditor is not required to make the communication before the auditor's report on the financial statements is finalized, as long as the communication occurs on a timely basis. (Note, however, that for audits of issuers, the communication must be made before the auditor's report is filled with the SEC.)
QUESTION 367
During consideration of internal control in a financial statement audit, an auditor is not obligated to:
A. Searchforallsignificantdeficienciesintheoperationofinternalcontrol.
B. Understandtheinternalcontrolenvironmentandtheaccountingsystem.
C. Determine whether the control activities relevant to audit planning have been implemented. D. Perform procedures to understand the design of internal control.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. During consideration of internal control in a financial statement audit, an auditor is not obligated to search for all significant deficiencies in the operation of internal control, but should communicate any such situations noted to management and those charged with governance. Choice "b" is incorrect. The auditor is required to obtain an understanding of each of the five components of internal control, including the control environment and the (accounting) information system.
Choices "c" and "d" are incorrect. As part of planning, the auditor is required to obtain an understanding of the design of relevant controls and to determine whether they have been implemented.
QUESTION 368
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the: A. Risk of overreliance.

B. T olerable rate.
C. Expected population deviation rate.
D. Sample size.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the sample size. Choices "a", "b", and "c" are incorrect. The risk of overreliance, the tolerable rate, and the expected population deviation rate are factors considered in determining a statistical sample size.
QUESTION 369
When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should:
A. Berelatedtotheauditor'sbusinessrisk.
B. Notbeadjustedforqualitativefactors.
C. Be related to preliminary judgments about materiality levels. D. Not be changed during the audit process.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Tolerable misstatement is the maximum monetary misstatement in an account balance that may exist without causing the financial statements to be materially misstateD. Tolerable misstatement is a planning concept related to the auditor's preliminary judgments about materiality levels. Choice "a" is incorrect. The auditor's overall business risk is not related to the tolerable misstatement used in planning a sample for a substantive test of details. Choice "b" is incorrect. The tolerable misstatement should be adjusted for both qualitative and quantitative factors.
Choice "d" is incorrect. The auditor should modify his or her consideration of tolerable misstatement if, during the audit process, information used to determine the initial level of tolerable misstatement changes.
QUESTION 370
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified MPU because it usually:

A. Maybeappliedtopopulationswheremanymonetaryerrorsareexpectedtooccur.
B. Producesanestimatehavingadesiredlevelofprecisionwithasmallersamplesize.
C. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.
D. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. A stratified sample generally is more efficient than an unstratified sample since the population is classified in a manner that emphasizes the higher dollar value items. The result is an estimate having a desired level of precision with a smaller sample size. Choice "a" is incorrect. Both stratified and unstratified MPU may be used for populations where many monetary errors are expected to occur.
Choice "c" is incorrect. Stratified sampling reduces the variability among items in a stratum. Choice "d" is incorrect. Standard deviations measure variability, and stratification would tend to reduce the strata standard deviations as compared to the overall standard deviation of the population.
QUESTION 371
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the allowable risk of assessing control risk too low, and the:
A. Expecteddeviationrate.
B. Upperdeviationrate.
C. Risk of incorrect acceptance. D. Risk of incorrect rejection.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. When determining the sample size for a test of controls, the auditor should consider the expected deviation rate (which is the auditor's best estimate of the deviation rate in the population before the sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too low.
Choice "b" is incorrect. The upper deviation rate is used to evaluate a balance after a sampling plan has been performed, not to determine the sample size for a test of controls. Choices "c" and "d" are incorrect. The risk of incorrect acceptance and risk of incorrect rejection are considered in direct tests of balances (i.e., substantive tests), not in tests of controls.

QUESTION 372
Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also known as dollar unit sampling?
A. Thesamplingdistributionshouldapproximatethenormaldistribution.
B. Overstatedunitshavealowerprobabilityofsampleselectionthanunitsthatareunderstated.
C. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
D. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. The inputs for PPS are tolerable error, risk of incorrect acceptance, number of errors allowed, and the recorded amount of the population being sampled. Choice "a" is incorrect. The sampling distribution does not have to approximate the normal distribution in order for PPS sampling to be used.
Choice "b" is incorrect. Overstated units have a higher (not lower) probability of sample selection than units that are understated, because with PPS sampling, each item is given a probability of selection in proportion to its recorded amount (probability-proportional-to-size). Choice "d" is incorrect. In PPS sampling, the sampling interval is calculated by dividing the recorded amount of the population (not the number of physical units) by the sample size.
QUESTION 373
When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by calculating the possible error in either direction. This statistical concept is known as:
A. Precision.
B. Reliability.
C. Projected error.
D. Standard deviation.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The statistical concept of precision is used to describe the auditor's evaluation of sampling results by calculating the possible error in either

direction. Choice "b" is incorrect. Reliability measures how frequently the procedure used will yield differences between the estimated value and the population value.
Choice "c" is incorrect. Projected error is the auditor's best estimate of the error in the total population based upon evaluating the actual error rate in the sample results. The auditor then adds an allowance for sampling risk to develop a "precision interval" within which the population is expected to fall. Choice "d" is incorrect. Standard deviation is a measure of the variability of a frequency distribution about its mean.
QUESTION 374
Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value?
A. Discoverysampling.
B. Numericalsampling. C. Sampling for attributes. D. Sampling for variables.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Variables sampling is used to estimate a numerical measurement of a population, such as the dollar value or the dollar value of errors in the population. Choice "a" is incorrect. Discovery sampling is a special case of sampling for "attributes" (errors) where the auditor's initial estimate of error occurrence is zero or near zero. It does not sample for dollar value. Choice "b" is incorrect. The term "numerical sampling" is not used in statistical sampling and is merely a well-designed distractor.
Choice "c" is incorrect. Attribute sampling is sampling for errors (or some other attribute). The auditor determines whether the attribute appears or not, but does not try to estimate a numerical measurement of the population.
QUESTION 375
In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be:
A. $1,000 B. $2,000 C. $4,000 D. $5,000
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
N/A = not applicable, as the actual difference of $2,000 is used when the recorded amount is larger than the sample interval.
Choice "b" is correct. There is a $2,000 projected error in this PPS sample. Choices "a", "c", and "d" are incorrect, based on the above Explanation: .
QUESTION 376
The diagram below depicts the auditor's estimated maximum deviation rate compared with the tolerable rate, and also depicts the true population deviation rate compared with the tolerable rate.
As a result of tests of controls, the auditor assesses control risk higher than necessary and thereby increases substantive testing. This is illustrated by situation: A. I.

B. II. C. III. D. IV.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. If, as a result of test of controls, the auditor assesses control risk higher than necessary, then the maximum deviation rate (auditor's estimate) exceeds the tolerable rate (putting us in row 2) and the deviation rate (true state of the population) is less than the tolerable rate (putting us in column 1). The intersection of column 1 and row 2 puts us in box II. Choice "a" is incorrect. The auditor estimates that the maximum deviation rate is more than the tolerable rate. Choice "c" is incorrect. The question states that the auditor assessed control risk "higher than necessary." This implies that the deviation rate (true state of the population) is actually less than the tolerable rate.
Choice "d" is incorrect. The question states that the auditor assessed control risk "higher than necessary." This implies that the deviation rate (true state of the population) is actually less than the tolerable rate.
QUESTION 377
Which of the following statements is correct concerning statistical sampling in tests of controls?
A. Deviationsfromcontrolproceduresatagivenrateusuallyresultinmisstatementsatahigherrate. B. Asthepopulationsizedoubles,thesamplesizeshouldalsodouble.
C. The qualitative aspects of deviations are not considered by the auditor.
D. There is an inverse relationship between the sample size and the tolerable rate.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. As the auditor's tolerable rate decreases (the auditor cannot accept as large an error rate), the sample size increases and vice-versA. Therefore, there is an inverse relationship between the sample size and the tolerable rate.
Choice "a" is incorrect. Deviations from control procedures at a given rate usually result in misstatements at a lower rate (i.e., not every deviation from an internal control procedure will necessarily result in a misstatement in the financial statements). Choice "b" is incorrect. When using statistical sampling for tests of controls, changing the size of the population has very little effect on the sample size (unless the population is very small). Choice "c" is incorrect. Consideration should be given to the qualitative aspects of deviations, including the nature and cause of deviations and the possible relationship of the deviations to other phases of the audit.

QUESTION 378
An auditor may decide to decrease the acceptable level of risk when:
A. Increasedreliabilityfromthesampleisdesired.
B. Manydifferences(auditvalueminusrecordedvalue)areexpected. C. Initial sample results do not support the planned level of control risk. D. The cost and effort of selecting additional sample items is low.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the auditor might not want to do unless the cost and effort of selecting additional sample items is low. Choice "a" is incorrect. Decreasing the acceptable level of risk doesn't increase the reliability of a given sample. It does, however, result in selection of a larger sample, which in turn makes it less likely that the auditor will make an incorrect decision.
Choice "b" is incorrect. The auditor's acceptable level of risk is not affected by the extent to which differences are expected.
Choice "c" is incorrect. Control risk is not relevant in assessing the acceptable level of risk, which is a factor of substantive testing.
QUESTION 379
In determining the number of documents to select for a test to obtain assurance that all sales returns have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the:
A. Likelyrateofdeviations.
II. Allowable risk of assessing control risk too high.
B. Ionly.
C. II only.
D. Both I and II.
E. EitherIorII.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:

Choice "a" is correct. In determining the number of sample items to select in a test of controls, the auditor would also consider the likely rate of deviations. The higher the expected rate, the greater the number of items selected.
Choices "b", "c", and "d" are incorrect. The process of establishing the number of sample items to select in a test of controls would include the consideration of the allowable risk of assessing control risk too low, not too high.
QUESTION 380
With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention that should be communicated to an entity's management and those charged with governance because they represent:
A. Manipulationorfalsificationofaccountingrecordsordocumentsfromwhichfinancialstatementsareprepared.
B. Disclosuresofinformationthatsignificantlycontradicttheauditor'sgoingconcernassumption.
C. Material irregularities or illegal acts perpetrated by high-level management.
D. Deficiencies in the design or operation of internal control that could reasonably be expected to cause a non-inconsequential misstatement in the financial statements.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential. Choice "a" is incorrect. Manipulation or falsification of accounting records may not represent an internal control deficiency (e.g., if such fraud occurs through collusion). Choice "b" is incorrect. Information indicative of a going concern problem is not an internal control deficiency.
Choice "c" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).
QUESTION 381
Which of the following characteristics distinguishes computer processing from manual processing?
A. Computerprocessingvirtuallyeliminatestheoccurrenceofcomputationalerrornormallyassociatedwithmanualprocessing. B. Errorsorirregularitiesincomputerprocessingwillbedetectedsoonaftertheiroccurrences.
C. The potential for systematic error is ordinarily greater in manual processing than in computerized processing.
D. Most computer systems are designed so that transaction trails useful for audit purposes do not exist.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation

Explanation/Reference:
Explanation:
Choice "a" is correct. Computer processing virtually eliminates the occurrence of (random) computational errors normally associated with manual processing. This is a major benefit of computer processing over manual processing.
Choice "b" is incorrect. Depending on human involvement and review, errors or irregularities in computer processing may not be detected quickly.
Choice "c" is incorrect. The potential for systematic errors (e.g., incorrect programming, incorrect data entry) is greater in a computerized system due to reduced human involvement in processing. Choice "d" is incorrect. Only poorly designed computerized systems provide no audit trail capabilities.
QUESTION 382
The two requirements crucial to achieving audit efficiency and effectiveness with a microcomputer are selecting:
A. Theappropriateaudittasksformicrocomputerapplicationsandtheappropriatesoftwaretoperformtheselectedaudittasks.
B. Theappropriatesoftwaretoperformtheselectedaudittasksandclientdatathatcanbeaccessedbytheauditor'smicrocomputer.
C. Client data that can be accessed by the auditor's microcomputer and audit procedures that are generally applicable to several clients in a specific industry. D. Auditproceduresthataregenerallyapplicabletoseveralclientsinaspecificindustryandtheappropriateaudittasksformicrocomputerapplications.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In microcomputer audit applications, efficient and effective system usage requires:
(1) identification of the appropriate audit tasks and
(2) appropriate software to perform the selected audit tasks. Choice "b" is incorrect. Although microcomputer access to client data is desirable, it is not required. Choice "c" is incorrect. Although microcomputer access to client data is desirable, it is not required. Also, microcomputer audit applications need not be applicable to several clients to be efficient and effective.
Choice "d" is incorrect. Microcomputer audit applications need not be applicable to several clients to be efficient and effective.
QUESTION 383
With respect to the audit of a nonissuer, significant deficiencies are matters that come to an auditor's attention, which should be communicated to an entity's management and those charged with governance because they represent:
A. Materialirregularitiesorillegalactsperpetratedbyhigh-levelmanagement.
B. Deficienciesinthedesignoroperationofinternalcontrolthatcouldreasonablybeexpectedtocauseanon-inconsequentialmisstatementinthefinancial statements.

C. Flagrant violations of the entity's documented conflict-of-interest policies.
D. Intentional attempts by client personnel to limit the scope of the auditor's fieldwork.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Significant deficiencies in the design or operation of internal control should be communicated to management and those charged with governance because there is more than a remote likelihood that they will result in a financial statement misstatement that is more than inconsequential. Choice "a" is incorrect. Irregularities or illegal acts may not represent deficiencies in internal control (e.g., if such acts occur through collusion).
Choice "c" is incorrect. Significant deficiencies do not necessarily involve violations of an entity's conflictof-interest policies.
Choice "d" is incorrect. Interfering with the auditor's procedures would not constitute a significant deficiency, since such interference would not affect the financial statements.
QUESTION 384
An auditor who is testing IT controls in a payroll system would most likely use test data that contain conditions such as:
A. Deductionsnotauthorizedbyemployees.
B. Overtimenotapprovedbysupervisors.
C. Time tickets with invalid job numbers.
D. Payroll checks with unauthorized signatures.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Test data often contains invalid information (such as invalid job numbers) that is used to test EDP controls.
Choices "a", "b", and "d" are incorrect. While approvals and authorizations should all be tested, they are not IT controls and would not be tested through use of test data.
QUESTION 385
Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files?

A. Itisusuallymoredifficulttodetecttranspositionerrors.
B. Transactionsareusuallyauthorizedbeforetheyareexecutedandrecorded.
C. It is usually easier for unauthorized persons to access and alter the files.
D. Random error associated with processing similar transactions in different ways is usually greater.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Microcomputer systems are sometimes characterized by weak file and data security, and are usually accessible by many office personnel. (Manual systems, in contrast, generally restrict one user from accessing other users' files.) Thus, it is usually easier (increased risk) for unauthorized persons to access and alter computer system files, especially microcomputer system files. Choice "a" is incorrect. No difference exists between manual and computer-based systems for detecting transposition errors.
Choice "b" is incorrect. Transactions should always be authorized before they are executed and recorded, in both manual and computer-based systems. Choice "d" is incorrect. Because computer-based processing imposes strict rules on input and processing, generally there are fewer random processing errors.
QUESTION 386
In a computerized payroll system environment, an auditor would be least likely to use test data to test controls related to:
A. Missingemployeenumbers.
B. Properapprovalofovertimebysupervisors.
C. Time tickets with invalid job numbers.
D. Agreement of hours per clock cards with hours on time tickets.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Proper approval of overtime by supervisors is least likely to be used by the auditor in a "test data" test of controls because it is information generally not recorded in the computer. Choices "a", "c", and "d" are incorrect. Test data is data (with a predetermined result) that is run through the client's computer system. The auditor creates one transaction of each type of valid and invalid conditions in which the auditor is interested and runs them through the client's processing system. The following are recorded in the computer and are likely candidates for "test data" tests of controls.
A. Missing employee numbers.
C. Time tickets with invalid job numbers.

D. Agreement of hours per clock card with hours on time tickets.
QUESTION 387
When engaged to express an opinion on a nonissuer's internal control, an accountant should:
A. Obtainmanagement'swrittenassertionsregardingwhetherthecompanyhasmaintainedeffectiveinternalcontrol.
B. Qualifyanyopinionconcerningmanagement'sassertionthatthecostofcorrectinganyweaknessesexceedsthebenefits. C. Keep informed of events subsequent to the date of the report that might have affected the accountant's opinion.
D. Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material errors or irregularities.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. An auditor should obtain management's written assertion about the effectiveness of the entity's internal control.
Choice "b" is incorrect. The accountant should disclaim (not qualify) an opinion on management's assertions that the cost of correcting weaknesses exceeds the benefits. Choice "c" is incorrect. The accountant has no responsibility to evaluate the effect of subsequent events. In fact, the report on an entity's internal control specifically states that projections of the internal control evaluation to future periods is inappropriate. Choice "d" is incorrect. The accountant does provide an opinion (and not a disclaimer) on the effective operation of internal control.
QUESTION 388
Processing data through the use of simulated files provides an auditor with information about the operating effectiveness of controls. One of the techniques involved in this approach makes use of:
A. Controlledreprocessing. B. Anintegratedtestfacility. C. Input validation.
D. Program code checking.
Correct Answer: B
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. An integrated test facility runs test transactions through the "live" system and posts to simulated (dummy) files to provide an auditor with

information about the operating effectiveness of controls.
Choice "a" is incorrect. Controlled reprocessing of transactions is a less common term used for parallel processing where the auditor writes a program to "reprocess" some or all of the client's live data. It does not involve the use of simulated files.
Choice "c" is incorrect. Input validation is a general description of any test that ensures that the input was accurate. It does not involve the use of simulated files. Choice "d" is incorrect. Program code checking is the review of the client's program source code by a qualified auditor/IT specialist. It does not involve the use of simulated files.
QUESTION 389
The management of Cain Company, a nonissuer, engaged Bell, CPA, to express an opinion on Cain's internal control. Bell's report described several material weaknesses and potential errors and irregularities that could occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:
A. Disclaimanopinionastomanagement'scost-benefitstatement.
B. AdvisetheBoardthatBelleitheragreesordisagreeswithmanagement'sstatement. C. AdvisemanagementthatBell'sreportwasrestrictedforuseonlybymanagement. D. Advise both management and the Board that Bell was withdrawing the opinion.
Correct Answer: A
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The auditor should disclaim an opinion as to management's cost-benefit statement (i.e., "We do not express an opinion or any other form of assurance on management's cost- benefit statement.").
Choice "b" is incorrect. The CPA should disclaim an opinion regarding management's representation. Choice "c" is incorrect. The CPA's report on internal control is not restricted as to use. Choice "d" is incorrect. The CPA does not need to withdraw the opinion as long as a disclaimer on management's cost-benefit statement is presented.
QUESTION 390
When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements of a nonissuer, the auditor should include a:
A. Descriptionoftestsperformedtosearchformaterialweaknesses. B. Statementofpositiveassuranceoninternalcontrol.
C. Paragraph describing the inherent limitations of internal control. D. Restriction on the use of the report.
Correct Answer: D
Section: Auditing and Attestation (II) (Volume E)

Explanation Explanation/Reference:
Explanation:
Choice "d" is correct. When reporting on conditions relating to an entity's internal control observed during an audit of the financial statements, the auditor should include a restriction on the use of the report.
Choice "a" is incorrect. The auditor would not include a description of tests performed to search for material weaknesses since the auditor is not in fact obligated to search for them. Choices "b" and "c" are incorrect. An auditor would make a statement of positive assurance on internal control and include a paragraph describing the inherent limitations of internal control in conjunction with an engagement to report on internal control. These comments would not be made when reporting on an entity's internal control in conjunction with an audit of the financial statements of a nonissuer.
QUESTION 391
An engagement to express an opinion on the internal control of a nonissuer will generally:
A. Requireproceduresthatduplicatethosealreadyappliedinassessingcontrolriskduringafinancialstatementaudit. B. Increasethereliabilityofthefinancialstatementsthathavealreadybeenaudited.
C. Be more extensive in scope than the assessment of control risk made during a financial statement audit.
D. Be more limited in scope than the assessment of control risk made during a financial statement audit.
Correct Answer: C
Section: Auditing and Attestation (II) (Volume E) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. An engagement to express an opinion on internal control will generally be more extensive in scope than the assessment of control risk made during a financial statement audit of a nonissuer. This occurs because assessing control risk is the primary purpose of an engagement to express an opinion on internal control, whereas it is an incidental result of an audit of a nonissuer. Choice "a" is incorrect. Since the results of the audit may be considered in performing the engagement to express an opinion on internal control, it is unlikely that the auditor would duplicate those procedures already applied.
Choice "b" is incorrect. It is unlikely that the reliability of the financial statements that have already been audited would be increased if an engagement to express an opinion on internal control is performed.
Choice "d" is incorrect. An engagement to express an opinion on internal control is more extensive in scope than the control risk assessment performed during an audit of a nonissuer.
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