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An auditor’s report contains the following: “We did not audit the financial statements of JK Company, a wholly owned subsidiary, which statements reflect total assets and revenues constituting 17% and 19%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for JK Company, is based solely on the report of the other auditors.” These sentences A. Qualify the opinion. B. Disclaim an opinion. C. Divide responsibility. D. Are an improper form of reporting.
Answer (C) is   correct. The given sentences are part of an introductory paragraph provided as an example in AU 543 of appropriately reporting the decision to refer to the work of another auditor. They meet the requirement that such reference indicate clearly the division of responsibility.
In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? A. Bonds payable. B. Bank charges. C. Sales. D. Equipment.
Answer (C) is   correct. In auditing the sales or revenue account, tests of controls are particularly appropriate, provided the auditor believes that control risk can be assessed at a low level. Because of the heavy volume of transactions, examining all items will seldom be cost-effective.
An auditor may achieve audit objectives related to particular assertions by A. Adhering to a system of quality control. B. Increasing the level of detection risk. C. Preparing auditor working papers. D. Performing analytical procedures.
Answer (D) is   correct. The auditor develops audit objectives in the light of specific assertions. The procedures adopted should be adequate to achieve the objectives. Analytical procedures and tests of details are substantive tests that are performed to obtain evidence relevant to the assertions and related audit objectives.
Because of the risk of material misstatement due to fraud, an audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of A. Independent integrity. B. Impartial conservatism. C. Objective judgment. D. Professional skepticism.  
Answer (D) is   correct. Due professional care requires the auditor to exercise professional skepticism. Professional skepticism is an attitude that includes a questioning mind and critical assessment of audit evidence. Regardless of past experience with the entity or belief in management’s honesty, the audit must be conducted with (1) an awareness that a material misstatement due to fraud may exist and (2) ongoing questioning of whether the evidence suggests that such fraud has occurred (AU 316).
When conducting field work for a physical inventory, an auditor cannot perform which of the following steps using a generalized audit software (GAS) package? A. Observing inventory. B. Analyzing data resulting from inventory. C. Selecting sample items of inventory. D. Recalculating balances in inventory reports.
Answer (A) is   correct. The primary use of GAS is to select and summarize a client’s records for additional testing. However, the physical observation of inventory, a required audit procedure under AU 331, can only be done by an auditor.
The auditor who interviews the plant manager is most likely to rely upon this interview as primary support for an audit conclusion on A. The necessity to record a provision for deferred maintenance costs. B. Capitalization vs. expensing policy. C. The adequacy of the depreciation expense. D. Allocation of fixed and variable costs.
Answer (A) is   correct. The auditor typically does not use the responses to inquiries as primary support for an audit conclusion. However, the determination by management that a liability exists would probably convince the auditor that an entry should be made.
Tech Company has disclosed an uncertainty arising from pending litigation. The auditor’s decision to express a qualified opinion rather than an unqualified opinion most likely would be determined by the A. Entity’s lack of experience with such litigation. B. Lack of insurance coverage for possible losses from such litigation. C. Lack of sufficient evidence. D. Inability to estimate the amount of loss.
Answer (C) is   correct. By definition, sufficient evidence regarding the outcome of an uncertainty cannot be expected to exist at the time of an audit. However, management must analyze existing conditions, including uncertainties, and their financial statement effects. The auditor must therefore determine whether the evidence is sufficient to support these analyses. If, as a result of a scope limitation, sufficient evidence is not available to the auditor to make this determination, a qualification or disclaimer of opinion is appropriate.
The controller of Excello Manufacturing, Inc. wants to use ratio analysis to identify the possible existence of idle equipment or the possibility that equipment has been disposed of without having been written off. Which of the following ratios would best accomplish this objective? A. Repairs and maintenance cost to direct labor costs. B. Depreciation expense to book value of manufacturing equipment. C. Accumulated depreciation to book value of manufacturing equipment. D. Gross manufacturing equipment cost to units produced.
Answer (D) is   correct. The ratio of gross manufacturing equipment cost to units produced increases if equipment is taken out of production but is not written off. As replacement equipment is installed, the amount of units produced remains constant and the gross equipment cost increases. If equipment is taken out of service without being replaced, gross equipment cost will remain constant, units produced will decline, and the ratio will again increase.
Gleim #: 18.5.89 -- Source: CPA 594 A-83 When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards. A. Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used. B. Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting. C. D. State that the basis of presentation is a comprehensive basis of accounting other than GAAP.
Answer (D) is   correct. An auditor may report on financial statements prepared in conformity with an other comprehensive basis of accounting (OCBOA). In addition to an introductory paragraph and a standard scope paragraph, the report should include a separate paragraph (after the scope paragraph) that states the basis of the presentation, refers to a note in the statements explaining the basis chosen, and states that the basis of the presentation is a comprehensive basis other than GAAP. Finally, the auditor should include a paragraph expressing an opinion that the statements are presented fairly in conformity with the OCBOA.
An entity’s internal control requires that an approved voucher, a prenumbered purchase order, and a prenumbered receiving report accompany every check request. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of all A. Canceled checks. B. Receiving reports. C. Purchase orders. D. Approved vouchers.
Answer (A) is   correct. The best procedure is to test whether any checks have been issued without vouchers, purchase orders, and receiving reports. An appropriate sample of canceled checks should be traced to the related supporting documentation. The checks should not have been written before the dates on the receiving reports.
A report based on a review of interim financial information would include all of the following elements except A. An identification of the interim financial information reviewed. B. A description of the procedures for a review of interim financial information. A statement about whether the accountant is aware of any material modifications that should be made to the accompanying financial information so that it conforms with GAAP. C. D. A statement that an audit was performed in accordance with GAAS.
Answer (D) is   correct. The scope of a review of interim financial information is less than the scope of an audit. The accountant’s report should therefore include a statement that a review of financial information is substantially less in scope than an audit in accordance with GAAS, the objective of which is an expression of an opinion on the statements as a whole, and that no such opinion is expressed. The report should also contain a statement that the review was made in accordance with AICPA standards (AU 722).
Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained? Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger. A. B. Direct access to securities in the safe-deposit box is limited to only one corporate officer. C. The purchase and sale of investments are executed on the specific authorization of the board of directors. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safe deposit box by independent personnel. D.
Answer (D) is   correct. Custody of securities should be separated from the accounting responsibility. Ideally, the treasurer should have custody of investment securities, accounting should maintain the related records (establish accountability), and, periodically, assets should be independently reconciled with the records.
A document in an auditor’s working papers includes the following statement: “Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential.” The above passage is most likely from a(an) A. Letter of audit inquiry. B. Comfort letter. C. Representation letter. D. Engagement letter.  
Answer (D) is   correct. The audit scope, limitations, expectations, and fees for services are usually set forth in the engagement letter. The engagement letter would disclaim liability for detecting fraud but disclose it if discovered.
Which of the following procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to continue as a going concern? A. Inquiring of the entity’s legal counsel about litigation, claims, and assessments. B. Inspecting title documents to verify whether any real property is pledged as collateral. C. Performing cutoff tests of sales transactions with customers with long-standing receivable balances. D. Evaluating the entity’s procedures for identifying and recording related party transactions.
Answer (A) is   correct. The letter of audit inquiry requests, among other things, that the lawyer evaluate the likelihood of unfavorable outcomes of pending or threatened litigation, claims, and assessments. It also requests that the lawyer estimate, if possible, the amount or range of potential loss (AU 337). Thus, the inquiry may reveal information indicating that the auditee’s existence is threatened.
The permanent file section of the audit documentation that is kept for each audit client most likely contains A. A schedule of time spent on the engagement by each individual auditor. B. Review notes pertaining to questions and comments regarding the audit work performed. C. Narrative descriptions of the client’s accounting procedures and internal control. D. Correspondence with the client’s legal counsel concerning pending litigation.
Answer (C) is   correct. The permanent section of the auditor’s audit documentation usually contains copies of important company documents. They may include the articles of incorporation, stock options, contracts, and bylaws; the engagement letter, which is the contract between the auditor and the client; analyses from previous audits of accounts of special importance to the auditor, such as long-term debt, PP&E, and shareholders’ equity; and information concerning internal control, e.g., flowcharts, organization charts, and questionnaires.
Which of the following is a true statement about the required documentation in an audit performed in accordance with generally accepted auditing standards? A. A flowchart depicting the segregation of duties and authorization of transactions is required. B. A memorandum setting forth the scope of the audit is required. C. A documented audit plan describing the necessary procedures to be performed is required. D. A written engagement letter formalizing the level of service to be rendered is recommended but not required.
Answer (C) is   correct. In planning the audit, the auditor must develop and document an audit plan that includes the nature, timing, and extent of audit procedures to be performed to reduce audit risk to an acceptably low level. This requirement is in accordance with the first standard of field work, which requires adequate planning and proper supervision.
Proper segregation of duties reduces the opportunities to allow persons to be in positions both to A. Establish internal control and authorize transactions. B. Record cash receipts and cash disbursements. C. Perpetrate and conceal errors and fraudulent acts. D. Journalize entries and prepare financial statements.
Answer (C) is   correct. Segregation of duties is a category of the control activities component of internal control. Segregating responsibilities for authorization, recording, and asset custody reduces an employee’s opportunity to perpetrate an error or fraud and subsequently conceal it in the normal course of his/her duties.
In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a specific transaction. The accountant’s report should include a statement that A. The engagement was performed in accordance with Statements on Standards for Consulting Services. Nothing came to the accountant’s attention that caused the accountant to believe that the accounting principles violated GAAP. B. C. The guidance provided is for general use. D. Any difference in the facts, circumstances, or assumptions presented may change the report.  
Answer (D) is   correct. The addressee of the accountant’s report is the requesting entity. It should contain (1) a description of the engagement and whether it was in accordance with AICPA standards; (2) a description of the transaction; (3) a description of the accounting principles applied (including their country of origin); (4) a statement that the responsibility for proper accounting is with the preparers of the financial statements; and (5) a statement that any difference in facts, circumstances, or assumptions may change the report (AU 625).
Which of the following statements regarding the audit of negotiable notes receivable in bearer form is not correct? A. Confirmation from the debtor is an acceptable alternative to inspection. B. Notes receivable discounted with recourse need to be confirmed. C. Physical inspection of a note by the auditor does not provide conclusive evidence. D. Materiality of the amount involved is a factor considered when selecting the accounts to be confirmed.
Answer (A) is   correct. Negotiable notes in bearer form are highly liquid assets because they are negotiable by transfer of possession alone. Thus, they should be inspected to determine whether the client has custody. Confirmation also does not establish collectibility. For this purpose, the auditor should examine cash receipts records to determine promptness of interest and principal payments.
An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that A. Fourth quarter payroll taxes were properly accrued and recorded, but were not paid until early in the subsequent year. Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities. B. C. The annual provision for uncollectible accounts expense was inadequate because of worsening economic conditions. Notice of an increase in property tax rates was received by management, but was not recorded until early in the subsequent year. D.
Answer (B) is   correct. Unrealized gains from increases in the value of available-for-sale securities should be recorded directly in other comprehensive income (a component of equity). Unrealized gains from increases in the value of trading securities should be included in income. Thus, a more-than-10% increase in income could have been caused by improper accounting for available-for-sale securities.
Subsequent to the issuance of the financial statements, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next A. Issue revised pro forma financial statements taking into consideration the newly discovered information. B. Request that management disclose the newly discovered information by issuing revised financial statements. C. Give public notice that the auditor is no longer associated with financial statements. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. D.
Answer (D) is   correct. AU 561 states that, if an auditor decides that action should be taken to prevent future reliance on the report, (s)he should advise the client to make appropriate disclosures to persons who are known to be relying or who are likely to rely on the financial statements and the related report.
Which of the following is an inherent limitation in internal control? A. Lack of an audit committee. B. Incompatible duties. C. Faulty human judgment. D. Lack of segregation of duties.
Answer (C) is   correct. Human judgment is faulty, and controls may fail because of a simple error or mistake
An auditor vouched data for a sample of employees in a payroll register to approved clock card data to provide assurance that A. Segregation of duties exist between the preparation and distribution of the payroll. B. Payments to employees are computed at authorized rates. C. Internal controls relating to unclaimed payroll checks are operating effectively. D. Employees work the number of hours for which they are paid.
Answer (D) is   correct. To test that payroll events actually occurred, an auditor would vouch a sample of employee transactions recorded in the payroll-related balances to supporting documentation, including approved time cards, time tickets, and notations in personnel records. The purpose is to verify that employees worked the number of hours for which they were paid.
An auditor determines that the entity is presenting certain supplementary financial disclosures of pension information that are required by the GASB. Under these circumstances, the auditor should A. State that the audit is not being performed in accordance with generally accepted auditing standards. B. Compare the required supplementary information for consistency with the audited financial statements. C. Add an explanatory paragraph to the auditor’s report that refers to the required supplementary information. Document in the working papers that the required supplementary information is presented, but should not apply any procedures to the information. D.
Answer (B) is   correct. The auditor should apply limited procedures, which include comparing the information for consistency with audited financial statements.
An accountant has been asked to compile the financial statements of a nonpublic company on a prescribed form that omits substantially all the disclosures required by GAAP. If the prescribed form is a standard preprinted form adopted by the company’s industry trade association, and is to be transmitted only to such association, the accountant A. Need not advise the industry trade association of the omission of all disclosures. B. Should express limited assurance that the financial statements are free of material misstatements. C. Should disclose the details of the omissions in separate paragraphs of the compilation report. D. Is precluded from issuing a compilation report when all disclosures are omitted.
Answer (A) is   correct. An alternative form of the standard compilation report is used when a prescribed form or related instructions call for departure from GAAP by specifying a measurement principle not in conformity with GAAP or failing to require disclosures in accordance with GAAP. The presumption is that the information required in a prescribed form is sufficient to meet the needs of the body that designed or adopted the form. In the standard report on statements included in such a form, the accountant should indicate that the statements are in a prescribed form and that they may differ from those presented in accordance with GAAP, but (s)he need not describe the differences in the report (AR 300).
One of a CPA firm’s basic objectives is to provide professional services that conform with professional standards. Reasonable assurance of achieving this basic objective is provided through A. A system of peer review. B. A system of quality control. C. Compliance with generally accepted reporting standards. D. Continuing professional education.  
Answer (B) is   correct. A CPA firm must have a system of quality control that ensures that its personnel comply with professional standards applicable to its audit and accounting practice. However, a deficiency in an engagement, by itself, does not necessarily indicate that the firm’s system of quality control is not sufficient (QC 20). GAAS apply to individual engagements, and quality control standards apply to the firm’s practice as a whole (AU 161).
In the audit of property, plant, and equipment, the auditor tries to do all of the following except to A. Obtain an understanding of the relevant internal controls. B. Judge the reasonableness of the depreciation. C. Assess the adequacy of replacement funds. D. Determine the extent of property abandoned during the year.
Answer (C) is   correct. In performing the attest function, the external auditor is not directly concerned with evaluating the soundness of the client’s business practices or financial prospects. Whether replacement funds are adequate does not bear on the question of whether the financial statements are fairly presented in conformity with GAAP.
An auditor’s client has violated a minor requirement of its bond indenture that could result in the trustee requiring immediate payment of the principal amount due. The client refuses to seek a waiver from the bond trustee. Request for immediate payment is not considered likely. Under these circumstances, the auditor must A. Contact the bond trustee directly. B. Obtain an opinion from the company’s attorney as to the likelihood of the trustee’s enforcement of the requirement. C. Disclose the situation in the auditor’s report. D. Require classification of bonds payable as a current liability.
Answer (C) is   correct. The auditor should disclose this situation in the report because the violation could have a material effect on financial statement presentation. Even if no basis exists for modifying the opinion paragraph, disclosure in an explanatory paragraph is appropriate when the auditor wishes to emphasize a matter affecting the statements (AU 508). But SFAS 78,   Classification of Obligations That Are Callable by the Creditor, requires such information to be disclosed, for example, when the obligation has been classified as a long-term liability although the creditor has not waived or lost its right to demand immediate repayment. Hence, the auditor may also need to modify the opinion paragraph if the client has not provided adequate disclosure (AU 431).
Which of the following items tend to be the most predictable for purposes of analytical procedures applied as substantive tests? A. Transactions subject to management discretion. B. Relationships involving income statement accounts. C. Relationships involving balance sheet accounts. D. Data subject to audit testing in the prior year.
Answer (B) is   correct. According to AU 329, “Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts because income statement accounts represent transactions over a period of time, whereas balance sheet accounts represent amounts at a moment in time.”
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s A. Evaluation of all matters of continuing accounting significance. B. Opinion of any subsequent events occurring since the predecessor’s audit report was issued. C. Understanding as to the reasons for the change of auditors. D. Awareness of the consistency in the application of generally accepted accounting principles between periods.
Answer (C) is   correct. According to AU 315, the successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding issues bearing upon acceptance of the engagement. The inquiries should include specific questions regarding, among other things, the predecessor’s understanding as to the reasons for the change of auditors.
In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified? A small number of accounts may be in dispute, and the accounts receivable balance arises from sales to many customers with small balances. A. A small number of accounts may be in dispute, and the accounts receivable balance arises from sales to a few major customers. B. A substantial number of accounts may be in dispute, and the accounts receivable balance arises from sales to many customers with small balances. C. A substantial number of accounts may be in dispute, and the accounts receivable balance arises from sales to a few major customers. D
Answer (A) is   correct. AU 330 indicates that negative confirmation requests may be used to reduce audit risk to an acceptable level when (1) the assessed risk of material misstatement is low, (2) a large number of small balances is involved, and (3) the auditor has no reason to believe that the recipients of the requests are unlikely to give them consideration.
A limitation on the scope of an audit sufficient to preclude an unqualified opinion will usually result when management A.  States that the financial statements are not intended to be presented in conformity with generally accepted accounting principles. B.  Presents financial statements that are prepared in accordance with the cash receipts and disbursements basis of accounting. C. Does not make the minutes of the board of directors’ meetings available to the auditor. D. Asks the auditor to report on the balance sheet and not on the other basic financial statements.
Answer (C) is   correct. An auditor should ordinarily disclaim an opinion because of a client-imposed scope limitation
For the audit of a non-public firm, the primary objective of procedures performed to obtain an understanding of internal control is to provide an auditor with A. Information necessary to prepare flowcharts. B. Knowledge necessary to plan the audit. C. Evidential matter to use in reducing detection risk. D. A basis for modifying tests of controls.
Answer (B) is   correct. The second standard of field work states, “The auditor must obtain a sufficient understanding of the entity and its environment including its internal control to assess the risk of material misstatement of the financial statements whether due to error or fraud and to design the nature, timing, and extent of further audit procedures.”
Which of the following internal control activities would an entity most likely use to assist in satisfying the completeness assertion related to long-term investments? A. The internal auditor compares the securities in the bank safe-deposit box with recorded investments. B. The controller compares the current market prices of recorded investments with the brokers’ advices on file. C. Senior management verifies that securities in the bank safe-deposit box are registered in the entity’s name. D. The treasurer vouches the acquisition of securities by comparing brokers’ advices with canceled checks.  
Answer (A) is   correct. The items being tested consist of the assets in the safe-deposit box. This population should be compared with the records of the investments to provide assurance that the balance is complete, that is, contains all long-term investments.
If the auditor obtains satisfaction with respect to the accounts receivable balance by alternative procedures because it is impracticable to confirm accounts receivable, the auditor’s report should be unqualified and could be expected to A. Disclose that alternative procedures were used because of a client-imposed scope limitation. B. Refer to a footnote that discloses the alternative procedures. C. Not mention the alternative procedures. D. Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
Answer (C) is   correct. If the auditor cannot confirm receivables but is able to become satisfied by applying alternative procedures, there is no significant scope limitation, and the report need not refer to the omission of the procedures or the use of alternative procedures.
When compared with a nineteenth-century auditor, today’s auditor places less relative emphasis upon A. Physical observation. B. Overall tests of ratios and trends. C. Examination of documentary support. D. Confirmation.
Answer (C) is   correct. The auditor ordinarily must apply certain auditing techniques, such as confirmation of receivables (AU 330), observation of inventory (AU 331), and analytical procedures (AU 329), instead of relying completely on documentary evidence.
Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases? Is the unpaid voucher file periodically reconciled with inventory records by an employee who does not have access to purchase requisitions? A. Is an authorized purchase order required before the receiving department can accept a shipment or the vouchers payable department can record a voucher? B. C. Are purchase orders, receiving reports, and vouchers prenumbered and periodically accounted for? D. Are purchase requisitions prenumbered and independently matched with vendor invoices?
Answer (C) is   correct. The completeness assertion concerns whether all transactions and accounts that should be presented are so included. Thus, management asserts that all purchases are recorded and included in the accounts. A standard control procedure related to the completeness assertion for purchases is the use of prenumbered documents. Items missing from the numerical sequence may represent unrecorded transactions and accounts.
Management believes and the auditor is satisfied that a material loss probably will occur when pending litigation is resolved. Management is unable to make a reasonable estimate of the amount or range of the potential loss but fully discloses the situation in the notes to the financial statements. If management does not make an accrual in the financial statements, the auditor should express a(n) A. Qualified opinion due to a scope limitation. B. Qualified opinion due to a departure from GAAP. C. Unqualified opinion in a standard auditor’s report. D. Unqualified opinion with an explanatory paragraph.
Answer (C) is   correct. If the auditor concludes that sufficient evidential matter supports management’s assertions about the nature of a matter involving an uncertainty, an unmodified report is ordinarily appropriate.
Subsequent to the issuance of the financial statements, the auditor became aware of facts existing at the report date that would have affected the report had the auditor then been aware of such facts. After determining that the information is reliable, the auditor should next A. Issue revised pro forma financial statements taking into consideration the newly discovered information. B. Notify the board of directors that the auditor’s report must no longer be associated with the financial statements. Determine whether there are persons relying or likely to rely on the financial statements who would attach importance to the information. C. Request that management disclose the effects of the newly discovered information by adding a footnote to subsequently issued financial statements. D
Answer (C) is   correct. When new information that existed at the report date has been found to be reliable, appropriate action must be taken if the matter would have affected the report and was not reflected in the financial statements, provided the auditor "believes there are persons currently relying or likely to rely on the financial statements who would attach importance to the information" (AU 561). The time elapsed since issuance is a factor to be weighed.
Late in December, Tech Products Company sold its available-for-sale securities that had appreciated in value and then repurchased them the same day. The sale and purchase transactions resulted in a large gain. Without the gain the company would have reported a loss for the year. Which of the following statements with respect to the auditor is correct? A. The repurchase transaction is a sham and the auditor should insist upon a reversal or express an adverse opinion. B. The auditor should withdraw from the engagement and refuse to be associated with the company. C. A disclaimer of opinion should be expressed. D. If the sale and repurchase are disclosed, an unqualified opinion should be rendered.
Answer (D) is   correct. Because a transaction has taken place, the proper accounting treatment is to record the gain realized on the sale. Although management has indulged in obvious window-dressing, an unqualified opinion may still be rendered if disclosure is adequate to prevent the financial statements from being misleading.
The AICPA Code of Professional Conduct requires compliance with accounting principles promulgated by the body designated by the AICPA Council to establish such principles. The pronouncements considered officially established accounting principles include all of the following except A. AICPA Issues Papers. B. Interpretations issued by the FASB. C. APB Opinions. D. AICPA Accounting Research Bulletins.
Answer (A) is   correct. According to Conduct Rule 203, Accounting Principles, a member shall not express an opinion or state affirmatively that statements or other financial data conform to GAAP, or state that (s)he is unaware of any material modifications necessary for such statements or data to conform to GAAP, if they contain an unjustified departure from principles promulgated by the appropriate authority (currently the FASB). According to AU 411, AICPA Issues Papers are not considered established accounting principles. In the GAAP hierarchy, they are included in the category of other accounting literature.
Which of the following bodies promulgates standards for audits of recipients of federal awards? A. Financial Accounting Standards Board. B. Governmental Auditing Standards Board. C. Government Accountability Office. D. Governmental Accounting Standards Board.
Answer (C) is   correct. The federal agency concerned with accounting and auditing standards for U.S. government programs and services is the Government Accountability Office. The GAO promulgates generally accepted government auditing standards.
Which of the following would be least likely to be comparable between similar corporations in the same industry line of business? A. Operating cycle. B. Return on total assets before interest and taxes. C. Accounts receivable turnover. D. Earnings per share.  
Answer (D) is   correct. Similar companies in the same industry that are equally profitable may have quite different earnings per share because of differences in shares outstanding and in other aspects of their capital structures.
In building an electronic data interchange (EDI) system, what process is used to determine which elements in the entity’s computer system correspond to the standard data elements? A. Mapping. B. Decoding. C. Encryption. D. Translation.
Answer (A) is   correct. Conventions are the procedures for arranging data elements in specified formats for various accounting transactions, e.g., invoices, materials releases, and advance shipment notices. In an attempt to provide standardization and structure for EDI, organizations such as the American National Standards Institute (ANSI) have defined virtually every type of business transaction in terms of their fields and information content. These are termed transmission sets. By using such standards, communication between trading partners can be facilitated. Mapping entails determining which data elements used by the entity correspond to the standard data elements.
Which of the following factors would least likely affect the extent of the auditor’s consideration of the client’s internal controls? A. The auditor’s prior experience with client operations. B. The nature of specific relevant controls. C. The size and complexity of the client. D. The amount of time budgeted to complete the engagement.
Answer (D) is   correct. The nature, timing, and extent of procedures performed to obtain an understanding of internal control are a function of (1) the size and complexity of the entity, (2) the nature of specific relevant controls used by the entity (including its use of IT), (3) the auditor’s prior experience with entity operations, (4) the nature and extent of changes in systems and operations, and (5) the nature of the entity’s documentation of specific controls (AU 314).
An auditor should design the written audit plan so that A. The audit procedures selected will achieve specific audit objectives. B. All material transactions will be selected for substantive testing. C. Each account balance will be tested under either tests of controls or tests of transactions. D. Substantive tests prior to the balance sheet date will be minimized.
Answer (A) is   correct. In planning, the auditor should consider the nature, timing, and extent of work to be performed and should prepare a written audit plan. An audit plan sets forth in reasonable detail the audit procedures necessary to accomplish audit objectives.
When reporting on an entity’s internal control over financial reporting in compliance with generally accepted government auditing standards, an auditor should issue a written report that includes a Description of the material weaknesses and the strengths that the auditor can rely on in reducing the extent of substantive testing. A. Description of the scope of the auditor’s work in obtaining an understanding of internal control and in assessing control risk. B. Statement of negative assurance that nothing came to the auditor’s attention that caused the auditor to believe significant deficiencies were present. C. Statement of positive assurance that the results of tests indicate that internal control either can, or cannot, be relied on to reduce control risk to an acceptable level. D
Answer (B) is   correct. The reporting standards for governmental financial audits state that an auditor should describe the scope of the testing of internal control and present the results of those tests. If the tests did not exceed those necessary for a financial statement audit, a statement that the scope included obtaining an understanding of internal control and assessing control risk is sufficient. The auditor should also state whether the tests provided sufficient evidence to support an opinion on internal control. The auditor should also report significant deficiencies in internal control, separately identifying material weaknesses.
Which of the following controls is most likely to detect an invalid customer number entered into the sales order entry screen? A. A logic check. B. An access log. C. A field check. D. An error listing.
Answer (A) is   correct. A logic check (also called a validity check) tests the relationships among input items and other parts of the system, e.g., that customer 1272 on the sales order is included in the customer file.
On March 15, Year 2, Kent, CPA, issued an unqualified opinion on a client’s audited financial statements for the year ended December 31, Year 1. On May 4, Year 2, Kent’s internal inspection program disclosed that engagement personnel failed to observe the client’s physical inventory. Omission of this procedure impairs Kent’s present ability to support the unqualified opinion. If the shareholders are currently relying on the opinion, Kent should first Reissue the auditor’s report and add an explanatory paragraph describing the departure from generally accepted auditing standards. A. B. Undertake to apply alternative procedures that would provide a satisfactory basis for the unqualified opinion. C. Advise management to disclose to the shareholders that Kent’s unqualified opinion should not be relied on. D. Compensate for the omitted procedure by performing tests of controls to reduce audit risk to a sufficiently low level.
Answer (B) is   correct. If the auditor determines that the omission impairs his/her current ability to support the opinion and (s)he believes persons are currently relying or are likely to rely on the report, the auditor should promptly undertake to apply the omitted procedure or alternative procedures that would provide a satisfactory basis for the opinion
Which of the following statements describes why a properly designed and executed audit may not detect a material fraud? Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. A. The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements. B. The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole. C. An audit is designed to provide reasonable assurance of detecting material errors, but there is no similar responsibility concerning material fraud. D.
Answer (A) is   correct. “Because of (A) the concealment of fraudulent activity, including the fact that fraud often involves collusion or falsified documents, and (B) the need to apply professional judgment in the identification and evaluation of fraud risk factors and other conditions, even a properly planned and performed audit may not detect a material misstatement resulting from fraud”
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