Current professional auditing standards require the performance of analytical
procedures during the planning and completion phases of the audit.
Depreciation amounts are determined by exchange transactions with outside parties.
International Standards on Auditing are issued by the International Auditing and
Assurance Standards Board (IAASB).
When performing a review service and the accountant becomes aware that fraud may
have occurred, the accountant must withdraw from the engagement.
Gross negligence is the existence of extreme or unusual negligence with the intent to
deceive.
Level 1 estimates require more management judgment than level 2 or level 3 estimates.
The job time ticket indicates the starting and stopping times of work during the pay
period.
A proof of cash helps the auditor determine whether all recorded cash receipts were
deposited in the bank and whether all recorded cash disbursements were paid by the
bank.
Auditors of public company financial statements must issue separate reports on internal
control over financial reporting.
General transaction-related audit objectives vary from audit to audit, depending on the
nature and characteristics of the client’s business and industry.
There is a direct relationship between acceptable audit risk and planned detection risk.
In applying the audit risk model, auditors are concerned about overstatements, not
understatements.
Completeness and existence are the auditor’s primary objectives in auditing
manufacturing equipment.
There is significant potential for misstatements and misclassification of financial
instruments.
Auditing standards require the engagement partner to be included in discussions about
the susceptibility of the client’s financial statements to material misstatements.
The risk of material misstatement exists only at the overall financial statement level.
To issue an unqualified opinion on internal control over financial reporting, there must
be no identified material weaknesses and no restrictions on the scope of the audit.
The prohibition on direct financial interests applies to covered members in a position to
influence an engagement.
The results of the tests of controls determine whether assessed control risk for sales and
cash receipts needs to be revised.
The transaction-related audit objective of timing is related to the assertion of cutoff.
Analytical procedures are the most expensive type of audit test to perform because of
the expertise and training required to properly use them.
Because attributes sampling is a statistical sampling approach, it allows the auditor to
quantify the allowance for sampling risk and the upper exception rate.
The objective of the test data approach is to determine whether the client’s computer
programs can correctly process valid and invalid transactions.
The two major balance-related audit objectives in testing payroll liabilities are accuracy
and cutoff.
A statement near the bottom of the standard bank confirmation form requires the bank
to inform auditors of open lines of credit and compensating balance requirements.
Individuals engaged in conducting a fraud will generally not misrepresent information
to the auditor.
Tests for kiting are performed using only a schedule of intrabank transfers.
When sending confirmations during most audits of accounts receivable, the emphasis is
often on confirming larger and older accounts.
It is a violation of the rules of conduct if someone does something on behalf of a
member that is a violation if the member does it.
The auditor assesses control risk for each related audit objective and supports control
risk assessments with tests of controls.
Output controls focus on preventing errors during processing.
All evidence must have the same level of persuasiveness.
Negative confirmations are less expensive, and less reliable, than positive
confirmations.
Tests of controls provide an indication of the likelihood of misstatements in both the
income statement and the balance sheet, simultaneously.
Firewalls can protect company data and software programs.
Before accepting a new client, most CPA firms investigate the company to determine its
acceptability. However, AICPA confidentiality requirements prohibit CPA firms from
contacting certain parties”namely the company’s attorneys and bankers”during this
investigation.
If an auditor does a test in the wrong direction, sampling risk will increase.
Under the International Standards for the Professional Practice of Internal Auditing, the
performance standards deal with the education requirements of the internal auditor.
The cutoff objective, “transactions near the balance sheet date are recorded in the
proper period,” is a balance-related audit objective.
“Cookie jar reserves” are often created by companies whenever their earnings are low
to create reserves for future periods when earnings need to be “boosted” upward.
Both sampling and nonsampling risks are associated with
A)
B)
C)
D)
One of the characteristics of professional skepticism is ________, which is the
conviction to decide for oneself, rather than accepting the claims of others.
A) interpersonal understanding
B) autonomy
C) suspension of judgment
D) self-esteem
When an auditor observes that personnel who are responsible for physically counting
inventory are not following the inventory instructions, the auditor should
A) contact a client’s supervisor to correct the problem.
B) modify the client’s physical inventory instructions.
C) not discuss the problem with client’s supervisor in order to maintain independence.
D) assign audit staff to the inventory count.
When analyzing a client’s performance measurement system,
A) ratio analysis and benchmarking against key competitors are utilized.
B) only income statement numbers are used.
C) inherent risk of financial statement misstatements may be decreased if the
performance measurement system encourages aggressive accounting.
D) the auditor is likely to decrease the extent of testing if the client has set unreasonable
objectives.
A third-party beneficiary is one which
A) has failed to establish legal standing before the court.
B) does not have privity of contract and is unknown to the contracting parties.
C) does not have privity of contract, but is known to the contracting parties and
intended to benefit under the contract.
D) may establish legal standing before the court after a contract has been consummated.
Which of the following statements is false?
A) Either an overstatement of an asset account or an understatement of a liability
account would have the same effect on the income statement.
B) A misclassification in the balance sheet will have no effect on operating income.
C) Either an overstatement of an asset account or an overstatement of a liability account
would have the same effect on the income statement.
D) Either an understatement of an asset account or an overstatement of a liability
account would have the same effect on the income statement.
When assets are being verified, auditors focus much of their attention on making sure
that the accounts are not overstated. Alternatively, auditors focus their efforts on
understatement when auditing liabilities. What is the primary reason for this difference
in focus?
A) auditors’ legal liability
B) GAAP
C) GAAS requirements
D) all of the above
Which of the following best explains the relationship between general controls and
application controls?
A) Application controls are effective even if general controls are extremely weak.
B) Application controls are likely to be effective only when general controls are
effective.
C) General controls have no impact on application controls.
D) None of the above
Which of the following is an accurate statement about professional skepticism?
A) Professional skepticism involves a critical assessment of the evidence.
B) Professional skepticism is easy to implement in practice.
C) It is easy for auditors to understand that their clients may try to deceive them
throughout the audit process.
D) Professional skepticism is only necessary for the audits of public companies.
Which of the following statements is not correct?
A) There are many ways an auditor can accumulate evidence to meet overall audit
objectives.
B) Sufficient appropriate evidence must be accumulated to meet the auditor’s
professional responsibility.
C) It is appropriate to minimize the cost of accumulating evidence.
D) Gathering evidence and minimizing costs are equally important considerations that
affect the approach the auditor selects.
When the auditor becomes aware of or suspects noncompliance with laws and
regulations
A) the auditor should evaluate the effects of the noncompliance on other aspects of the
audit.
B) the auditor should discuss the matter with management at a level above those
suspected of the noncompliance.
C) the auditor should obtain additional information to evaluate the possible effects on
the financial statements.
D) all of the above
Calculating the sample size using monetary unit sampling depends on which of the
following factors?
A)
B)
C)
D)
If the results of tests of controls support the design and operations of controls as
expected, the auditor uses ________ control risk as the preliminary assessment.
A) a lower
B) the same
C) a higher
D) either a lower or higher
The principles underlying an audit
A) contain the procedures that must be followed during an audit.
B) carry the same authority as AICPA auditing standards.
C) only apply to the audits of public companies
D) provide structure for the clarified Codification.
Which of the following is most correct with regard to the comparison of the financial
auditing standards of the Yellow Book with the principles of the AICPA auditing
standards?
A) the same as
B) quite different from
C) incompatible with
D) consistent with
Except for two key differences, the transaction-related audit objectives are essentially
the same for the processing of credit memos as they are for sales. Which of the
following are the two key differences?
A) risk and emphasis on the completeness objective
B) materiality and emphasis on the accuracy objective
C) risk and emphasis on the classification objective
D) materiality and emphasis on the occurrence objective
The audit objective to determine that notes payable in the schedule actually exist is
verified by the test of details of balances procedure to
A) foot the notes payable list.
B) confirm notes payable.
C) recalculate interest expense.
D) examine the balance sheet for proper disclosure of noncurrent portions.
The following information applies to the questions below:
Listed below are four interbank cash transfers, indicated by the numbers 1, 2, 3, and 4,
of a client for late December 2015 and early January 2016:
Based on the schedule of interbank transfers above, which of the cash transfers would
not appear as an outstanding check on the December 31, 2015 bank reconciliation?
A) 1
B) 2
C) 3
D) 4
A deficiency uncovered in the audit of internal control is explained by which of the
following in relation to a financial statement misstatement?
A) the amount of the misstatement
B) the likelihood of the misstatement
C) the amount, likelihood, and classification of the misstatement
D) the amount and the classification of the misstatement
________ is the auditor’s examination of the client’s documents and records to
substantiate that the information is included in the financial statements.
A) Inspection
B) Recalculation
C) Observation
D) Verification
Place the following steps in their proper order:
1. Analyze exceptions.
2. Select the sample.
3. Define attributes and exception conditions.
4. State the objectives of the audit test.
5. Specify the tolerable exception rate.
A) 1, 3, 2, 4, 5.
B) 4, 3, 1, 2, 5.
C) 4, 3, 5, 2, 1.
D) 1, 2, 3, 4, 5.
The auditor designs and performs a combination of tests of controls and substantive
procedures to obtain reasonable assurance that the financial statements are fairly stated
when control risk
A) is assessed above the maximum.
B) is assessed below the maximum.
C) cannot be assessed.
D) none of the above
Which of the following best describes one of the primary objectives of audit
documentation?
A) defend against claims of a deficient audit
B) provide a basis for reviewing the work of subordinates
C) provide reasonable assurance that the audit was conducted in accordance with
auditing standards
D) provide additional support of recorded amounts to the client
Which of the following is not one of the types of engagements and related forms of
conclusions that are defined by the attestation standards?
A) reviews
B) compilations
C) examinations
D) agreed-upon procedures
A document indicating a reduction in the amount owed to a vendor because of returned
goods is
A) a debit memo.
B) a credit memo.
C) a receiving report.
D) a contractual adjustment form.
Changing circumstances may require a change in the useful life of an asset. When this
occurs, it involves a change in
A) accounting estimate rather than a change in accounting principle.
B) accounting principle rather than a change in accounting estimate.
C) both accounting principle and accounting estimate.
D) neither accounting principle nor accounting estimate.
Failure to capitalize a fixed asset at the correct amount would impact which financial
statements?
A) the balance sheet only
B) the income statement only
C) the cash flow statement only
D) both the income statement and the balance sheet
Most auditors believe that financial statements are “presented fairly” when the
statements are in accordance with GAAP, and that it is also necessary to
A) determine that they are not in violation of FASB statements.
B) examine the substance of transactions and balances for possible misinformation.
C) review the statements using the accounting principles promulgated by the SEC.
D) assure investors that net income reported this year will be exceeded in the future.
When a client uses perpetual inventory records, the tests of details of balances for
inventory can be significantly reduced if the auditor believes the records are accurate.
The controls over the acquisitions included in the records are normally tested as a part
of the
A) tests of controls for acquisitions.
B) tests of controls and substantive tests of transactions for acquisitions.
C) tests of details of balances for acquisitions.
D) analytical procedures and tests of controls for acquisitions.
Which of the following departments is most likely responsible for pay rate changes and
changes in deductible amounts for employees?
A) general accounting department
B) human resources department
C) treasurer
D) controller
The Sarbanes-Oxley Act requires which employees of an accounting firm to rotate off
the engagement every five years?
A)
B)
C)
D)
Which of the following is not a business function within the “Sales” class of
transactions?
A) processing customer orders
B) granting credit
C) processing and recording sales returns and allowances
D) shipping goods
Which of the following attestation engagements result in a conclusion that represents
positive assurance?
A) review
B) compilation
C) examination
D) agreed upon procedure engagement
Which of the following best describes the purpose of control activities?
A) the actions, policies and procedures that reflect the overall attitudes of management
B) the identification and analysis of risks relevant to the preparation of financial
statements
C) the policies and procedures that help ensure that necessary actions are taken to
address risks to the achievement of the entity’s objectives
D) activities that deal with the ongoing assessment of the quality of internal control by
management
An audit of historical financial statements most commonly includes the
A) balance sheet, statement of retained earnings, and the statement of cash flows.
B) income statement, the statement of cash flows, and the statement of net working
capital.
C) statement of cash flows, balance sheet, and the statement of retained earnings.
D) balance sheet, income statement, statement of cash flows, and the statement of
changes in stockholders’ equity.
List and briefly describe the three conditions for fraud.
The AICPA Code of Conduct includes a conceptual framework approach for the
member to evaluate threats to compliance with the Code. List the three steps necessary
to evaluate the threats.
Identify the three categories of application controls, and give one example of each.
Explain why the audit of work in process and finished goods inventory is generally
more complex than the audit of purchased inventory.
Why are substantive analytical procedures essential for notes payable?
Define ordinary negligence, gross negligence, and constructive fraud.
What events initiate and terminate the payroll and personnel cycle?
List and briefly describe examples of risk factors for each condition of fraud for
fraudulent financial reporting.
Discuss the six Statements on Standards for Accounting and Review Services (SSARS)
requirements that must be met when an accountant is performing a compilation of
financial statements.
What are the six Ethical Principles stated in the Code of Professional Conduct? Briefly
discuss each principle. Are these principles enforceable?
List each of the five types of audit tests.
Explain what is meant by information risk, and list the four causes of this risk.
What are the three most important controls over cash disbursements?
Senior management is responsible for promoting a culture of honesty and ethics.
Describe what that implies for the organization.
The basis for preparing financial statements for companies is the general ledger. As
soon as possible the auditor obtains the general ledger accounts of the client and
prepares a working trial balance. Discuss the audit documentation in the current file that
relates to the working trial balance. Include a description of lead and support schedules
in your answer.
Evidence is paramount to audit and attestation engagements. List the four basic types of
audit evidence.
Smith and Jones, CPAs, audited the consolidated financial statements of Concord Inc.
and all but one of its subsidiaries for the year ended September 30, 2016 and are
expressing an unqualified opinion on the financials presented as a whole.
Smith, the engagement partner, instructed Mary, an assistant on the engagement, to
draft the auditor’s report on November 4, 2016, the date of fieldwork completion. In
drafting the report Mary considered the following:
– In preparing its financial statements, Concord changed its method of accounting for
research and development costs and properly expensed these amounts. Management
described the change in principle in Note 10 to the consolidated financial statements.
– Ball & Brown, CPAs, audited the financial statements of Biotherm, Inc., a
consolidated subsidiary of Concord for the year ended September 30, 2016. The
subsidiary’s financial statements reflect total assets of 22% and total revenues of 20% of
the consolidated totals. Ball & Brown expressed an unqualified opinion and furnished
to Smith & Jones a copy of their auditor report. Smith & Jones have decided not to
assume responsibility for the work of Ball & Brown insofar as it relates to the
expression of an opinion on the consolidated financial statements taken as a whole
because of the materiality of Biotherm’s financial statements to the consolidated whole.
Ball & Brown’s report will not be presented together with that of Smith & Jones.
– Concord is the subject of a grand jury investigation into possible violations of federal
antitrust laws and possible related crimes. Related civil class actions are pending.
Concord’s management has adequately disclosed in Note 12 to their consolidated
financial statements. Because of the early stage of the investigation, the ultimate
outcome of these matters cannot be determined at this time. Therefore, no provision for
any liability that may result has been recorded.
– Concord experienced a net loss in 2016 and is currently in default under substantially
all of its debt agreements. Management’s plans in regard to these matters are adequately
disclosed in Note 14 to Concord’s consolidated financial statements. The financials do
not include any adjustments that might result from the outcome of this uncertainty.
These matters rase substantial doubt about Concord’s ability to continue as a going
concern.
Ball reviewed Mary’s draft and indicated in his review notes that there were many
deficiencies in Mary’s Draft. The audit report that Mary drafted follows.
Independent Auditor’s Report
We have audited the consolidated financial statements of Concord, Inc., and
subsidiaries as of September 30, 2016, and the related consolidated statements of
income, changes in stockholders equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We did not audit the financial statements of Biotherm, Inc., a wholly-owned subsidiary,
which statements reflect total assets and revenues constituting 22% and 20%
respectively at September 30, 2016 of the consolidated totals. Those statements were
audited by Ball & Brown, CPAs, whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Biotherm, Inc. is based solely
on their report.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting
principles used, as well as assessing control risk. We believe our audits provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Concord Inc., as of September 30, 2016 in conformity with
generally accepted accounting principles, except for the uncertainty, which is discussed
in Note 12 to the consolidated financials.
The accompanying consolidated financial statements have been prepared assuming that
the Company will continue in existence for a reasonable period of time. As discussed in
Note 14 to the consolidated financial statements, the Company suffered a net loss and is
currently in default under substantially all of its debt agreements. Management’s plans
in regard to these matters are also described in Note 14. The consolidated financial
statements do not include any adjustments that might result from the outcome of this
uncertainty.
Smith & Jones, CPAs
November 4, 2016
Required:
The following items present some of the deficiencies in the drafted audit report noted
by Smith. For each deficiency, indicate whether:
S. Smith’s review note is correct
M. Mary’s draft is correct
B. Both Smith’s review note and Mary’s draft are incorrect
Smith’s Review Notes
1. An explanatory paragraph is required between the scope and opinion paragraphs for
the change in accounting principles referring the reader to Note 10.
2. The names of the other auditors do not need to be explicitly stated in the introductory
paragraph. Only that “other auditors” performed the audit and provided their report.
3. The opinion paragraph should extend the auditor’s opinion beyond financial position
to include the results of Concord’s operations and flows.
4. The reference to the uncertainty in the opinion paragraph is incomplete. It should
describe the nature of the uncertainty as pertaining to the grand jury investigation into
possible violations of federal antitrust laws.
5. The explanatory paragraph following the opinion paragraph does not include the
terms ‘substantial doubt” and “going concern”. These terms are required to be used in
this paragraph.
6. The explanatory paragraph following the opinion paragraph includes an inappropriate
statement that “the consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.” This statement is misleading
and should be omitted.