Wiley Exam Questions with 100% Correct Answers | Verified | Updated 2024, Exams of Advanced Education

Download Wiley Exam Questions with 100% Correct Answers | Verified | Updated 2024 and more Exams Advanced Education in PDF only on Docsity! Wiley Exam Questions with 100% Correct Answers | Verified | Updated 2024 Which of the following is not a primary responsibility of an auditor: - Correct Answer-Provide management with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework. The phrase "generally accepted accounting principles" is an accounting term that - Correct Answer-Encompasses the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time. The auditor's judgment concerning the overall fairness of the presentation of financial position - Correct Answer-results of operations, and statement of cash flows is applied within the framework of,Generally accepted accounting principles Which of the following is most likely to be unique to the audit work of CPAs as compared to work performed by practitioners of other professions? - Correct Answer-Independence. pg. 1 professoraxe l Principles Underlying an Audit Conducted in Accordance with GAAS state that sufficient appropriate audit evidence is to be obtained through designing and implementing appropriate responses i.e. by performing audit procedures to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidential matter required by this standard may be obtained in part through - Correct Answer-Analytical procedures. The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the - Correct Answer-Results are consistent with the conclusions to be presented in the auditor's report. The auditor faces a risk that the examination will not detect material misstatements which occur in the accounting process. In regard to minimizing this risk - Correct Answer-the auditor primarily relies on,Substantive tests. An attestation engagement is one in which a CPA is engaged to - Correct Answer-Issue a written communication expressing a conclusion about the reliability of a written assertion that is the responsibility of another party. pg. 2 professoraxe l Which of the following best describes what is meant by the term generally accepted auditing standards? - Correct Answer- Pronouncements issued by the Auditing Standards Board. As guidance for measuring the quality of the performance of an auditor - Correct Answer-the auditor should refer to,Generally accepted auditing standards. In AICPA professional standards the word should indicates an (a) - Correct Answer-Presumptively mandatory requirement from which the CPA may depart in rare circumstances. Interpretive publications include all of the following except for, - Correct Answer-Articles in the AICPA's Journal of Accountancy. Which of the following has the lowest authoritative status but may be useful in assisting the auditor in applying the SASs? - Correct Answer-Journal of Accountancy articles. The Sarbanes Oxley Act of 2002 imposes a mandatory ‐ rotation applicable to both the audit engagement partner and pg. 5 professoraxe l the quality control (also called review) partner. How long in total is the partner allowed to serve as the engagement partner or review partner before someone else must serve in that capacity? - Correct Answer-5 years. Under the Sarbanes Oxley Act of 2002, which of the following ‐ is not a stated responsibility of the Public Company Accounting Oversight Board? - Correct Answer-Issuing accounting standards that must be followed by issuers in financial reporting. Which of the following is least likely to be directly examined in an inspection performed by the PCAOB? - Correct Answer- Compilation engagements. Which of the following are issued by the Securities and Exchange Commission? - Correct Answer-Financial Reporting Releases. A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences except, - Correct Answer-Serving on at least one other issuer's pg. 6 professoraxe l audit committee or disclosure committee of the board of directors. The organization charged with protecting investors and the public by requiring full disclosure of financial information by companies offering securities to the public is the: - Correct Answer-Securities and Exchange Commission. Section 404 of the Sarbanes Oxley Act of 2002 requires each ‐ annual report of an issuer to include which of the following? - Correct Answer-Management's assessment of the effectiveness of internal control over financial reporting. Which of the following is correct concerning PCAOB inspections? - Correct Answer-Inspections may include consideration of aspects of practice management, such as how partner compensation is determined. The Public Company Accounting Oversight Board (PCAOB) has authority to establish which of the following relating to public companies? - Correct Answer-Attestation Standards Yes Independence Standards Yes pg. 7 professoraxe l Answer-Concluding that the entity's management probably lacks integrity. An auditor's engagement letter most likely would include a statement that - Correct Answer-Limits the auditor's responsibility to detect errors and fraud. A successor auditor ordinarily should request to review the predecessor's audit documentation relating to - Correct Answer-Contingencies Yes Internal Control Yes An understanding with the client should include the objectives of the engagement management's responsibilities, and - Correct Answer-The auditor's responsibilities Yes Limitations of the audit Yes A predecessor auditor - Correct Answer-Is not required to attempt communication with a successor since this is the successor's responsibility. Before accepting an audit engagement a successor auditor should make specific inquiries of the predecessor auditor pg. 10 professoraxe l regarding the predecessor's - Correct Answer-Understanding as to the reasons for the change of auditors. Ordinarily the predecessor auditor permits the successor auditor to review the predecessor's working paper analyses relating to - Correct Answer-Contingencies Yes Balance Sheet Accounts Yes An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes - Correct Answer-The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies in internal control that come to the auditor's attention. In assessing whether to accept a client for an audit engagement a CPA should consider the - Correct Answer- Client's Business Risk Yes CPA's Business Risk Yes Which of the following factors most likely would cause a CPA to not accept a new audit engagement? - Correct Answer-The prospective client is unwilling to make all financial records available to the CPA. pg. 11 professoraxe l The understanding with the client regarding a financial statement audit generally includes which of the following matters? - Correct Answer-The responsibilities of the auditor. A successor auditor most likely would make specific inquiries of the predecessor auditor regarding - Correct Answer- Disagreements with management as to auditing procedures. Which of the following matters does an auditor usually include in the engagement letter? - Correct Answer- Arrangements regarding fees and billing. The scope and nature of an auditor's contractual obligation to a client ordinarily is set forth in the - Correct Answer- Engagement letter. The understanding with the client regarding a financial statement audit generally includes which of the following matters? - Correct Answer-The responsibilities of the auditor. Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? - Correct Answer-There will be a client imposed scope limitation.‐ pg. 12 professoraxe l The audit plan usually cannot be finalized until the - Correct Answer-Consideration of the entity's internal control structure has been completed. Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements? - Correct Answer-The entity's industry is experiencing declining customer demand. Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. Conditions that require extension of audit tests. - Correct Answer-Both I and II. Prior to commencing fieldwork an auditor usually discusses the general audit strategy with the client's management. Which of the following matters do the auditor and management agree upon at this time? - Correct Answer-The coordination of the assistance of the client's personnel in data preparation. pg. 15 professoraxe l Audit plans should be designed so that - Correct Answer-The audit evidence gathered supports the auditor's conclusions. Prior to commencing fieldwork an auditor usually discusses the general audit strategy with the client's management. Which of the following details do management and the auditor usually agree upon at this time? - Correct Answer-The schedules and analyses that the client's staff should prepare In developing an overall audit strategy an auditor should consider - Correct Answer-Reporting objectives of the engagement. Which of the following factors is most likely to affect the extent of the documentation of the auditor's understanding of a client's system of internal controls? - Correct Answer-The degree to which information technology is used in the accounting function. Which of the following conditions most likely would pose the greatest risk in accepting a new audit engagement? - Correct Answer-There will be a client imposed scope limitation.‐ pg. 16 professoraxe l In planning a new engagement which of the following is not a factor that affects the auditor's judgment as to the quantity, type, and content of audit documentation? - Correct Answer- The content of the client's representation letter 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 - Correct Answer-Professional skepticism Which of the following procedures would an auditor least likely perform in planning a financial statement audit? - Correct Answer-Selecting a sample of vendors' invoices for comparison to receiving reports. The in charge auditor most likely would have a supervisory ‐ responsibility to explain to the staff assistants - Correct Answer-How the results of various auditing procedures performed by the assistants should be evaluated. Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement? I. Financial statement accounts likely to contain a misstatement. II. pg. 17 professoraxe l An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate? - Correct Answer-Document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated. In considering materiality for planning purposes an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate - Correct Answer-$10,000 Which of the following statements is not correct about materiality? - Correct Answer-An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about pg. 20 professoraxe l materiality? - Correct Answer-The entity's annualized interim financial statements. Which of the following would an auditor most likely use in determining the auditor's preliminary judgment about materiality? - Correct Answer-The entity's annualized interim financial statements Which of the following statements is not correct about materiality? - Correct Answer-An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. As a lower acceptable level of materiality is established the auditor should plan more work on individual accounts to - Correct Answer-Find smaller misstatements. Which of the following statements is correct concerning materiality in a financial statement audit? - Correct Answer- Materiality levels are generally considered in terms of the smallest aggregate level of misstatement that could be considered material to any one of the financial statements. pg. 21 professoraxe l Which of the following statements is not correct about materiality? - Correct Answer-An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. When issuing an unqualified opinion the auditor who evaluates the audit findings should be satisfied that the - Correct Answer-Estimate of the total likely misstatement is less than a material amount. When planning a sample for a substantive test of details an auditor should consider tolerable misstatement for the sample. This consideration should - Correct Answer-Be related to preliminary judgments about materiality levels. Based on new information gained during an audit of a non- issuer an auditor determines that it is necessary to modify materiality for the financial statements as a whole. In this circumstance, which of the following statements is accurate? - Correct Answer-Materiality levels for particular classes of transactions, account balances, or disclosures might also need to be revised. pg. 22 professoraxe l appropriate reporting practice if the - Correct Answer-Auditor, as a result of the specialist's findings, modifies the auditor's opinion on the entity's financial statements. When using the work of a specialist an auditor may refer to and identify the specialist in the auditor's report if the - Correct Answer-Auditor expresses a qualified opinion as a result of the specialist's findings. Which of the following statements is correct concerning an auditor's use of the work of an actuary in assessing a client's pension obligations? - Correct Answer-The auditor is required to understand the objectives and scope of the actuary's work. An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the - Correct Answer- Auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset. An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the - Correct Answer- Auditor issues a modified opinion because of a matter related to the specialist's findings. pg. 25 professoraxe l An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances the auditor - Correct Answer-Should assess the risk that the actuary's objectivity might be impaired. An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the - Correct Answer- Auditor modifies the report opinion because of the difference between the client's and the specialist's valuations of an asset. In using the work of a specialist an auditor may refer to the specialist in the auditor's report if, as a result of the specialist's findings, the auditor - Correct Answer-Adds an emphasis of matter paragraph to the auditor's report to ‐ ‐ emphasize an unusually important subsequent event. Which of the following statements is correct concerning an auditor's use of the work of a specialist? - Correct Answer-The work of a specialist who is related to the client may be acceptable under certain circumstances. pg. 26 professoraxe l In using the work of a specialist an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the - Correct Answer-Auditor, as a result of the specialist's findings, adds an explanatory paragraph emphasizing a matter regarding the financial statements. Which of the following is least likely to include a reference to the use of a specialist? - Correct Answer-Unmodified opinion. The auditor may refer to and identify a specialist in the auditor's report if the auditor - Correct Answer-Believes it will facilitate an understanding of the reason for modification of the report. An auditor intends to use the work of an actuary who has a relationship with the client. Under these circumstances the auditor - Correct Answer-Should assess the risk that the actuary's objectivity might be impaired. Which of the following statements is correct about the auditor's use of the work of a specialist? - Correct Answer-The auditor should obtain an understanding of the methods and assumptions used by the specialist. pg. 27 professoraxe l Holding other planning considerations equal a decrease in the number of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to - Correct Answer-Perform the planned auditing procedures closer to the balance sheet date. When an auditor increases the assessed level of control risk because certain control procedures were determined to be ineffective the auditor would most likely increase the - Correct Answer-Extent of tests of details. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are - Correct Answer-Functions of the client and its environment while detection risk is not. Inherent risk and control risk differ from detection risk in which of the following ways? - Correct Answer-Inherent risk and control risk exist independently of the audit. Inherent risk and control risk differ from detection risk in that they - Correct Answer-Exist independently of the financial statement audit. pg. 30 professoraxe l The acceptable level of detection risk is inversely related to the - Correct Answer-Assurance provided by substantive tests. As the acceptable level of detection risk decreases an auditor may - Correct Answer-Postpone the planned timing of substantive tests from interim dates to the year-end. Which of the following audit risk components may be assessed in nonquantitative terms? - Correct Answer-Control Risk Yes Detection Risk Yes Inherent Risk Yes The existence of audit risk is recognized by the statement in the auditor's standard report that the - Correct Answer- Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement. Detection risk differs from both control risk and inherent risk in that detection risk - Correct Answer-Can be changed at the auditor's discretion. Which of the following audit risk components may be assessed in nonquantitative terms? - Correct Answer-Inherent Risk Yes Control Risk Yes Detection Risk pg. 31 professoraxe l The risk that an auditor will conclude based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as - Correct Answer-Detection risk. Use the audit risk model to calculate audit risk (to the closest percent) in the following circumstance: Control Risk 40% Inherent Risk 40% Detection Risk 40% - Correct Answer-6%. Which of the following audit risk components may be assessed in nonquantitative terms? - Correct Answer-Control Risk Yes Detection Risk Yes Inherent Risk Yes Which of the following is a definition of control risk? - Correct Answer-The risk that a material misstatement will not be prevented or detected on a timely basis by the client's system of internal control. In a financial statement audit inherent risk is evaluated to help an auditor assess which of the following? - Correct Answer-The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls. pg. 32 professoraxe l While performing an audit of the financial statements of a company for the year ended December 31 year 1, the auditor notes that the company's sales increased substantially in December, year 1, with a corresponding decrease in January, year 2. In assessing the risk of fraudulent financial reporting or misappropriation of assets, what should be the auditor's initial indication about the potential for fraud in sales revenue? - Correct Answer-There is a broad indication of financial reporting fraud. Which of the following factors would be most likely to heighten an auditor's concern about the risk of fraudulent financial reporting? - Correct Answer-An overly complex organizational structure involving unusual lines of authority. What is the primary objective of the fraud brainstorming session? - Correct Answer-Assess the potential for material misstatement due to fraud. Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? - Correct Answer- Management places substantial emphasis on meeting earnings projections. pg. 35 professoraxe l Which of the following factors would most likely heighten an auditor's concern about the risk of fraudulent financial reporting? - Correct Answer-An overly complex organizational structure involving unusual lines of authority. Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud? - Correct Answer-The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements. Which of the following is correct concerning a "fraud risk factor?" - Correct Answer-It has been observed in circumstances where frauds have occurred. Which of the following situations most likely could lead to an embezzlement scheme? - Correct Answer-Access to blank checks and signature plates is restricted to the cash disbursements bookkeeper who personally reconciles the monthly bank statements. Which of the following statements reflects an auditor's responsibility for detecting errors and irregularities? - Correct Answer-An auditor should design the audit to provide pg. 36 professoraxe l reasonable assurance of detecting errors and irregularities that are material to the financial statements. Which of the following statements best describes an auditor's responsibility to detect errors and irregularities (fraud)? - Correct Answer-An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements. What assurance does the auditor provide that errors irregularities (fraud), and direct effect illegal acts that are material to the financial statements will be detected? , - Correct Answer-Errors Reasonable Irregulaties Reasonable Direct Effect Illegal Acts Reasonable Which of the following circumstances most likely would cause an auditor to suspect that material misstatements exist in a client's financial statements? - Correct Answer-Differences between reconciliations of control accounts and subsidiary records are not investigated. An auditor who discovers that a client's employees have paid small bribes to public officials most likely would withdraw from the engagement if the - Correct Answer-Employees' pg. 37 professoraxe l Which of the following statements is correct concerning fraud risk factors that an auditor considers when performing a financial statement audit? - Correct Answer-Their existence in an audit does not necessarily indicate the existence of fraud. Disclosure of irregularities to parties other than a client's senior management and its audit committee or board of directors ordinarily is not part of an auditor's responsibility. However to which of the following outside parties may a duty to disclose irregularities exist? - Correct Answer-To the SEC when the client reports an auditor change YES To a successor auditor when the successor makes appropriate inquiries YES To a government funding agency from which the client receives financial assistance YES Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements? - Correct Answer-Consider whether the results of audit procedures affect the assessment of the risk of material misstatement due to fraud. Which of the following is correct concerning requirements about auditor communications about fraud? - Correct Answer- pg. 40 professoraxe l All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee. Which of the following parties should an auditor notify first when discovering an immaterial fraud is committed by an accounting clerk? - Correct Answer-An appropriate level of management. Which of the following statements is correct concerning an auditor's responsibility to report fraud? - Correct Answer-The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility. Which of the following need not be documented in relation to the auditor's consideration of fraud? - Correct Answer-The assessed level of the risk of management override of controls. In which of the following circumstances is it least likely that the auditor will have a responsibility to disclose a fraudulent act to parties other than the client's senior management and its audit committee? - Correct Answer-In response to question raised by an analyst who follows the stock of the company. pg. 41 professoraxe l Disclosure of fraud to parties other than a client's senior management and its audit committee or board of directors ordinarily is not part of an auditor's responsibility. However to which of the following outside parties may a duty to disclose fraud exist? - Correct Answer-To the SEC when the client reports an auditor change YES To a successor auditor when the successor makes appropriate inquiries YES To a government funding agency from which the client receives financial assistance YES Which of the following information discovered during an audit most likely would raise a question concerning possible illegal acts? - Correct Answer-The entity prepared several large checks payable to cash during the year. Which of the following information that comes to an auditor's attention would be most likely to raise a question about the occurrence of illegal acts? - Correct Answer-The discovery of unexplained payments made to government employees. During the audit of a new client the auditor determined that management had given illegal bribes to municipal officials during the year under audit and for several prior years. The auditor notified the client's board of directors, but the board pg. 42 professoraxe l financial statements. Under these circumstances, the auditor should - Correct Answer-Consider withdrawing from the audit engagement and disassociating from future relationships with the client. The Foreign Corrupt Practices Act requires that - Correct Answer-Publicly held companies devise and maintain adequate internal control. Which of the following is not a procedure performed primarily for the purpose of expressing an opinion on the financial statements but may bring possible illegal acts to the auditor's attention? - Correct Answer-Review of policies concerning effectiveness of management decision making policies. When an auditor becomes aware of a possible client illegal act the auditor should obtain an understanding of the nature of the act to - Correct Answer-Evaluate the effect on the financial statements. Which of the following statements is correct regarding the auditor's consideration of the possibility of illegal acts by clients? - Correct Answer-If specific information concerning an illegal act comes to the auditor's attention, the auditor should pg. 45 professoraxe l apply audit procedures specifically directed to ascertaining whether an illegal act has occurred. The objective of performing analytical procedures in planning an audit is to identify the existence of - Correct Answer- Unusual transactions and events. Which of the following comparisons would an auditor most likely make in evaluating an entity's costs and expenses? - Correct Answer-The current year's payroll expense with the prior year's payroll expense. Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit? - Correct Answer-Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified. An auditor's decision either to apply analytical procedures as substantive tests or to perform tests of transactions and account balances usually is determined by the - Correct Answer-Relative effectiveness and efficiency of the tests. pg. 46 professoraxe l Auditors try to identify predictable relationships when using analytical procedures. Relationships involving transactions from which of the following accounts most likely would yield the highest level of evidence? - Correct Answer-Payroll expense. An auditor's analytical procedures most likely would be facilitated if the entity - Correct Answer-Uses a standard cost system that produces variance reports. An example of an analytical procedure is the comparison of - Correct Answer-Financial information with similar information regarding the industry in which the entity operates. Which of the following factors would least influence an auditor's consideration of the reliability of data for purposes of analytical procedures? - Correct Answer-Whether the data were processed in a computerized system or in a manual accounting system. Which of the following factors would most likely influence an auditor's consideration of the reliability of data when performing analytical procedures? - Correct Answer-Whether pg. 47 professoraxe l An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? - Correct Answer-The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. A primary objective of analytical procedures used near completion of an audit is to - Correct Answer-Assist the auditor in forming overall conclusions about whether the financial statements are consistent with the auditor's understanding of the company. An auditor most likely would apply analytical procedures near the completion of the audit to - Correct Answer-Determine whether additional audit evidence may be needed. Which of the following statements concerning analytical procedures is correct? - Correct Answer-Analytical procedures alone may provide the appropriate level of assurance for some assertions. pg. 50 professoraxe l Which of the following analytical procedures should be applied to the income statement? - Correct Answer-Compare the actual revenues and expenses with the corresponding figures of the previous year and investigate significant differences. When applying analytical procedures during an audit which of the following is the best approach for developing and evaluating expectations? - Correct Answer-Identifying reasonable explanations for unexpected differences before talking to client management. Which of the following activities is most likely to be performed near completion of an audit to ensure that the financial statements are free from material misstatement? - Correct Answer-Comparing the current year's financial statements with those of the prior year. Which of the following ratios would an engagement partner most likely consider in the overall review stage of an audit? - Correct Answer-Cost of goods sold/average inventory. pg. 51 professoraxe l The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the - Correct Answer- Timing of inventory observation procedures to be performed. Which of the following factors would most likely influence an auditor's determination of the auditability of an entity's financial statements? - Correct Answer-The adequacy of the accounting records. At the conclusion of an audit an auditor is reviewing the evidence gathered in support of the financial statements. With regard to the valuation of inventory, the auditor concludes that the evidence obtained is not sufficient to support management's representations. Which of the following actions is the auditor most likely to take? - Correct Answer-Obtain additional evidence regarding the valuation of inventory. Which of the following is an analytical procedure? - Correct Answer-Comparing current year balances to prior year ‐ ‐ balances. pg. 52 professoraxe l Auditors sometimes use comparison of ratios as audit evidence. For example an unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? - Correct Answer-Unrecorded sales. Which of the following procedures would provide the most reliable audit evidence? - Correct Answer-Inspection of bank statements obtained directly from the client's financial institution. Which of the following is a management assertion regarding account balances at the period end? - Correct Answer-The entity holds or controls the rights to assets, and liabilities are obligations of the entity. Which of the following internal control procedures would an entity be most likely to use to assist in satisfying the completeness assertion related to long term investments? - ‐ Correct Answer-The internal auditor compares the securities in the bank safe deposit box with recorded investments. Which of the following presumptions does not relate to the appropriateness of audit evidence? - Correct Answer-An auditor's opinion, to be economically useful, is formed within pg. 55 professoraxe l reasonable time and based on evidence obtained at a reasonable cost. Which of the following control procedures would be most likely to assist in reducing control risk related to the existence or occurrence of manufacturing transactions? - Correct Answer-Perpetual inventory records are independently compared with goods on hand. Which of the following types of audit evidence is the least persuasive? - Correct Answer-Prenumbered purchase order forms. Which of the following presumptions is correct about the reliability of audit evidence? - Correct Answer-Effective internal control provides more assurance about the reliability of audit evidence. Which of the following is not an assertion relating account balances? - Correct Answer-Understandability. pg. 56 professoraxe l Which of the following procedures would be most effective in reducing attestation risk? - Correct Answer-Examination of evidence. Which of the following types of audit evidence is the most persuasive? - Correct Answer-Bank statements obtained from the client. Which of the following statements concerning evidential matter is correct? - Correct Answer-A client's accounting data cannot be considered sufficient audit evidence to support the financial statements. An auditor observed that a client mails monthly statements to customers. Subsequently the auditor reviewed evidence of follow up on the errors reported by the customers. This test ‐ of controls most likely was performed to support management's financial statement assertion(s) of - Correct Answer-Presentation and Disclosure NO Rights and Obligations YES Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? - Correct Answer-Are pg. 57 professoraxe l Which of the following statements concerning audit evidence is correct? - Correct Answer-To be appropriate, audit evidence should be both relevant and reliable. Which of the following is the least persuasive documentation in support of an auditor's opinion? - Correct Answer- Schedules of details of physical inventory counts conducted by the client. What type of evidence would provide the highest level of assurance in an attestation engagement? - Correct Answer- Evidence obtained from independent sources. Before applying principal substantive tests to the details of accounts at an interim date prior to the balance sheet date an auditor should: - Correct Answer-Consider whether the amounts of the year end balances selected for interim testing ‐ are reasonably predictable. Which of the following procedures would an auditor most likely perform during an audit engagement's overall review stage in formulating an opinion on an entity's financial statements? - Correct Answer-Consider whether the results of pg. 60 professoraxe l audit procedures affect the assessment of the risk of material misstatement due to fraud. An auditor of a non-issuer should design tests of details to ensure that sufficient audit evidence supports which of the following? - Correct Answer-The planned level of assurance at the relevant assertion level. Before applying principal substantive tests to an entity's accounts receivable at an interim date an auditor should: - Correct Answer-Assess the difficulty in controlling the incremental audit risk. Samples to test internal control structure procedures are intended to provide a basis for an auditor to conclude whether: - Correct Answer-The control procedures are operating effectively. The objective of tests of details of transactions performed as substantive procedures is to - Correct Answer-Detect material misstatements in the financial statements. pg. 61 professoraxe l Which of the following documents are examples of audit evidence generated by the client? - Correct Answer-Shipping documents and receiving reports. Which of the following elements ultimately determines the specific auditing procedures that are necessary in the circumstances to afford a reasonable basis for an opinion? - Correct Answer-Auditor judgment. Which of the following is an analytical procedure that an auditor most likely would perform when performing the risk assessment of an audit? - Correct Answer-Comparing the current year account balances for conformity with predictable patterns. Which of the following procedures would a CPA most likely perform in the risk assessment stage of a financial statement audit? - Correct Answer-Compare recorded financial information with anticipated results from budgets and forecasts. Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash pg. 62 professoraxe l The auditor notices significant fluctuations in key elements of the company's financial statements. If management is unable to provide an acceptable explanation the auditor should - Correct Answer-Perform additional audit procedures to investigate the matter further. Which of the following is not required documentation for an audit in accordance with generally accepted auditing standards? - Correct Answer-A flowchart or an internal control questionnaire that evaluates the effectiveness of the entity's internal control policies and procedures. Which of the following pairs of accounts would an auditor most likely analyze on the same audit documentation? - Correct Answer-Notes receivable and interest income. An auditor's documentation serves mainly to - Correct Answer-Provide the principal support for the auditor's report. The current file of an auditor's documentation most likely would include a copy of the - Correct Answer-Bank reconciliation. pg. 65 professoraxe l An auditor ordinarily uses a working trial balance resembling the financial statements without footnotes but containing columns for - Correct Answer-Reclassification and adjustments. Which of the following is not required documentation in an audit in accordance with generally accepted auditing standards? - Correct Answer-A flowchart depicting the segregation of duties and authorization of transactions. Audit documentation should be prepared so as to enable an individual to understand the procedures performed audit evidence obtained, and conclusions reached. The individual is - Correct Answer-An experienced auditor with no previous connection to the audit. Audit documentation of the audit of a nonpublic company should be retained - Correct Answer-The longer of five years, or the legal requirements. An auditor's working papers will generally be least likely to include documentation showing how the - Correct Answer- Client's schedules were prepared. pg. 66 professoraxe l During the course of the audit of a nonpublic company the auditor prepares and accumulates audit working papers. A primary purpose of the audit working papers is to - Correct Answer-Support the auditor's opinion. Which of the following is required documentation in an audit in accordance with generally accepted auditing standards? - Correct Answer-An audit program setting forth in detail the procedures necessary to accomplish the engagement's objectives. Which of the following statements ordinarily is correct concerning the content of audit documentation? - Correct Answer-It is appropriate to use calculator tapes with names or explanations on the tapes, rather than writing separate lists into the audit documentation. Which of the following factors most likely would affect an auditor's judgment about the quantity type, and content of the auditor's documentation? - Correct Answer-The assessed level of control risk. The permanent file of an auditor's documentation generally would not include - Correct Answer-Working trial balance. pg. 67 professoraxe l An auditor's working papers serve mainly to - Correct Answer- Provide the principal support for the auditor's report. An auditor's flowchart of a client's accounting system is a diagrammatic representation that depicts the auditor's - Correct Answer-Understanding of the system. Decision tables differ from program flowcharts in that decision tables emphasize - Correct Answer-Logical relationships among conditions and actions. Which of the following is a management control method that most likely could improve management's ability to supervise company activities effectively? - Correct Answer-Establishing budgets and forecasts to identify variances from expectations. An auditor's primary consideration regarding an entity's internal control structure policies and procedures is whether they - Correct Answer-Affect the financial statement assertions pg. 70 professoraxe l When obtaining an understanding of an entity's internal control an auditor should concentrate on the substance of controls rather than their form because - Correct Answer- Management may establish appropriate controls but not enforce compliance with them. An auditor uses the knowledge provided by the understanding of internal control and the assessed level of the risks of material misstatements primarily to - Correct Answer- Determine the nature, timing, and further audit procedures. Decision tables differ from program flowcharts in that decision tables emphasize - Correct Answer-Logical relationships among conditions and actions. Which of the following is not a typical question asked during a walk through? - Correct Answer-What is the largest ‐ fraudulent transaction you ever processed? To obtain an understanding of a continuing client's business an auditor most likely would - Correct Answer-Review prior year working papers and the permanent file for the client. pg. 71 professoraxe l When preparing a record of a client's internal control the independent auditor sometimes uses a flowchart, which can best be described as a - Correct Answer-Symbolic representation of a system or series of sequential processes. When obtaining an understanding of an entity's internal control procedures an auditor should concentrate on the substance of the procedures, rather than their form, because - Correct Answer-Management may establish appropriate procedures but not enforce compliance with them. In planning an audit of certain accounts an auditor may conclude that specific procedures used to obtain an understanding of an entity's internal control structure need not be included because of the auditor's judgments about materiality and assessments of - Correct Answer-Inherent risk. Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been - Correct Answer-Implemented. An advantage of using systems flowcharts to document information about internal control instead of using internal pg. 72 professoraxe l Correct Answer-Assemble the internal control findings into a comprehensible format suitable for analysis. In an audit of financial statements an auditor's primary consideration regarding a control is whether the control - Correct Answer-Affects management's financial statement assertions. Assessing control risk at below the maximum level most likely would involve - Correct Answer-Identifying specific internal control structure policies and procedures relevant to specific assertions. Control risk should be assessed in terms of - Correct Answer- Financial statement assertions. An auditor is evaluating a client's internal controls. Which of the following situations would be the most difficult internal control issue for an auditor to detect? - Correct Answer-Two employees, who work in different departments, are circumventing an internal control. pg. 75 professoraxe l After obtaining an understanding of the internal control structure and assessing control risk of an entity an auditor decided not to perform tests of controls. The auditor most likely decided that - Correct Answer-It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests. The auditor most likely decided that - Correct Answer-It would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests. Which of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? - Correct Answer- Transactions selected for testing are not supported by proper documentation. Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? - Correct Answer-Observe the consistency of the employees' use of cash registers and tapes. pg. 76 professoraxe l In obtaining an understanding of an entity's internal control relevant to audit planning an auditor is required to obtain knowledge about the - Correct Answer-Design of the controls pertaining to internal control components. When an auditor discovered that certain control activities were ineffective the auditor most likely would increase the - Correct Answer-Extent of tests of details. After obtaining an understanding of internal control and assessing control risk of an entity n auditor decided not to perform tests of controls. The auditor most likely decided that - Correct Answer-aIt would be inefficient to perform tests of controls that would result in a reduction in planned substantive tests. The objective of tests of details of transactions performed as tests of controls is to - Correct Answer-Evaluate whether controls operated effectively. Which of the following is a step in an auditor's decision to assess control risk at below the maximum? - Correct Answer- Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements. pg. 77 professoraxe l An independent auditor has concluded that the client's records procedures, and representation can be relied upon based on tests made during the year when internal control was found to be effective. The auditor should test the records, procedures, and representations again at year end if - Correct ‐ Answer-Inquiries and observations lead the auditor to believe that conditions have changed significantly. For certain controls such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by - Correct Answer-Observation and inquiry. Which of the following represents an inherent limitation of internal controls - Correct Answer-The CEO can request a check with no purchase order. Tests of controls are performed in order to determine whether - Correct Answer-Controls are functioning as designed. Which of the following is not a step in an auditor's decision to conclude that controls operate effectively? - Correct Answer- pg. 80 professoraxe l Perform tests of details of transactions to detect material misstatements in the financial statements. Which of the following is ordinarily considered a test of a control? - Correct Answer-Examine signatures on checks. Management's attitude toward aggressive financial reporting and its emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when - Correct Answer-Management is dominated by one individual who is also a shareholder. When assessing control risk at below the maximum level an auditor is required to document the auditor's understanding of the I. Entity's control activities that help ensure management directives are carried out. II. Entity's control environment factors that help the auditor plan the engagement. - Correct Answer-Both I and II. Which of the following elements of an entity's internal control structure includes the development of personnel manuals documenting employee promotion and training policies? - Correct Answer-Control environment. pg. 81 professoraxe l After obtaining an understanding of an entity's internal control structure an auditor may assess control risk at the maximum level for some assertions because the auditor - Correct Answer-Believes the internal control policies and procedures are unlikely to be effective. In an audit of financial statements in accordance with generally accepted auditing standards an auditor is required to - Correct Answer-Document the auditor's understanding of the entity's internal control structure. The overall attitude and awareness of an entity's board of directors concerning the importance of the internal control structure usually is reflected in its - Correct Answer-Control environment. Which of the following analytical procedures most likely would be used during the risk assessment stage of an audit? - Correct Answer-Comparing current year to prior year sales volumes. As a result of analytical procedures the independent auditor determines that the gross profit percentage has declined from 30% in the preceding year to 20% in the current year. The pg. 82 professoraxe l which recognizes that - Correct Answer-The cost of an entity's internal control structure should not exceed the benefits expected to be derived. Which of the following factors would least likely affect the extent of the auditor's consideration of the client's internal control? - Correct Answer-The amount of time budgeted to complete the engagement. An auditor assesses control risk because it - Correct Answer- Affects the level of detection risk that the auditor may accept. An auditor reviews a client's accounting policies and procedures when considering which of the following planning matters - Correct Answer-Understanding of the client's operations and business. Which of the following most likely would cause an auditor to consider whether a client's financial statements contain material misstatements? - Correct Answer-The results of an analytical procedure disclose unexpected differences. pg. 85 professoraxe l Which of the following is not a component of internal control? - Correct Answer-Inherent risk. The overall attitude and awareness of an entity's board of directors concerning the importance of internal control usually is reflected in its - Correct Answer-Control environment. Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization? - Correct Answer-Allowing for greater management oversight of incompatible activities. When the operating effectiveness of a control is not evidenced by written documentation an auditor should obtain evidence about the control's effectiveness by - Correct Answer-Inquiry and other procedures such as observation. When companies use information technology (IT) extensively evidence may be available only in electronic form. What is an auditor's best course of action in such situations? - Correct Answer-Use generalized audit software to extract evidence from client databases. pg. 86 professoraxe l The objective of tests of details of transactions performed as tests of controls is to - Correct Answer-Evaluate whether an internal control structure policy or procedure operated effectively. Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed? - Correct Answer- There is a substantial risk of intentional misapplication of accounting principles. When control risk is assessed at the maximum level for all financial statement assertions an auditor should document the auditor's - Correct Answer-Understanding of the entity's internal control structure elements YES Conclusion that control risk is at the maximum level YES Basis for concluding that control risk is at the maximum level YES An audit client failed to maintain copies of its procedure's manuals and organizational flowcharts. What should the auditor do in an audit of financial statements? - Correct Answer-Document the auditor's understanding of internal control. pg. 87 professoraxe l material misstatement? - Correct Answer-Select more effective substantive tests. Which of the following types of transactions generally has less risk? - Correct Answer-Routine transactions. Which of the following matters is an auditor required to communicate to an entity's audit committee (or those charged with governance)? I. Disagreements with management about matters significant to the entity's financial statements that have been satisfactorily resolved. II. The auditor's views about qualitative aspects of the entity's significant accounting practices including accounting policies, accounting estimates, and financial statement disclosures. - Correct Answer-Both I and II. Which of the following statements is correct concerning an auditor's required communication with an entity's audit committee (or those charged with governance)? - Correct Answer-This communication should include management changes in the application of significant accounting policies. An auditor would be least likely to initiate a discussion with a client's audit committee concerning - Correct Answer-The pg. 90 professoraxe l maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. Should an auditor communicate the following matters to an audit committee (or those charged with governance) of a public entity? - Correct Answer-Significant audit adjustments recorded by the entity YES Management's consultation with other accountants about significant accounting matters YES An auditor is obligated to communicate an uncorrected audit adjustment to an entity's audit committee (or those charged with governance) only if the adjustment - Correct Answer-Is not believed to be trivial An auditor's communication with the audit committee is required to include the - Correct Answer-Discussion of disagreements with management about matters that significantly impact the entity's financial statements. It would not be appropriate for the auditor to initiate discussion with the audit committee concerning - Correct Answer-Details of the procedures which the auditor intends to apply. pg. 91 professoraxe l Which of the following statements is correct about an auditor's required communication with those charged with governance of an audit client? - Correct Answer-The auditor is required to inform those charged with governance about significant misstatements discovered by the auditor and subsequently corrected by management. Should an auditor communicate the following matters to an independent audit committee of a public entity? - Correct Answer-Significant audit adjustments recorded by the entity YES Management's consultation with other accountants adjustments recorded about significant accounting matters YES A properly disclosed uncertainty relating to litigation arising against a company is most likely to result in which of the following types of reports? - Correct Answer-Unmodified opinion with an emphasis of matter paragraph.‐ ‐ Which of the following statements is correct concerning an auditor's required communication with an entity's audit committee? - Correct Answer-This communication should include disagreements with management about significant pg. 92 professoraxe l In assessing the objectivity of internal auditors the independent CPA who is auditing the entity's financial statements would most likely consider the - Correct Answer- Internal auditing standards developed by The Institute of Internal Auditors. Miller Retailing Inc. maintains a staff of three full time ‐ internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor will most likely - Correct Answer-Place limited reliance on the work performed by the internal auditors. The work of internal auditors may affect the independent auditor's I. Procedures performed in obtaining an understanding of the internal control structure. II. Procedures performed in assessing the risk of material misstatement. III. Substantive procedures performed in gathering direct evidence. - Correct Answer-I II and III. Which of the following factors should an external auditor obtain updated information about when assessing an internal auditor's competence? - Correct Answer-The educational level and professional experiences of the internal auditor. pg. 95 professoraxe l In assessing the competence of an internal auditor an independent CPA would most likely obtain information about the, - Correct Answer-Quality of the internal auditor's working paper documentation. The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances the independent auditor may - Correct Answer-Allow the internal auditor to perform tests of internal controls. Miller Retailing Inc. maintains a staff of three full time ‐ internal auditors who report directly to the controller. In planning to use the internal auditors to provide assistance in performing the audit, the independent auditor most likely will - Correct Answer-Place limited reliance on the work performed by the internal auditors. When assessing internal auditors' objectivity an independent auditor should - Correct Answer-Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned. pg. 96 professoraxe l In assessing the competence of a client's internal auditor an independent auditor most likely would consider the - Correct Answer-Internal auditor's compliance with professional internal auditing standards. When assessing the internal auditor's competence the independent CPA should obtain information about the - Correct Answer-Educational background and professional certification of the internal auditors. When considering the objectivity of internal auditors an independent auditor should - Correct Answer-Determine the organizational level to which the internal auditors report. For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? - Correct Answer-Materiality of misstatements NO Evaluation of accounting estimates NO When assessing the competence of the internal auditors an independent CPA should obtain information about the - Correct Answer-Quality of the internal auditors' working paper documentation. pg. 97 professoraxe l