at-testbank-wiley-practice.pdf

lOMoARcPSD|20462347 AT Testbank Wiley - practice Accountancy (University of the East (Philippines)) Studocu is not sponsored or endorsed by any college or university Downloaded by Veronika Blair ([email protected]) ...

lOMoARcPSD|20462347 AT Testbank Wiley - practice Accountancy (University of the East (Philippines)) Studocu is not sponsored or endorsed by any college or university Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 AUDITING AND ATTESTATION PROBLEMS AND SOLUTIONS The Auditing and Attestation Exam is scheduled for four and one-half hours. Based on information released by the AICPA, candidates should expect three multiple-choice testlets of approximately thirty questions each, and two simulations. The Uniform CPA Examination Content Specifications appear in Volume 1, Outlines and Study Guides. Module 1/Engagement Planning (ENPL) No. of Page no. minutes Problem Answer 122 Multiple-Choice 9 26 3 Essay Questions: 1. Other Auditors and Planning 15-25 20 39 2. Fraud 15-25 20 39 3. Planning Checklist—Computer Refurbishing Company 15-25 20 40 2 Simulation Problems 22 41 Module 2/Internal Control (IC) No. of Page no. minutes Problem Answer 137 Multiple-Choice 44 62 3 Essay Questions: 1. Billing and Cash Receipts Weaknesses 25-35 56 77 2. Internal Control Questionnaire—Payroll 15-25 56 77 3. Communicating with the Audit Committee 25-35 56 78 2 Simulation Problems 58 80 Module 3/Evidence (EVID) No. of Page no. minutes Problem Answer 181 Multiple-Choice 83 108 6 Essay Questions: 1. Audit Program for Accounts Payable 15-25 100 129 2. Audit Program—Accounts Receivable 15-25 100 129 3. Analytical Procedures 15-25 100 129 4. Litigation 15-25 100 130 5. Going Concern 25-35 101 130 6. Reconciling Confirmation Replies 25-35 101 131 3 Simulation Problems 104 133 Module 4/Reporting (REPT) No. of Page no. minutes Problem Answer 179 Multiple-Choice 137 161 5 Essay Questions: 1. Analyze a Compilation Report 15-25 155 179 2. Report Deficiencies 15-25 155 179 3. Reports on Prospective Financial Statements 15-25 155 179 4. Analyze Audit Report 15-25 156 180 5. Compliance Report 15-25 156 180 1 Simulation Problem 158 181 Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 8 CH 2 AUDITING AND ATTESTATION Module 5/Audit Sampling (AUDS) No. of Page no. minutes Problem Answer 58 Multiple-Choice 184 194 3 Essay Questions: 1. Attribute Sampling 15-25 190 201 2. Steps in a Substantive Sampling Plan 15-25 190 201 3. Analyze Sampling Plan 15-25 190 201 2 Simulation Problems 191 203 Module 6/Auditing with Technology (ATEC) No. of Page no. minutes Problem Answer 33 Multiple-Choice 205 210 4 Essay Questions: 1. Using Microcomputer Software 15-25 208 214 2. Computerized Audit Procedures—Inventory 15-25 208 214 3. Computer Assisted Audit Techniques 15-25 208 215 4. Computerized Audit Tools 15-25 208 215 1 Simulation Problem 209 216 Simulations Page no. Auditing and Attestation Appendix A Sample Examination Page no. Auditing and Attestation Appendix B AICPA Sample Testlets Page no. Auditing and Attestation Appendix C Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 MODULE 1 ENGAGEMENT PLANNING 9 MULTIPLE-CHOICE QUESTIONS (1-122) 8. Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about 1. As the acceptable level of detection risk decreases, an materiality? auditor may a. The anticipated sample size of the planned sub- a. Reduce substantive testing by relying on the stantive tests. assessments of inherent risk and control risk. b. The entity’s annualized interim financial state- b. Postpone the planned timing of substantive tests ments. from interim dates to the year-end. c. The results of the internal control questionnaire. c. Eliminate the assessed level of inherent risk from d. The contents of the management representation consideration as a planning factor. letter. d. Lower the assessed level of control risk from the maximum level to below the maximum. 9. Which of the following statements is not correct about materiality? 2. The risk that an auditor will conclude, based on sub- a. The concept of materiality recognizes that some stantive tests, that a material misstatement does not exist in matters are important for fair presentation of fi- an account balance when, in fact, such misstatement does nancial statements in conformity with GAAP, exist is referred to as while other matters are not important. a. Sampling risk. b. An auditor considers materiality for planning pur- b. Detection risk. poses in terms of the largest aggregate level of c. Nonsampling risk. misstatements that could be material to any one of d. Inherent risk. the financial statements. c. Materiality judgments are made in light of sur- 3. As the acceptable level of detection risk decreases, the rounding circumstances and necessarily involve assurance directly provided from both quantitative and qualitative judgments. a. Substantive tests should increase. d. An auditor’s consideration of materiality is influ- b. Substantive tests should decrease. enced by the auditor’s perception of the needs of a c. Tests of controls should increase. reasonable person who will rely on the financial d. Tests of controls should decrease. statements. 4. Which of the following audit risk components may be 10. Which of the following elements underlies the ap- assessed in nonquantitative terms? plication of generally accepted auditing standards, particu- Control risk Detection risk Inherent risk larly the standards of fieldwork and reporting? a. Yes Yes No a. Internal control. b. Yes No Yes b. Corroborating evidence. c. Yes Yes Yes c. Quality control. d. No Yes Yes d. Materiality and relative risk. 5. Inherent risk and control risk differ from detection risk 11. In considering materiality for planning purposes, an in that they auditor believes that misstatements aggregating $10,000 a. Arise from the misapplication of auditing proce- would have a material effect on an entity’s income state- dures. ment, but that misstatements would have to aggregate b. May be assessed in either quantitative or non- $20,000 to materially affect the balance sheet. Ordinarily, it quantitative terms. would be appropriate to design auditing procedures that c. Exist independently of the financial statement au- would be expected to detect misstatements that aggregate dit. a. $10,000 d. Can be changed at the auditor’s discretion. b. $15,000 c. $20,000 6. On the basis of the audit evidence gathered and d. $30,000 evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an 12. Which of the following would an auditor most likely overall audit risk level that is substantially the same as the use in determining the auditor’s preliminary judgment about planned audit risk level, the auditor would materiality? a. Decrease substantive testing. a. The results of the initial assessment of control risk. b. Decrease detection risk. b. The anticipated sample size for planned substan- c. Increase inherent risk. tive tests. d. Increase materiality levels. c. The entity’s financial statements of the prior year. d. The assertions that are embodied in the financial 7. Relationship between control risk and detection risk is statements. ordinarily a. Parallel. 13. Holding other planning considerations equal, a de- b. Inverse. crease in the amount of misstatement in a class of transac- c. Direct. tions that an auditor could tolerate most likely would cause d. Equal. the auditor to a. Apply the planned substantive tests prior to the balance sheet date. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 10 MODULE 1 ENGAGEMENT PLANNING b. Perform the planned auditing procedures closer to 19. Audits of financial statements are designed to obtain the balance sheet date. assurance of detecting misstatement due to c. Increase the assessed level of control risk for rele- Fraudulent Misappropriation vant financial statement assertions. Errors financial reporting of assets d. Decrease the extent of auditing procedures to be a. Yes Yes Yes applied to the class of transactions. b. Yes Yes No c. Yes No Yes 14. When issuing an unqualified opinion, the auditor who d. No Yes No evaluates the audit findings should be satisfied that the a. Amount of known misstatement is documented in 20. An auditor is unable to obtain absolute assurance that the management representation letter. misstatements due to fraud will be detected for all of the b. Estimate of the total likely misstatement is less following except than a material amount. a. Employee collusion. c. Amount of known misstatement is acknowledged b. Falsified documentation. and recorded by the client. c. Need to apply professional judgment in evaluating d. Estimate of the total likely misstatement includes fraud risk factors. the adjusting entries already recorded by the client. d. Professional skepticism. 15. Which of the following is an example of fraudulent 21. The most difficult type of misstatement to detect is financial reporting? fraud based on a. Company management changes inventory count a. The overrecording of transactions. tags and overstates ending inventory, while un- b. The nonrecording of transactions. derstating cost of goods sold. c. Recorded transactions in subsidiaries. b. The treasurer diverts customer payments to his d. Related-party receivables. personal due, concealing his actions by debiting an expense account, thus overstating expenses. 22. When considering fraud risk factors relating to man- c. An employee steals inventory and the “shrinkage” agement’s characteristics, which of the following is least is recorded in cost of goods sold. likely to indicate a risk of possible misstatement due to d. An employee steals small tools from the company fraud? and neglects to return them; the cost is reported as a. Failure to correct known reportable conditions on a a miscellaneous operating expense. timely basis. b. Nonfinancial management’s preoccupation with 16. Which of the following best describes what is meant the selection of accounting principles. by the term “fraud risk factor?” c. Significant portion of management’s compensation a. Factors whose presence indicates that the risk of represented by bonuses based upon achieving fraud is high. unduly aggressive operating results. b. Factors whose presence often have been observed d. Use of unusually conservative accounting prac- in circumstances where frauds have occurred. tices. c. Factors whose presence requires modification of planned audit procedures. 23. Which of the following conditions identified during d. Reportable conditions identified during an audit. fieldwork of an audit is most likely to affect the auditor’s assessment of the risk of misstatement due to fraud? 17. Which of the following is correct concerning require- a. Checks for significant amounts outstanding at ments about auditor communications about fraud? year-end. a. Fraud that involves senior management should be b. Computer generated documents. reported directly to the audit committee regardless c. Missing documents. of the amount involved. d. Year-end adjusting journal entries. b. Fraud with a material effect on the financial state- ments should be reported directly by the auditor to 24. Which of the following is most likely to be a response the Securities and Exchange Commission. to the auditor’s assessment that the risk of material c. Fraud with a material effect on the financial state- misstatement due to fraud for the existence of inventory is ments should ordinarily be disclosed by the auditor high? through use of an “emphasis of a matter” a. Observe test counts of inventory at certain loca- paragraph added to the audit report. tions on an unannounced basis. d. The auditor has no responsibility to disclose fraud b. Perform analytical procedures rather than taking outside the entity under any circumstances. test counts. c. Request that inventories be counted prior to year- 18. When performing a financial statement audit, auditors end. are required to explicitly assess the risk of material d. Request that inventory counts at the various loca- misstatement due to tions be counted on different dates so as to allow a. Errors. the same auditor to be present at every count. b. Fraud. c. Illegal acts. 25. Which of the following is most likely to be an example d. Business risk. of fraud? a. Defalcations occurring due to invalid electronic approvals. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 MODULE 1 ENGAGEMENT PLANNING 11 b. Mistakes in the application of accounting princi- Direct effect ples. Errors Fraud illegal acts c. Mistakes in processing data. a. Limited Negative Limited d. Unreasonable accounting estimates arising from b. Limited Limited Reasonable oversight. c. Reasonable Limited Limited d. Reasonable Reasonable Reasonable 26. Which of the following characteristics most likely would heighten an auditor’s concern about the risk of in- 31. Because of the risk of material misstatement, an audit tentional manipulation of financial statements? of financial statements in accordance with generally ac- a. Turnover of senior accounting personnel is low. cepted auditing standards should be planned and performed b. Insiders recently purchased additional shares of the with an attitude of entity’s stock. a. Objective judgment. c. Management places substantial emphasis on b. Independent integrity. meeting earnings projections. c. Professional skepticism. d. The rate of change in the entity’s industry is slow. d. Impartial conservatism. 27. Which of the following statements reflects an auditor’s 32. Which of the following most accurately summarizes responsibility for detecting misstatements due to errors and what is meant by the term “material misstatement?” fraud? a. Fraud and direct-effect illegal acts. a. An auditor is responsible for detecting employee b. Fraud involving senior management and material errors and simple fraud, but not for discovering fraud. fraud involving employee collusion or manage- c. Material error, material fraud, and certain illegal ment override. acts. b. An auditor should plan the audit to detect mis- d. Material error and material illegal acts. statements due to errors and fraud that are caused by departures from GAAP. 33. Which of the following statements best describes the c. An auditor is not responsible for detecting mis- auditor’s responsibility to detect conditions relating to finan- statements due to errors and fraud unless the ap- cial stress of employees or adverse relationships between a plication of GAAS would result in such detection. company and its employees? d. An auditor should design the audit to provide rea- a. The auditor is required to plan the audit to detect sonable assurance of detecting misstatements due these conditions on all audits. to errors and fraud that are material to the financial b. These conditions relate to fraudulent financial re- statements. porting, and an auditor is required to plan the audit to detect these conditions when the client is ex- 28. Disclosure of fraud to parties other than a client’s posed to a risk of misappropriation of assets. senior management and its audit committee or board of c. The auditor is required to plan the audit to detect directors ordinarily is not part of an auditor’s responsi- these conditions whenever they may result in mis- bility. However, to which of the following outside parties statements. may a duty to disclose fraud exist? d. The auditor is not required to plan the audit to dis- cover these conditions, but should consider them if To a he or she becomes aware of them during the audit. government To the SEC To a successor funding agency 34. When the auditor believes a misstatement is or may be when the auditor when the from which the the result of fraud but that the effect of the misstatement is client reports successor makes client receives not material to the financial statements, which of the fol- an auditor appropriate financial lowing steps is required? change Inquiries assistance a. Consider the implications for other aspects of the a. Yes Yes No audit. b. Yes No Yes b. Resign from the audit. c. No Yes Yes c. Commence a fraud examination. d. Yes Yes Yes d. Contact regulatory authorities. 29. Under Statements on Auditing Standards, which of the 35. Which of the following statements is correct relating following would be classified as an error? to the auditor’s consideration of fraud? a. Misappropriation of assets for the benefit of man- a. The auditor’s interest in fraud consideration relates agement. to fraudulent acts that cause a material misstate- b. Misinterpretation by management of facts that ex- ment of financial statements. isted when the financial statements were prepared. b. A primary factor that distinguishes fraud from er- c. Preparation of records by employees to cover a ror is that fraud is always intentional, while errors fraudulent scheme. are generally, but not always, intentional. d. Intentional omission of the recording of a transac- c. Fraud always involves a pressure or incentive to tion to benefit a third party. commit fraud, and a misappropriation of assets. 30. What assurance does the auditor provide that misstate- d. While an auditor should be aware of the possibility ments due to errors, fraud, and direct effect illegal acts that of fraud, management, and not the auditor, is re- are material to the financial statements will be detected? sponsible for detecting fraud. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 12 MODULE 1 ENGAGEMENT PLANNING 36. Which of the following factors or conditions is an Incentive Opportunity auditor least likely to plan an audit to discover? a. Yes Yes a. Financial pressures affecting employees. b. Yes No b. High turnover of senior management. c. No Yes c. Inadequate monitoring of significant controls. d. No No d. Inability to generate positive cash flows from op- erations. 43. What is an auditor’s responsibility who discovers man- agement involved in what is financially immaterial fraud? 37. At which stage(s) of the audit may fraud risk factors a. Report the fraud to the audit committee. be identified? b. Report the fraud to the Public Company Oversight Obtaining Conducting Board. Planning understanding fieldwork c. Report the fraud to a level of management at least a. Yes Yes Yes one below those involved in the fraud. b. Yes Yes No d. Determine that the amounts involved are immate- c. Yes No No rial, and if so, there is no reporting responsibility. d. No Yes Yes 44. Which of the following is most likely to be considered a 38. Management’s attitude toward aggressive financial risk factor relating to fraudulent financial reporting? reporting and its emphasis on meeting projected profit goals a. Domination of management by top executives. most likely would significantly influence an entity’s control b. Large amounts of cash processed. environment when c. Negative cash flows from operations. a. External policies established by parties outside the d. Small high-dollar inventory items. entity affect its accounting practices. 45. Which of the following is most likely to be presumed to b. Management is dominated by one individual who represent fraud risk on an audit? is also a shareholder. a. Capitalization of repairs and maintenance into the c. Internal auditors have direct access to the board of property, plant, and equipment asset account. directors and the entity’s management. b. Improper revenue recognition. d. The audit committee is active in overseeing the en- c. Improper interest expense accrual. tity’s financial reporting policies. d. Introduction of significant new products. 39. Which of the following is least likely to be required on 46. An auditor who discovers that a client’s employees an audit? paid small bribes to municipal officials most likely would a. Test appropriateness of journal entries and adjust- withdraw from the engagement if ment. a. The payments violated the client’s policies regard- b. Review accounting estimates for biases. ing the prevention of illegal acts. c. Evaluate the business rationale for significant un- b. The client receives financial assistance from a fed- usual transactions. eral government agency. d. Make a legal determination of whether fraud has c. Documentation that is necessary to prove that the occurred. bribes were paid does not exist. 40. Which of the following is most likely to be an overall d. Management fails to take the appropriate remedial response to fraud risks identified in an audit? action. a. Supervise members of the audit team less closely 47. Which of the following factors most likely would cause and rely more upon judgment. a CPA to not accept a new audit engagement? b. Use less predictable audit procedures. a. The prospective client has already completed its c. Only use certified public accountants on the en- physical inventory count. gagement. b. The CPA lacks an understanding of the prospective d. Place increased emphasis on the audit of objective client’s operation and industry. transactions rather than subjective transactions. c. The CPA is unable to review the predecessor audi- 41. Which of the following is least likely to be included in tor’s working papers. an auditor’s inquiry of management while obtaining infor- d. The prospective client is unwilling to make all fi- mation to identify the risks of material misstatement due to nancial records available to the CPA. fraud? 48. Which of the following factors would most likely a. Are financial reporting operations controlled by heighten an auditor’s concern about the risk of fraudulent and limited to one location? financial reporting? b. Does it have knowledge of fraud or suspect fraud? a. Large amounts of liquid assets that are easily con- c. Does it have programs to mitigate fraud risks? vertible into cash. d. Has it reported to the audit committee the nature of b. Low growth and profitability as compared to other the company’s internal control? entities in the same industry. 42. Individuals who commit fraud are ordinarily able to c. Financial management’s participation in the initial rationalize the act and also have an selection of accounting principles. d. An overly complex organizational structure involv- ing unusual lines of authority. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 MODULE 1 ENGAGEMENT PLANNING 13 49. An auditor who discovers that a client’s employees a. Apply audit procedures specifically directed to as- have paid small bribes to public officials most likely would certaining whether an illegal act has occurred. withdraw from the engagement if the b. Seek the advice of an informed expert qualified to a. Client receives financial assistance from a federal practice law as to possible contingent liabilities. government agency. c. Report the matter to an appropriate level of man- b. Evidential matter that is necessary to prove that the agement at least one level above those involved. illegal acts were committed does not exist. d. Discuss the evidence with the client’s audit com- c. Employees’ actions affect the auditor’s ability to mittee, or others with equivalent authority and re- rely on management’s representations. sponsibility. d. Notes to the financial statements fail to disclose the employees’ actions. 55. An auditor who discovers that client employees have committed an illegal act that has a material effect on the 50. Which of the following illegal acts should an audit be client’s financial statements most likely would withdraw designed to obtain reasonable assurance of detecting? from the engagement if a. Securities purchased by relatives of management a. The illegal act is a violation of generally accepted based on knowledge of inside information. accounting principles. b. Accrual and billing of an improper amount of reve- b. The client does not take the remedial action that nue under government contracts. the auditor considers necessary. c. Violations of antitrust laws. c. The illegal act was committed during a prior year d. Price fixing. that was not audited. d. The auditor has already assessed control risk at the 51. Which of the following relatively small misstatements maximum level. most likely could have a material effect on an entity’s finan- cial statements? 56. Under the Private Securities Litigation Reform Act of a. An illegal payment to a foreign official that was 1995, Baker, CPA, reported certain uncorrected illegal acts not recorded. to Supermart’s board of directors. Baker believed that fail- b. A piece of obsolete office equipment that was not ure to take remedial action would warrant a qualified audit retired. opinion because the illegal acts had a material effect on Su- c. A petty cash fund disbursement that was not prop- permart’s financial statements. Supermart failed to take erly authorized. appropriate remedial action and the board of directors re- d. An uncollectible account receivable that was not fused to inform the SEC that it had received such notifica- written off. tion from Baker. Under these circumstances, Baker is re- quired to 52. During the annual audit of Ajax Corp., a publicly held a. Resign from the audit engagement within ten busi- company, Jones, CPA, a continuing auditor, determined that ness days. illegal political contributions had been made during each of b. Deliver a report concerning the illegal acts to the the past seven years, including the year under audit. Jones SEC within one business day. notified the board of directors about the illegal contributions, c. Notify the stockholders that the financial state- but they refused to take any action because the amounts in- ments are materially misstated. volved were immaterial to the financial statements. Jones d. Withhold an audit opinion until Supermart takes should reconsider the intended degree of reliance to be appropriate remedial action. placed on the a. Letter of audit inquiry to the client’s attorney. 57. Before accepting an engagement to audit a new client, b. Prior years’ audit programs. a CPA is required to obtain c. Management representation letter. a. An understanding of the prospective client’s indus- d. Preliminary judgment about materiality levels. try and business. b. The prospective client’s signature to the engage- 53. The most likely explanation why the auditor’s ex- ment letter. amination cannot reasonably be expected to bring all illegal c. A preliminary understanding of the prospective cli- acts by the client to the auditor’s attention is that ent’s control environment. a. Illegal acts are perpetrated by management over- d. The prospective client’s consent to make inquiries ride of internal control. of the predecessor auditor, if any. b. Illegal acts by clients often relate to operating as- pects rather than accounting aspects. 58. Before accepting an audit engagement, a successor c. The client’s internal control may be so strong that auditor should make specific inquiries of the predecessor the auditor performs only minimal substantive auditor regarding testing. a. Disagreements the predecessor had with the client d. Illegal acts may be perpetrated by the only person concerning auditing procedures and accounting in the client’s organization with access to both as- principles. sets and the accounting records. b. The predecessor’s evaluation of matters of continu- ing accounting significance. 54. If specific information comes to an auditor’s attention c. The degree of cooperation the predecessor received that implies the existence of possible illegal acts that could concerning the inquiry of the client’s lawyer. have a material, but indirect effect on the financial state- d. The predecessor’s assessments of inherent risk and ments, the auditor should next judgments about materiality. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 14 MODULE 1 ENGAGEMENT PLANNING 59. Before accepting an audit engagement, a successor c. Read specialized industry journals. auditor should make specific inquiries of the predecessor d. Reevaluate the client’s internal control environ- auditor regarding the predecessor’s ment. a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued. 65. Which of the following matters is generally included b. Understanding as to the reasons for the change of in an auditor’s engagement letter? auditors. a. Management’s responsibility for the entity’s com- c. Awareness of the consistency in the application of pliance with laws and regulations. GAAP between periods. b. The factors to be considered in setting preliminary d. Evaluation of all matters of continuing accounting judgments about materiality. significance. c. Management’s vicarious liability for illegal acts committed by its employees. 60. Which of the following factors would most likely d. The auditor’s responsibility to search for signifi- cause a CPA to decide not to accept a new audit engage- cant internal control deficiencies. ment? a. The CPA’s lack of understanding of the prospec- 66. During the initial planning phase of an audit, a CPA tive client’s internal auditor’s computer-assisted most likely would audit techniques. a. Identify specific internal control activities that are b. Management’s disregard of its responsibility to likely to prevent fraud. maintain an adequate internal control environment. b. Evaluate the reasonableness of the client’s ac- c. The CPA’s inability to determine whether related- counting estimates. party transactions were consummated on terms c. Discuss the timing of the audit procedures with the equivalent to arm’s-length transactions. client’s management. d. Management’s refusal to permit the CPA to per- d. Inquire of the client’s attorney as to whether any form substantive tests before the year-end. unrecorded claims are probable of assertion. 61. An auditor is required to establish an understanding 67. Which of the following statements would least likely with a client regarding the services to be performed for each appear in an auditor’s engagement letter? engagement. This understanding generally includes a. Fees for our services are based on our regular per a. Management’s responsibility for errors and the il- diem rates, plus travel and other out-of-pocket ex- legal activities of employees that may cause mate- penses. rial misstatement. b. During the course of our audit we may observe op- b. The auditor’s responsibility for ensuring that the portunities for economy in, or improved controls audit committee is aware of any reportable condi- over, your operations. tions that come to the auditor’s attention. c. Our engagement is subject to the risk that material c. Management’s responsibility for providing the misstatements or fraud, if they exist, will not be auditor with an assessment of the risk of material detected. misstatement due to fraud. d. After performing our preliminary analytical proce- d. The auditor’s responsibility for determining pre- dures we will discuss with you the other proce- liminary judgments about materiality and audit risk dures we consider necessary to complete the en- factors. gagement. 62. Which of the following is most likely to require spe- 68. Which of the following documentation is not required cial planning considerations related to asset valuation? for an audit in accordance with generally accepted auditing a. Inventory is comprised of diamond rings. standards? b. The client has recently purchased an expensive a. A written audit program setting forth the proce- copy machine. dures necessary to accomplish the audit’s objec- c. Assets costing less than $250 are expensed even tives. when the expected life exceeds one year. b. An indication that the accounting records agree or d. Accelerated depreciation methods are used for am- reconcile with the financial statements. ortizing the costs of factory equipment. c. A client engagement letter that summarizes the timing and details of the auditor’s planned field- 63. Which of the following factors most likely would in- work. fluence an auditor’s determination of the auditability of an d. The basis for the auditor’s conclusions when the entity’s financial statements? assessed level of control risk is below the maxi- a. The complexity of the accounting system. mum level. b. The existence of related-party transactions. 69. An engagement letter should ordinarily include infor- c. The adequacy of the accounting records. mation on the objectives of the engagement and d. The operating effectiveness of control procedures. CPA Client Limitation of 64. To obtain an understanding of a continuing client’s responsibilities responsibilities engagement business in planning an audit, an auditor most likely would a. Yes Yes Yes a. Perform tests of details of transactions and bal- b. Yes No Yes ances. c. Yes No No b. Review prior year working papers and the perma- d. No No No nent file for the client. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 MODULE 1 ENGAGEMENT PLANNING 15 70. Arrangements concerning which of the following are 76. Which of the following procedures would an auditor least likely to be included in engagement letter? least likely perform in planning a financial statement audit? a. A predecessor auditor. a. Coordinating the assistance of entity personnel in b. Fees and billing. data preparation. c. CPA investment in client securities. b. Discussing matters that may affect the audit with d. Other services to be provided in addition to the au- firm personnel responsible for nonaudit services to dit. Parang terms & conditions c. the entity. Selecting a sample of vendors’ invoices for com- 71. When an auditor believes that an understanding with the client has not been established, he or she should ordi- parison to receiving reports. narily d. Reading the current year’s interim financial state- a. Perform the audit with increased professional skep- ments. ticism. 77. Ordinarily, the predecessor auditor permits the succes- b. Decline to accept or perform the audit. sor auditor to review the predecessor’s working paper analy- c. Assess control risk at the maximum level and per- ses relating to form a primarily substantive audit. Contingencies Balance sheet accounts d. Modify the scope of the audit to reflect an in- a. Yes Yes creased risk of material misstatement due to fraud. b. Yes No 72. Select the proper reply as to the allowable form of the c. No Yes understanding with a client when an audit is being per- d. No No formed 78. In auditing the financial statements of Star Corp., Land a. While preferably written, it may be oral; but in all discovered information leading Land to believe that Star’s cases it should be documented in the working pa- prior year’s financial statements, which were audited by pers. Tell, require substantial revisions. Under these circum- b. While preferably written, it may be oral, in which stances, Land should case it need not be documented in the working pa- a. Notify Star’s audit committee and stockholders pers. c. The understanding must be obtained in written that the prior year’s financial statements cannot be form and included in the working papers. relied on. d. No requirement exists that the auditor obtain an b. Request Star to reissue the prior year’s financial understanding with the client. statements with the appropriate revisions. c. Notify Tell about the information and make inquir- 73. A CPA wishes to determine how various publicly held ies about the integrity of Star’s management. companies have complied with the disclosure requirements d. Request Star to arrange a meeting among the three of a new financial accounting standard. Which of the fol- parties to resolve the matter. lowing information sources would the CPA most likely con- sult for information? 79. A successor auditor should request the new client to a. AICPA Codification of Statements on Auditing authorize the predecessor auditor to allow a review of the Standards. predecessor’s b. AICPA Accounting Trends and Techniques. Engagement letter Working papers c. SEC Quality Control Review. a. Yes Yes d. SEC Statement 10-K Guide. b. Yes No 74. Which of the following procedures would an auditor c. No Yes most likely include in the planning phase of a financial d. No No statement audit? 80. Which of the following procedures would an auditor a. Obtain an understanding of the entity’s risk assess- most likely perform in planning a financial statement audit? ment process. a. Inquiring of the client’s legal counsel concerning b. Identify specific internal control activities designed pending litigation. to prevent fraud. b. Comparing the financial statements to anticipated c. Evaluate the reasonableness of the entity’s ac- results. counting estimates. c. Examining computer generated exception reports d. Perform cutoff tests of the entity’s sales and pur- to verify the effectiveness of internal control. chases. d. Searching for unauthorized transactions that may 75. An auditor obtains knowledge about a new client’s aid in detecting unrecorded liabilities. business and its industry to 81. Analytical procedures used in planning an audit should a. Make constructive suggestions concerning im- focus on provements to the client’s internal control. a. Reducing the scope of tests of controls and sub- b. Develop an attitude of professional skepticism con- stantive tests. cerning management’s financial statement asser- b. Providing assurance that potential material mis- tions. statements will be identified. c. Evaluate whether the aggregation of known mis- c. Enhancing the auditor’s understanding of the cli- statements causes the financial statements taken as ent’s business. a whole to be materially misstated. d. Assessing the adequacy of the available evidential d. Understand the events and transactions that may matter. have an effect on the client’s financial statements. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 16 MODULE 1 ENGAGEMENT PLANNING 82. The objective of performing analytical procedures in 89. The audit work performed by each assistant should be planning an audit is to identify the existence of reviewed to determine whether it was adequately performed a. Unusual transactions and events. and to evaluate whether the b. Illegal acts that went undetected because of inter- a. Auditor’s system of quality control has been main- nal control weaknesses. tained at a high level. c. Related-party transactions. b. Results are consistent with the conclusions to be d. Recorded transactions that were not properly au- presented in the auditor’s report. thorized. c. Audit procedures performed are approved in the professional standards. 83. Which of the following nonfinancial information d. Audit has been performed by persons having ade- would an auditor most likely consider in performing analyti- quate technical training and proficiency as audi- cal procedures during the planning phase of an audit? tors. a. Turnover of personnel in the accounting depart- ment. 90. With respect to planning an audit, which of the follow- b. Objectivity of audit committee members. ing statements is always true? c. Square footage of selling space. a. It is acceptable to perform a portion of the audit of d. Management’s plans to repurchase stock. a continuing audit client at interim dates. b. An engagement should not be accepted after the 84. An auditor should design the written audit program so client’s year-end. that c. An inventory count must be observed at year-end. a. All material transactions will be selected for sub- d. Final staffing decisions must be made prior to stantive testing. completion of the planning stage. b. Substantive tests prior to the balance sheet date will be minimized. 91. The element of the audit planning process most likely c. The audit procedures selected will achieve specific to be agreed upon with the client before implementation of audit objectives. the audit strategy is the determination of the d. Each account balance will be tested under either a. Evidence to be gathered to provide a sufficient ba- tests of controls or tests of transactions. sis for the auditor’s opinion. b. Procedures to be undertaken to discover litigation, 85. The audit program usually cannot be finalized until claims, and assessments. the c. Pending legal matters to be included in the inquiry a. Consideration of the entity’s internal control has of the client’s attorney. been completed. d. Timing of inventory observation procedures to be b. Engagement letter has been signed by the auditor performed. and the client. c. Reportable conditions have been communicated to 92. The “Special Committee on Assurance Services” de- the audit committee of the board of directors. fined assurance services as independent professional ser- d. Search for unrecorded liabilities has been per- vices that formed and documented. a. Include a written communication that expresses a conclusion. 86. Audit programs should be designed so that b. Improve the quality of information, or its context, a. Most of the required procedures can be performed for decision makers. as interim work. c. Include audit services, attest services, and consult- b. Inherent risk is assessed at a sufficiently low level. ing services. c. The auditor can make constructive suggestions to d. Involve the examination of the credibility of a writ- management. ten assertion that is the responsibility of another d. The audit evidence gathered supports the auditor’s party. conclusions. 93. The group that was established in 1994 by the Ameri- 87. In designing written audit programs, an auditor should can Institute of Certified Public Accountants to analyze and establish specific audit objectives that relate primarily to the report on the current state and future of the audit/assurance a. Timing of audit procedures. function and trends shaping its environment is the b. Cost-benefit of gathering evidence. a. Commission on Auditors’ Responsibilities. c. Selected audit techniques. b. Committee of Sponsoring Organizations (COSO). d. Financial statement assertions. c. Special Committee on Assurance Services. 88. The in-charge auditor most likely would have a super- d. Accountancy Future Task Force (AFTF). visory responsibility to explain to the staff assistants 94. Which of the following is not a type of attest engage- a. That immaterial fraud is not to be reported to the ment? client’s audit committee. a. Agreed-upon procedures. b. How the results of various auditing procedures per- b. Compilation. formed by the assistants should be evaluated. c. Examination. c. What benefits may be attained by the assistants’ d. Review. adherence to established time budgets. d. Why certain documents are being transferred from 95. Which of the following is a conceptual difference be- the current file to the permanent file. tween the attestation standards and generally accepted au- diting standards? Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 MODULE 1 ENGAGEMENT PLANNING 17 a. The attestation standards do not apply to audits of 102. The third general standard states that due care is to be historical financial statements, while the generally exercised in the performance of an audit. This standard is accepted auditing standards do. ordinarily interpreted to require b. The requirement that the practitioner be indepen- a. Thorough review of the existing safeguards over dent in mental attitude is omitted from the attesta- access to assets and records. tion standards. b. Limited review of the indications of employee c. The attestation standards do not permit an attest fraud and illegal acts. engagement to be part of a business acquisition c. Objective review of the adequacy of the technical study or a feasibility study. training and proficiency of firm personnel. d. None of the standards of fieldwork in generally ac- d. Critical review of the judgment exercised at every cepted auditing standards are included in the at- level of supervision. testation standards. 103. After fieldwork audit procedures are completed, a 96. Which of the following is not an attestation standard? partner of the CPA firm who has not been involved in the a. Sufficient evidence shall be obtained to provide a audit performs a second or wrap-up working paper review. reasonable basis for the conclusion that is ex- This second review usually focuses on pressed in the report. a. The fair presentation of the financial statements in b. The report shall identify the subject matter on the conformity with GAAP. assertion being reported on and state the character b. Fraud involving the client’s management and its of the engagement. employees. c. The work shall be adequately planned and assis- c. The materiality of the adjusting entries proposed tants, if any, shall be properly supervised. by the audit staff. d. A sufficient understanding of internal control shall d. The communication of internal control weaknesses be obtained to plan the engagement. to the client’s audit committee. 97. On an audit engagement performed by a CPA firm 104. Which of the following statements is correct concern- with one office, at the minimum, knowledge of the relevant ing an auditor’s responsibilities regarding financial state- professional accounting and auditing standards should be ments? held by a. Making suggestions that are adopted about the a. The auditor with final responsibility for the audit. form and content of an entity’s financial statements b. All professionals working upon the audit. impairs an auditor’s independence. c. All professionals working upon the audit and the b. An auditor may draft an entity’s financial state- partner in charge of the CPA firm. ments based on information from management’s d. All professionals working in the office. accounting system. c. The fair presentation of audited financial state- 98. An attitude that includes a questioning mind and a ments in conformity with GAAP is an implicit part critical assessment of audit evidence is referred to as of the auditor’s responsibilities. a. Due professional care. d. An auditor’s responsibilities for audited financial b. Professional skepticism. statements are not confined to the expression of c. Reasonable assurance. the auditor’s opinion. d. Supervision. 105. Which of the following is an authoritative body desig- 99. Professional skepticism requires that an auditor as- nated to promulgate attestation standards? sume that management is a. Auditing Standards Board. a. Honest, in the absence of fraud risk factors. b. Governmental Accounting Standards Board. b. Dishonest until completion of audit tests. c. Financial Accounting Standards Board. c. Neither honest nor dishonest. d. General Accounting Office. d. Offering reasonable assurance of honesty. 106. Which of the following best describes what is meant 100. An unqualified attestation report ordinarily may refer by the term generally accepted auditing standards? to a. Procedures to be used to gather evidence to support a. Only the assertion. financial statements. b. Only the subject matter to which the assertion re- b. Measures of the quality of the auditor’s perform- lates. ance. c. Either the assertion or the subject matter to which c. Pronouncements issued by the Auditing Standards the assertion relates. Board. d. Neither the assertion nor the subject matter to d. Rules acknowledged by the accounting profession which the assertion relates. because of their universal application. 101. Which of the following is most likely to be unique to 107. The auditor with final responsibility for an engage- the audit work of CPAs as compared to work performed by ment and one of the assistants have a difference of opinion practitioners of other professions? about the results of an auditing procedure. If the assistant a. Due professional care. believes it is necessary to be disassociated from the matter’s b. Competence. resolution, the CPA firm’s procedures should enable the c. Independence. assistant to d. Complex body of knowledge. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 18 MODULE 1 ENGAGEMENT PLANNING a. Refer the disagreement to the AICPA’s Quality 112. An accountant has been engaged to review a nonpublic Review Committee. entity’s financial statements that contain several departures b. Document the details of the disagreement with the from GAAP. If the financial statements are not revised and conclusion reached. modification of the standard review report is not adequate to c. Discuss the disagreement with the entity’s manage- indicate the deficiencies, the accountant should ment or its audit committee. a. Withdraw from the engagement and provide no d. Report the disagreement to an impartial peer re- further services concerning these financial state- view monitoring team. ments. NO TOC, NO ST b. Inform management that the engagement can pro- 108. When engaged to compile the financial statements of a ceed only if distribution of the accountant’s report nonpublic entity, an accountant is required to possess a level is restricted to internal use. of knowledge of the entity’s accounting principles and prac- c. Determine the effects of the departures from tices. This requirement most likely will include obtaining a GAAP and issue a special report on the financial general understanding of the statements. a. Stated qualifications of the entity’s accounting per- d. Issue a modified review report provided the entity sonnel. b. Design of the entity’s internal controls placed in agrees that the financial statements will not be operation. used to obtain credit. c. Risk factors relating to misstatements arising from 113. Statements on Standards for Accounting and Review illegal acts. Services (SSARS) require an accountant to report when the d. Internal control awareness of the entity’s senior accountant has management. a. Typed client-prepared financial statements, without modification, as an accommodation to the client. 109. An accountant is required to comply with the provi- b. Provided a client with a financial statement format sions of Statements on Standards for Accounting and Re- that does not include dollar amounts, to be used by view Services when the client in preparing financial statements. I. Reproducing client-prepared financial statements, with- c. Proposed correcting journal entries to be recorded out modification, as an accommodation to a client. by the client that change client-prepared financial II. Preparing standard monthly journal entries for deprecia- statements. tion and expiration of prepaid expenses. d. Generated, through the use of computer software, a. I only. financial statements prepared in accordance with a b. II only. comprehensive basis of accounting other than c. Both I and II. GAAP. d. Neither I nor II. 114. Statements on Standards for Accounting and Review 110. If requested to perform a review engagement for a Services establish standards and procedures for which of the nonpublic entity in which an accountant has an immaterial following engagements? direct financial interest, the accountant is a. Assisting in adjusting the books of account for a a. Not independent and, therefore, may not be associ- partnership. ated with the financial statements. b. Reviewing interim financial data required to be b. Not independent and, therefore, may not issue a re- filed with the SEC. view report. c. Processing financial data for clients of other ac- c. Not independent and, therefore, may issue a review counting firms. d. Compiling an individual’s personal financial state- report, but may not issue an auditor’s opinion. ment to be used to obtain a mortgage. d. Independent because the financial interest is im- material and, therefore, may issue a review report. 115. The authoritative body designated to promulgate stan- dards concerning an accountant’s association with unaudited 111. Kell engaged March, CPA, to submit to Kell a written financial statements of an entity that is not required to file personal financial plan containing unaudited personal finan- financial statements with an agency regulating the issuance cial statements. March anticipates omitting certain disclo- of the entity’s securities is the sures required by GAAP because the engagement’s sole a. Financial Accounting Standards Board. purpose is to assist Kell in developing a personal financial b. General Accounting Office. plan. For March to be exempt from complying with the c. Accounting and Review Services Committee. requirements of SSARS 1, Compilation and Review of Fi- d. Auditing Standards Board. nancial Statements, Kell is required to agree that the a. Financial statements will not be presented in com- 116. Which of the following accounting services may an parative form with those of the prior period. accountant perform without being required to issue a com- b. Omitted disclosures required by GAAP are not pilation or review report under the Statements on Standards material. for Accounting and Review Services? c. Financial statements will not be disclosed to a non- I. Preparing a working trial balance. CPA financial planner. II. Preparing standard monthly journal entries. d. Financial statements will not be used to obtain a. I only. credit. b. II only. c. Both I and II. d. Neither I nor II. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 MODULE 1 ENGAGEMENT PLANNING 19 117. An examination of a financial forecast is a profes- sional service that involves a. Compiling or assembling a financial forecast that is based on management’s assumptions. b. Limiting the distribution of the accountant’s report to management and the board of directors. c. Assuming responsibility to update management on key events for one year after the report’s date. d. Evaluating the preparation of a financial forecast and the support underlying management’s assump- tions. 118. An accountant may accept an engagement to apply agreed-upon procedures to prospective financial statements provided that a. Use of the report is restricted to the specified par- ties. b. The prospective financial statements are also ex- amined. c. Responsibility for the adequacy of the procedures performed is taken by the accountant. d. Negative assurance is expressed on the prospective financial statements taken as a whole. 119. The nature and extent of a CPA firm’s quality control policies and procedures depend on The nature The CPA of the CPA Cost-benefit firm’s size firm’s practice considerations a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes 120. Would the following factors ordinarily be considered in planning an audit engagement’s personnel requirements? Opportunities Continuity and for on-the-job periodic rotation training of personnel a. Yes Yes b. Yes No c. No Yes d. No No 121. Quality control for a CPA firm, as referred to in State- ments on Quality Control Standards, applies to a. Auditing services only. b. Auditing and management advisory services. c. Auditing and tax services. d. Auditing and accounting and review services. 122. One of a CPA firm’s basic objectives is to provide professional services that conform with professional stan- dards. Reasonable assurance of achieving this basic objec- tive is provided through a. A system of quality control. b. A system of peer review. c. Continuing professional education. d. Compliance with generally accepted reporting standards. Downloaded by Veronika Blair ([email protected])  lOMoARcPSD|20462347 20