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Which of the following combinations of procedures would an auditor most likely perform to obtain evidence about fixed asset additions? A. Observing operating activities and comparing balances with prior-period balances. B. Confirming ownership and corroborating transactions through inquiries of client personnel. C. Inspecting documents and physically examining assets. D. Recomputing calculations and obtaining written management representations.
Answer (C) is   correct. The auditor’s direct observation of fixed assets is one means of determining whether additions have been made. Tracing to the detailed records determines whether additions have been recorded. Inspection of deeds, lease agreements, insurance policies, invoices, canceled checks, and tax notices may also reveal additions.
The independent auditor’s plan for an audit in accordance with GAAS is influenced by the possibility of material misstatements. The auditor will therefore conduct the audit A. With an attitude of professional skepticism. B. With the attitude that all evidence in support of assertions must be conclusive. C. On the assumption of the unquestioned honesty of management. D. On the assumption that management is dishonest.
Answer (A) 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).
Which of the following procedures is an auditor most likely to include in the planning phase of a financial statement audit? A. Obtain an understanding of the entity’s risk assessment process. B. Perform cutoff tests of the entity’s sales and purchases. C. Evaluate the reasonableness of the entity’s accounting estimates. D. Identify specific controls designed to prevent fraud.
Answer (A) is   correct. According to the second standard of field work, “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.” An auditor must obtain an understanding of the entity’s risk assessment process as well as the other components of internal control when planning a financial statement audit (AU 314).
Which of the following statements concerning the parallel simulation approach when testing a computerized accounting system is false? A. Only real, not fictitious, transactions are reprocessed. B. It tends to be a very costly method. C. Transactions from throughout the period may be reprocessed. D. Transactions are reprocessed only by the client’s computer programs.
Answer (D) is   correct. Parallel simulation is a test of the controls in a client’s application program. An auditor-developed program, not the client’s program, is used to process actual client data and compare the outputs and exceptions report with those of the client’s application program. If the client’s programmed controls are operating effectively, the two sets of results should be reconcilable.
An auditor concludes that a substantive auditing procedure considered necessary during the prior year’s audit was omitted and there are persons currently relying on the auditor’s report. The auditor most likely would promptly apply the omitted procedure if A. The omission of the procedure impairs the auditor’s present ability to support the previously expressed opinion. B. Control risk was assessed at a high level for the relevant financial statement assertions. C. The auditor’s working papers will be subject to post-issuance review in connection with a peer review program. D. The results of other procedures that were applied tend to compensate for the one omitted.
Answer (A) 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 (AU 390).
A CPA is engaged to examine management’s assertion that the entity’s schedule of investment returns is presented in accordance with specific criteria. In performing this engagement, the CPA should comply with the provisions of A. Statements on Standards for Accounting and Review Services (SSARS). B. Statements on Auditing Standards (SAS). C. Statements on Standards for Consulting Services (SSCS). D. Statements on Standards for Attestation Engagements (SSAE).
Answer (D) is   correct. The AICPA’s Statements on Standards for Attestation Engagements (SSAE) cover attest engagements. Examining management’s assertion that the entity’s schedule of investment returns is an example of an examination engagement that falls under the guidelines of the SSAE.
Which of the following is a term for an attest engagement in which a CPA assesses a client’s commercial Internet site for compliance with principles such as online privacy, security, and confidentiality? A. TechSafe. B. EDIFACT. C. WebTrust. D. ElectroNet.
Answer (C) is   correct. The WebTrust seal provides assurance about compliance with the principles of online privacy, security, processing integrity, availability, and confidentiality. It is a modular service that allows the practitioner to express an opinion about compliance with individual principles or combinations of principles. Online privacy is the protection of the collection, use, disclosure, and retention of personal information. Security is the protection against unauthorized access to the system (both physical and logical). Processing integrity is the assurance that system processing is complete, accurate, timely, and authorized. Availability is the assertion that the system is available for operation and used as agreed. Confidentiality is the protection of information from being viewed by non-authorized parties.
May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles but plans to obtain the required level of knowledge before compiling or reviewing the financial statements?     Compilation   Review A.       No            Yes B.       Yes           Yes C.        No            No D.        Yes          No
Answer (B) is   correct. The accountant may accept a compilation or review engagement for an entity in an industry with which the accountant has no previous experience. Acceptance, however, places upon him/her a responsibility to obtain the required level of knowledge prior to performing the engagement.
Analytical procedures performed in the overall review stage of an audit suggest that several accounts have unexpected relationships. The results of these procedures most likely would indicate that A. Additional tests of details are required. B. Irregularities exist among the relevant account balances. C. The communication with the audit committee should be revised. D. Internal control activities are not operating effectively.
Answer (A) is   correct. Analytical procedures are required to be performed in the final review stage of the audit. They assist in assessing the conclusions reached and in evaluating the overall financial presentation. When analytical procedures have unexpected results, the auditor should investigate the causes. Thus, additional tests of details should be performed to gather additional evidence (AU 329).
Usually, the decision to notify parties outside the client’s organization regarding an illegal act is the responsibility of the A. Independent auditor. B. Outside legal counsel. C. Internal auditor. D. Management.
Answer (D) is   correct. Deciding whether to contact parties other than personnel within the client’s organization about an illegal act is the responsibility of management. However, the auditor’s responsibility to report externally may be expanded in special engagements. For example, in audits of governmental units in accordance with the Single Audit Act, the auditor may be required to report on the unit’s compliance with laws and regulations applicable to federal financial assistance programs (AU 317).
An auditor would consider a cashier’s job description to contain compatible duties if the cashier receives remittances from the mail room and also prepares the A. Monthly bank reconciliation. B. Remittance advices. C. Daily deposit slip. D. Prelist of individual checks.
Answer (C) is   correct. Preparing the bank deposit slip is a part of the custodial function, which is the primary responsibility of a cashier. The cashier is an assistant to the treasurer and thus performs an asset custody function. The preparation of a bank deposit slip is an integral part of the custodial function, along with the depositing of remittances daily at a local bank.
Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements? A. Senior management has an excessive interest in upgrading the entity’s information technology capabilities. Senior financial management participates in the selection of accounting principles and the determination of significant estimates. B. Related party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm. C. D. Supporting accounting records and files that should be readily available are not produced promptly when requested.
Answer (D) is   correct. An auditor must assess fraud risk throughout the audit. Conditions observed during field work that may change or support the assessment include difficult or unusual relationship with management, for example, denial of access to records, unusual delays in providing requested information, and unwillingness to facilitate access to computer files (AU 316).
The financial statements of KCP America, a U.S. entity, are prepared for inclusion in the consolidated financial statements of its non-U.S. parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent’s country and are for use only in that country. Which is an appropriate report on the financial statements for KCP America’s auditor to issue? I. A U.S.-style report (unmodified) II. A U.S.-style report modified to report on the accounting principles of the parent’s country III. The report form of the parent’s country A. II only. B. II and III only. C. I, II, and III. D. I only.
Answer (B) is   correct. According to AU 534, if financial statements prepared in conformity with accounting principles generally accepted in another country are prepared for use only outside the U.S., the auditor may use either a U.S.-style report modified to report on the accounting principles of the other country or, if appropriate, the report form of the other country. An unmodified U.S.-style report is inappropriate because of the departures from GAAP contained in statements prepared in conformity with principles generally accepted in the other country.
Which of the following procedures would an entity most likely include in its computer disaster recovery plan? A. Translate data for storage purposes with a cryptographic secret code. B. Store duplicate copies of critical files in a location away from the computer center. C. Maintain a listing of all entity passwords with the network manager. D. Develop an auxiliary power supply to provide uninterrupted electricity.
Answer (B) is   correct. Off-site storage of duplicate copies of critical files protects them from a fire or other disaster at the computing facility. The procedure is part of an overall disaster recovery plan
On August 13, a CPA dated the audit report on financial statements for the year ended June 30. On August 27, an event came to the CPA’s attention that should be disclosed in the notes to the financial statements. The event was properly disclosed by the entity, but the CPA decided not to dual-date the auditor’s report and dated the report August 27. Under these circumstances, the CPA was taking responsibility for A. All subsequent events that occurred through August 13 and the specific subsequent event disclosed by the entity. B. Only the subsequent events that occurred through August 13. C. All subsequent events that occurred through August 27. D. Only the specific subsequent event disclosed by the entity.
Answer (C) is   correct. Subsequent events are material events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements; they require adjustment or disclosure in the financial statements. If the auditor dates the report August 27, the auditor is assuming responsibility for all subsequent events that occurred through August 27.
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit? A. Comparing the current-year account balances for conformity with predictable patterns. B. Scanning accounts receivable for amounts over credit limits. C. Confirming bank balances with the financial institutions. D. Recalculating inventory extensions of physical inventory counts.
Answer (A) is   correct. The auditor performs analytical procedures during the planning stage of the audit. These procedures include the auditor developing expectations of recorded balances and comparing these predictions to financial information from comparable prior period(s).
For several years, a client’s physical inventory count has been lower than the books have shown at the time of the count, and downward adjustments of the inventory account have been required. Contributing to the inventory problem could be weaknesses in internal control that led to the failure to record some A. Cash purchases. B. Sales returns received. C. Purchases returned to vendors. D. Sales discounts allowed
Answer (C) is   correct. Purchases returned to the vendor but not recorded overstate inventory records. The goods are reflected in inventory but are not on hand.
Kelly Corporation needs an internal communication network that provides high speed communication among nodes. Which of the following is appropriate for Kelly? A. Local area network (LAN). B. Wide area network (WAN). C. File server. D. Value-added network (VAN).
Answer (A) is   correct. Local area networks are privately owned networks that provide high speed communication among nodes. They are usually restricted to limited areas, such as a particular floor of an office building.
An entity engaged a CPA to determine whether the client’s web sites comply with defined WebTrust principles and criteria. In performing this engagement, the CPA should apply the provisions of A. Statements on Auditing Standards. B. Statements on Standards for Attestation Engagements. C. Statements on Assurance Standards. D. Statements on Standards for Management Consulting Services.
Answer (B) is   correct. An attest engagement involves reporting on subject matter, or an assurance about subject matter, that is the responsibility of another party. When providing WebTrust assurance, the accountant must address written assertions by management. Thus, Statements on Standards for Attestation Engagements are applicable.
To obtain evidential matter about the effectiveness of control risk, an auditor ordinarily selects tests from a variety of techniques, including A. Confirmation. B. Reperformance. C. Analysis. D. Comparison.  
Answer (B) is   correct. According to AU 314, the auditor selects tests of controls from a variety of techniques such as inquiry, observation, inspection, and reperformance of a control that pertains to an assertion. No one specific test of controls is always necessary, applicable, or equally effective in every circumstance.
Which of the following activities is most likely to prevent the improper disposition of equipment? A. The use of serial numbers to identify equipment that could be sold. A separation of duties between those authorized to dispose of equipment and those authorized to approve removal work orders. B. C. Periodic comparison of removal work orders with authorizing documentation. D. A periodic analysis of the scrap sales and the repairs and maintenance accounts.
Answer (B) is   correct. Segregation of duties reduces the opportunity for an individual both to perpetrate and to conceal errors or fraud. Accordingly, the authorization, recording, and asset custody functions should be separated (AU 314). Thus, the same individual should not approve removal work orders (authorization) and dispose of equipment (asset custody).
Which of the following auditing procedures is ordinarily performed last? A. Confirming accounts payable. B. Testing of the purchasing function. C. Obtaining a management representation letter. D. Reading of the minutes of the directors’ meetings.
Answer (C) is   correct. According to AU 333, the written representations by management should be dated as of the date of the auditor’s report because the auditor is concerned with events occurring through that date that may require adjustment to or disclosure in the financial statements.
For effective internal control purposes, the vouchers payable department ordinarily should A. Establish the agreement of the vendor’s invoice with the receiving report and purchase order. B. Stamp, perforate, or otherwise cancel supporting documentation after payment is mailed. C. Ascertain that each requisition is approved as to price, quantity, and quality by an authorized employee. D. Obliterate the quantity ordered on the receiving department copy of the purchase order.
Answer (A) is   correct. A voucher should not be prepared for payment until the vendor’s invoice has been matched against the corresponding purchase order and receiving report. This procedure provides assurance that a valid transaction has occurred and that the parties have agreed on the terms, such as price and quantity.
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they provide a scientific basis for planning the A. Expected population deviation rate. B. Risk of assessing control risk too low. C. Sample size. D. Tolerable rate.
Answer (C) is   correct. Statistical theory permits the auditor to measure sampling risk and to restrict it to an acceptable level. Statistical methods determine the sample size that will accomplish the auditor’s objectives.
In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if A. The population has highly variable recorded amounts. B. The standard deviation of recorded amounts is relatively small. C. The auditor’s estimated tolerable misstatement is extremely small. D. Probability-proportional-to-size (PPS) sampling is used.
Answer (A) is   correct. The primary objective of stratification is to reduce the effect of high variability by dividing the population into subpopulations. Reducing the effect of the variance within each subpopulation allows the auditor to sample a smaller number of items while holding precision and the confidence level constant.
In the confirmation of accounts receivable, the auditor would most likely A. Request confirmation of a sample of the inactive accounts. B. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables. C. Require that confirmation requests be sent within 1 month of the fiscal year-end. D. Require confirmation of all receivables from agencies of the federal government.
Answer (A) is   correct. When the combined assessed level of inherent and control risk is at an acceptably low level, the auditor will confirm only a sample of receivables. The sample should include inactive or past due accounts. If such accounts are to be regarded as assets, acknowledgment of the debts must be obtained. Confirming inactive accounts may also detect lapping or establish what amounts are in dispute.
Which of the following best describes the reference to the expression “taken as a whole” in the fourth generally accepted auditing standard of reporting? A. It applies equally to each item in each financial statement. B. It applies only to a complete set of financial statements. C. It applies equally to a complete set of financial statements and to an individual financial statement. D. It applies equally to each material item in each financial statement.
Answer (C) is   correct. The phrase “taken as a whole” applies equally to a set of financial statements and to an individual financial statement, e.g., to a balance sheet. The auditor may express an unqualified opinion on one of the financial statements and express a qualified or adverse opinion or disclaim an opinion on another if the circumstances call for such treatment (AU 508).
If a client will not permit inquiry of outside legal counsel, the auditor’s report ordinarily will contain a(n) A. Adverse opinion. B. Unqualified opinion with a separate explanatory paragraph. C. Qualified opinion. D. Disclaimer of opinion.
Answer (D) is   correct. A disclaimer of opinion states that the auditor does not express an opinion on the financial statements. It is appropriate when the auditor has not performed an audit sufficient in scope to enable him or her to form an opinion. The client has imposed a scope limitation by refusing to allow performance of a procedure that the auditor considers necessary to the audit.
In connection with the audit of financial statements, an independent auditor could be responsible for failure to detect a material fraud if A. The fraud was perpetrated by one client employee, who circumvented existing internal control. The auditors performing important parts of the work failed to discover a personal relationship between the treasurer and the cashier. B. C. Statistical sampling techniques were not used on the audit engagement. D. The auditor planned the work in a hasty and inefficient manner.
Answer (D) is   correct. If the auditor had planned the work in a hasty and inefficient manner, thus violating the first standard of field work (adequate planning and supervision) as well as the third general standard (due professional care), (s)he would be responsible for failure to detect a material fraud.
Which of the following best describes what the auditor means by the rate of occurrence in an attribute sampling plan? A. The estimated frequency with which a certain characteristic occurs within a population. B. The dollar range within which the true population total can be expected to fall. C. The number of deviations that can be estimated to be contained in the sample. D. The degree of confidence that the sample is representative of the population.  
Answer (A) is   correct. Attribute sampling is used to estimate the rate of occurrence of a specific attribute in a population, e.g., the number of invoices paid twice by a client. In effect, the auditor attempts to estimate the number (or percentage) of times this specified deviation occurred in the population based upon results from the sample.
A client who recently installed a new accounts payable system assigned employees a user identification code (UIC) and a separate password. Each UIC is a person’s name, and the individual’s password is the same as the UIC. Users are not required to change their passwords at initial log-in nor do passwords ever expire. Which of the following statements does not reflect a limitation of the client’s computer-access control? A. Employees are not required to take regular vacations. B. Employees can circumvent procedures to segregate duties. C. Employees are not required to change passwords. D. Employees can easily guess fellow employees’ passwords
Answer (A) is   correct. To be effective, passwords should consist of random letters, symbols, and numbers. They should not contain words or phrases which are easily guessed. Proper user authentication by means of passwords requires procedures to ensure that the valid passwords generated are known only by appropriate individuals. Moreover, passwords should be changed frequently so that the maximum retention period (the period during which they may be compromised) is relatively short. However, a minimum retention period should be required so that users cannot change passwords back to their old, convenient forms. Another weakness in access control is that different passwords are not required to perform different functions, e.g., to obtain access, to read certain files, or to update certain files. Use of separate passwords is a means of segregating duties. However, the password security system is unrelated to the absence of a requirement to take vacations. Nevertheless, such requirement may be appropriate for personnel in a position to embezzle funds.
The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A. Detect kiting activities that may otherwise not be discovered. B. Request information about contingent liabilities and secured transactions. C. Provide the data necessary to prepare a proof of cash. D. Corroborate information regarding deposit and loan balances.
Answer (D) is   correct. The AICPA Standard Form to Confirm Account Balance Information with Financial Institutions is used to confirm specifically listed deposit and loan balances. The form confirms the account name, account number, interest rate, and balance for deposits.
A CPA is most likely to refer to one or more of the three general auditing standards in determining A. Requirements for a sufficient understanding of internal control. B. The nature of the CPA’s report qualification. C. Whether the CPA should undertake an audit engagement. D. The scope of the CPA’s auditing procedures.
Answer (C) is   correct. The three general standards require the auditor 1. To have adequate technical training and proficiency as an auditor, 2. To have an independent mental attitude, and 3. To use due professional care in planning and performing the audit and preparing the report. An auditor who cannot meet any one of these requirements should not accept the audit engagement. Conduct Rule 201, General Standards , requires an AICPA member to “undertake only those professional services that the member or the member’s firm can reasonably expect to be completed with professional competence.”
Due to a scope limitation, an auditor disclaimed an opinion on the financial statements taken as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is A. Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion. B. Appropriate provided the auditor’s scope paragraph adequately describes the scope limitation. C. Appropriate provided the statement is in a separate paragraph preceding the disclaimer of opinion paragraph. D. Not appropriate because the auditor is prohibited from reporting on only one basic financial statement.
Answer (A) is   correct. “Piecemeal opinions (expressions of an opinion as to certain identified items in a financial statement) should not be expressed when the auditor has disclaimed an opinion or has expressed an adverse opinion on the financial statements taken as a whole because piecemeal opinions tend to overshadow or contradict a disclaimer of opinion or an adverse opinion” (AU 508).
The predecessor auditor, who is satisfied after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative financial statements. The predecessor auditor’s report should A. Refer to the report of the successor auditor only in the scope paragraph. B. Not refer to the report or the work of the successor auditor. C. Refer to the work of the successor auditor in the scope and opinion paragraphs. D. Refer to both the work and the report of the successor auditor only in the opinion paragraph.
Answer (B) is   correct. A predecessor auditor who has been asked to reissue his/her report should (1) read the current-period statements, (2) compare the statements (s)he reported on with other statements to be presented comparatively, (3) obtain a letter of representations from the successor auditor, and (4) obtain a representation letter from management. The predecessor auditor may also wish to consider the professional reputation and standing of the successor auditor and other matters discussed in AU 543, but the reissued report should not refer to the report or work of the successor auditor.
In testing controls over cash disbursements, an auditor most likely would determine that the person who signs checks also A. Returns the checks to accounts payable. B. Is responsible for mailing the checks. C. Reviews the monthly bank reconciliation. D. Is denied access to the supporting documents.
Answer (B) is   correct. The person responsible for signing the checks should also be responsible for assuring that the checks are mailed. This precaution assures limited access to the checks once they are signed.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls A.  Contains proportionately fewer deviations from prescribed internal controls than exist in the balance or class as a whole. B.  Contains misstatements that could be material to the financial statements when aggregated with misstatements in other account balances or transactions classes. C.  Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of internal control justifies such an assessment. C. D. Does not support the tolerable misstatement for some or all of management’s assertions.
Answer (C) is   correct. According to AU 350, one aspect of sampling risk in performing tests of controls is the risk of assessing control risk too high. It is the risk that the assessed level of control risk based on the sample is greater than the true operating effectiveness of the control.
An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting A. Shipping and receiving activities. B. Cash receipts and accounts receivable. C. Opening and closing inventory balances. D. Cutoffs of sales and purchases.  
Answer (B) is   correct. Cash receipts and accounts receivable have a direct relationship with sales. A cash sale results in a debit to cash and a credit to sales. A sale on account results in a debit to accounts receivable and a credit to sales. Thus, evidence related to cash receipts and accounts receivable provides assurances about sales.
Which of the following statements is not true of the test data approach to testing an accounting system? A. The test data must consist of all possible valid and invalid conditions. B. Test data are processed by the client’s computer programs under the auditor’s control. C. The test data need consist of only those valid and invalid conditions that interest the auditor. D. Only one transaction of each type need be tested.
Answer (A) is   correct. The test data approach includes preparation of dummy transactions by the auditor. These transactions are processed by the client’s computer programs under the auditor’s control. The test data consist of one transaction for each valid and invalid condition that interests the auditor. Consequently, the test data need not consist of all possible valid and invalid conditions.
Comparative financial statements include the financial statements of a prior period that were audited by a predecessor auditor whose report is not presented. If the predecessor auditor’s report was other than a standard report, the successor auditor must A. Express an opinion on the current year statements alone and not refer to the prior year statements. B. Issue a standard comparative audit report indicating the division of responsibility. C. Obtain written approval from the predecessor auditor to include the prior year’s financial statements. D. Disclose the reasons for any modification of the predecessor auditor’s report.
Answer (D) is   correct. If the financial statements of a prior period have been audited by a predecessor auditor whose report is not presented, the successor should indicate in the introductory paragraph (1) that the prior period statements were audited by another auditor; (2) the date of his/her report; (3) the type of report issued; and, (4) if the report was other than a standard report, the substantive reasons therefor (AU 508).
When audited financial statements are presented in a document containing other information, the auditor A. Has an obligation to perform auditing procedures to corroborate the other information. B. Has no responsibility for the other information because it is not part of the basic financial statements. C. Is required to express an “except for” (qualified) opinion if the other information has a material misstatement of fact. D. Should read the other information to consider whether it is inconsistent with the audited financial statements.
Answer (D) is   correct. AU 550 states that the auditor should read the other information and consider whether it and its manner of presentation are consistent with the financial statements on which (s)he is expressing an opinion or whether it contains a material misstatement. AU 550 is not applicable, however, to registration statements.
The purpose of segregating the duties of hiring personnel and distributing payroll checks is to separate the A. Authorization of transactions from the custody of related assets. B. Human resources function from the controllership function. C. Operational responsibility from the record-keeping responsibility. D. Administrative controls from the internal accounting controls.
Answer (A) is   correct. In principle, the payroll function should be divided into its authorization, recording, and custody functions. Authorization of hiring, wage rates, and deductions is provided by personnel. Authorization of hours worked (executed by employees) is provided by production. Based upon these authorizations, accounting calculates and records the payroll. Based on the calculated amounts, the treasurer prepares and distributes payroll checks.
A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor’s    Engagement Letter    Audit Documentation A.         No                            No B.         No                           Yes C.         Yes                          Yes D.         Yes                          No
Answer (B) is   correct. The predecessor’s engagement letter is not useful for the successor auditor in evaluating whether to accept a new client. However, the audit documentation provides useful information for a successor auditor in the process. Therefore, the client should comply with the auditor’s request for the predecessor’s audit documentation upon gaining the client’s authorization.
A financial forecast consists of prospective financial statements that present an entity’s expected financial position, results of operations, and cash flows. A forecast A. Presents estimates given one or more hypothetical assumptions. B. Is based on the most conservative estimates. C. Unlike a projection, may contain a range. D. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken.
Answer (D) is   correct. According to AT 301, a financial forecast consists of prospective financial statements “that present, to the best of the responsible party’s knowledge and belief, an entity’s expected financial position, results of operations, and cash flows.” A forecast is based on “the responsible party’s assumptions reflecting conditions it expects to exist and the course of action it expects to take.”
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding A. The degree of cooperation the predecessor received concerning the inquiry of the client’s lawyer. B. Disagreements the predecessor had with the client concerning auditing procedures and accounting principles. C. The predecessor’s assessments of inherent risk and judgments about materiality. D. The predecessor’s evaluation of matters of continuing accounting significance.
Answer (B) is   correct. The successor auditor should make specific and reasonable inquiries of the predecessor auditor that include specific questions regarding, among other things, disagreements with management as to accounting principles and auditing procedures.
The scope of an audit is not restricted when an attorney’s response to an auditor as a result of a client’s letter of audit inquiry limits the response to A. The probable outcome of asserted claims and pending or threatened litigation. B. The attorney’s opinion of the entity’s historical experience in recent similar litigation. C. Matters to which the attorney has given substantive attention in the form of legal representation. D. An evaluation of the likelihood of an unfavorable outcome of the matters disclosed by the entity.
Answer (C) is   correct. AU 337 states that two limitations on the lawyer’s response will not be considered scope limitations. The response may be limited to matters to which the lawyer has given substantive attention on behalf of the client in the form of legal consultation or representation. Also, if the lawyer and auditor have reached an understanding as to the limits of materiality, the response may be limited to matters that are individually or collectively material.
When an auditor increases the planned assessed level of control risk because certain controls were determined to be ineffective, the auditor will most likely increase the A. Level of inherent risk. B. Level of detection risk. C. Extent of tests of controls. D. Extent of tests of details.
Answer (D) is   correct. An auditor considers internal control to assess control risk. The greater (lower) the assessed level of control risk, the lower (greater) the acceptable level of detection risk. In turn, the acceptable level of detection risk affects substantive testing. For example, as the acceptable level of detection risk decreases, the auditor changes the nature, timing, or extent of substantive tests to increase the assurance they provide.
When the client fails to include information that is necessary for the fair presentation of financial statements in the body of the statements or in the related footnotes, it is the responsibility of the auditor to present the information, if practicable, in the auditor’s report and express A. An adverse opinion or a disclaimer of opinion. B. A qualified or an adverse opinion. C. A qualified opinion or a disclaimer of opinion. D. A qualified or an unqualified opinion
Answer (B) is   correct. Presenting statements in conformity with GAAP includes adequate disclosure of material matters related to the form, arrangement, and content of the statements and notes. If management omits information required by GAAP, the auditor should provide the necessary disclosures in the report, if practicable, and express a qualified or adverse opinion (AU 431).
Analytical procedures performed in the final review stage of an audit generally would include A. Reassessing the factors that assisted the auditor in deciding on preliminary materiality levels and audit risk. B. Summarizing uncorrected misstatements specifically identified through tests of details of transactions and balances. C. Calculating projected uncorrected misstatements estimated through audit sampling techniques. D. Considering the adequacy of the evidence gathered in response to unexpected balances identified in planning.
Answer (D) is   correct. To be effective, analytical procedures in the overall review stage should be performed by a manager or partner having a comprehensive knowledge of the client’s business and industry. This manager or partner should read the financial statements and notes and consider (1) the adequacy of evidence gathered in response to unusual or unexpected balances identified in planning or conducting the audit, and (2) unusual or unexpected balances or relationships not previously identified (AU 329).
In connection with the examination of bonds payable, an auditor would expect to find in a trust indenture the A. Company’s debt-to-equity ratio at the time of issuance. B. Names of the original subscribers to the bond issue. C. Issue date and maturity date of the bond. D. Yield to maturity of the bonds issued.
Answer (C) is   correct. A bond trust indenture is the contractual agreement between the bondholders and the bond issuer. It contains the date of issue and the date of maturity of the bond issue as well as the amount of the bonds, interest rates, payment dates, descriptions of collateral, provisions for conversion or retirement, trustee duties, sinking-fund requirements, and restrictions on the borrower.
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