2009 a 3 class questions preview

Auditing and Attestation 3

Class Questions

1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

1. CPA-04620

A successor auditor should request the new client to authorize the predecessor auditor to allow a review of the predecessor's: Engagement letter Working papers a. Yes Yes b. Yes No c. No Yes d. No No CPA-04620

Choice "c" is correct. It is not appropriate for the successor auditor to request a review of the predecessor auditor's engagement letter. This is a business matter between the client and the predecessor auditor that has no impact on the successor's audit. Conversely, review of the predecessor auditor's working papers (audit documentation) is appropriate and customary to facilitate the successor's audit.

Choices "a", "b", and "d" are incorrect, based on the above explanation. 2. CPA-04621

A document in an auditor's working papers includes the following statement: "Our audit is subject to the inherent risk that material errors and fraud, including defalcations, if they exist, will not be detected. However, we will inform you of fraud that comes to our attention, unless it is inconsequential."

The above passage is most likely from a(an): a. Comfort letter. b. Engagement letter. c. Letter of audit inquiry. d. Representation letter. CPA-04621

Choice "b" is correct. An engagement letter includes discussion of both the auditor's responsibilities and the limitations of the engagement. The fact that audit risk exists and that an audit may not detect material errors and fraud is typically included in this letter.

Choice "a" is incorrect. A comfort letter provides negative assurance on certain unaudited financial information for the period from the last audit to the date of the registration of securities. It would not include discussion of the limitations of an audit or of the auditor's responsibilities during the audit.

Choice "c" is incorrect. A letter of audit inquiry is sent to the client's attorney, requesting direct corroboration of information provided to the auditor by management. It would not include discussion of the limitations of an audit or of the auditor's responsibilities during the audit.

Choice "d" is incorrect. The management representation letter is provided by management at the end of the engagement, to confirm representations given to the auditor. It would not include discussion of the limitations of an audit or of the auditor's responsibilities during the audit.


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3. CPA-05603

Which of the following is always necessary in a financial statement audit? I. Tests of the operating effectiveness of controls. II. Analytical procedures. III. Risk assessment procedures.

a. I, II, and III. b. I and III. c. I and II. d. II and III. CPA-05603

Choice "d" is correct. Risk assessment procedures must be performed to assess the risk of material misstatement and to determine whether and to what extent further audit procedures are necessary. In addition, the planning process and the overall review stage of the audit must include application of analytical procedures. Tests of the operating effectiveness of controls, however, are only performed when the auditor's risk assessment is based on the assumption that controls are operating effectively, or when substantive procedures alone are insufficient.

Choices "a", "b", and "c" are incorrect, based on the above explanation. 4. CPA-02679

Of the following nonfinancial information, what would an auditor most likely consider in performing analytical procedures during the planning phase of an audit? a. Turnover of personnel in the accounting department. b. Objectivity of audit committee members. c. Square footage of selling space. d. Management's plans to repurchase stock. CPA-02679

Choice "c" is correct. When performing analytical procedures, the auditor considers relevant nonfinancial information, which generally is related to financial data in some way. For example, a relationship might exist between the square footage of selling space and the level of sales.

Choice "a" is incorrect. The auditor would consider the turnover of accounting personnel when assessing the risk of material misstatement and the risk of fraud, not when performing analytical procedures during planning.

Choice "b" is incorrect. The auditor would consider the integrity of members of the audit committee when deciding whether to accept the engagement and when assessing the risk of material misstatement and the risk of fraud, not when performing analytical procedures during planning.

Choice "d" is incorrect. The auditor would consider management's plans to repurchase stock when assessing the risk of material misstatement and when considering appropriate disclosure, not when performing analytical procedures during planning.


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5. CPA-02675

During the initial planning phase of an audit, a CPA most likely would: a. Identify specific internal control activities that are likely to prevent fraud. b. Evaluate the reasonableness of the client's accounting estimates. c. Discuss the timing of the audit procedures with the client's management. d. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion. CPA-02675

Choice "c" is correct. Procedures that an auditor may consider in planning the audit include discussing the type, scope, and timing of the audit with the client's management.

Choice "a" is incorrect. Identifying specific internal control activities that are likely to prevent fraud is an audit procedure, but not an initial planning activity.

Choice "b" is incorrect. Evaluating the reasonableness of the client's accounting estimates is not a planning activity. It is part of the evidence gathered later in the audit process.

Choice "d" is incorrect. Inquiring of the client's attorney is not a planning activity. It is part of the evidence gathered later in the audit process. 6. CPA-02754

Inherent risk and control risk differ from detection risk in that they: a. Arise from the misapplication of auditing procedures. b. May be assessed in either quantitative or nonquantitative terms. c. Exist independently of the financial statement audit. d. Can be changed at the auditor's discretion. CPA-02754

Choice "c" is correct. Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk is related to the auditor's procedures and can be changed at the auditor's sole discretion.

Choice "a" is incorrect. Inherent risk and control risk exist independently of the audit and do not arise from misapplication of auditing procedures.

Choice "b" is incorrect. All three components of audit risk may be assessed in quantitative terms, such as percentages, or in nonquantitative terms that range, for example, from a minimum to a maximum.

Choice "d" is incorrect. The auditor cannot change inherent risk or control risk since they exist independently of the financial statement audit. Only detection risk can be changed at the auditor's discretion.


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7. CPA-02759

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: a. Decrease substantive testing. b. Decrease detection risk. c. Increase inherent risk. d. Increase materiality levels. CPA-02759

Choice "b" is correct. Detection risk is inversely related to the risk of material misstatement. Therefore, an increase in the risk of material misstatement would cause a decrease in allowable detection risk.

Choice "a" is incorrect. The auditor uses the assessed risk of material misstatement (combined assessments of inherent and control risks) to determine the acceptable level of detection risk, which is then used to determine the nature, extent, and timing of substantive tests. An increase in the risk of material misstatement would cause a decrease in allowable detection risk. This is accomplished by increasing substantive testing.

Choice "c" is incorrect. The auditor uses the assessed risk of material misstatement (combined assessments of inherent and control risks) to determine the acceptable level of detection risk, which is then used to determine the nature, extent, and timing of substantive tests. Inherent risk exists independently of the audit and cannot be changed by the auditor.

Choice "d" is incorrect. Materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality levels would not be affected by a change in the assessed risk of material misstatement. 8. CPA-02682

For which of the following judgments may an independent auditor share responsibility with an entity's internal auditor who is assessed to be both competent and objective? Assessment of Assessment of inherent risk control risk a. Yes Yes b. Yes No c. No Yes d. No No CPA-02682

Choice "d" is correct. The independent auditor is solely responsible for reporting on the financial statements. Thus, while he or she may use the work of the entity's internal auditor (both work already performed and work performed as part of the audit), independent auditors may not share any responsibility involving judgments, including the assessment of inherent and control risk. This is true because the internal auditor, even if assessed to be both competent and objective, is not independent.

Choices "a", "b", and "c" are incorrect, based on the above explanation.


Class Questions


9. CPA-02903

Which of the following statements best describes an auditor's responsibility to detect errors and fraud? a. An auditor should design an audit to provide reasonable assurance of detecting errors and fraud that

are material to the financial statements. b. An auditor is responsible to detect material errors, but has no responsibility to detect fraud that is

concealed through employee collusion or management override of internal control. c. An auditor has no responsibility to detect errors and fraud unless analytical procedures or tests of

transactions identify conditions causing a reasonably prudent auditor to suspect that the financial statements were materially misstated.

d. An auditor has no responsibility to detect errors and fraud because an auditor is not an insurer and an audit does not constitute a guarantee.

CPA-02903

Choice "a" is correct. The auditor should design the audit to provide reasonable assurance of detecting errors and fraud.

Choice "b" is incorrect. The auditor is not "responsible for" detecting all material errors, but is responsible for designing an audit to provide reasonable assurance of detecting material misstatements. Due to the concealment aspects of fraudulent activity, however, even a properly planned and performed audit may not detect a material misstatement resulting from fraud. While auditors provide only reasonable (and not absolute) assurance of detecting fraud (due to such concealment factors), the presence of risk factors may still alert the auditor to the possibility that fraud exists.

Choice "c" is incorrect. The auditor should specifically assess the risk of material misstatement of the financial statements due to fraud and consider that assessment in designing the audit, even if analytical procedures or tests of transactions do not identify specific conditions indicative of potential misstatement.

Choice "d" is incorrect. The auditor does have some responsibility for detecting errors and fraud. The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.


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10. CPA-04619

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. The entity's management places no emphasis on meeting publicized earnings projections. b. Significant differences between the physical inventory count and the accounting records are not

investigated. c. Monthly bank reconciliations ordinarily include several large outstanding checks. d. Cash transactions are electronically processed and recorded, leaving no paper audit trail. CPA-04619

Choice "b" is correct. Inadequate recordkeeping with respect to assets, such as failing to reconcile the physical inventory count and the accounting records, provides an opportunity for fraud or error to occur.

Choice "a" is incorrect. An auditor might suspect misstatement when management commits to aggressive or unrealistic earning projections, not when management does not emphasize meeting such projections.

Choice "c" is incorrect. The inclusion of several large, outstanding checks in the monthly bank reconciliation may be a normal occurrence and is not necessarily indicative of material misstatement.

Choice "d" is incorrect. Electronic processing and recording of transactions without a paper audit trail may be acceptable as long as a satisfactory electronic audit trail exists. 11. CPA-02872

An auditor who discovers that a client's employees paid small bribes to municipal officials most likely would withdraw from the engagement if: a. The payments violated the client's policies regarding the prevention of illegal acts. b. The client receives financial assistance from a federal government agency. c. Documentation that is necessary to prove that the bribes were paid does not exist. d. Management fails to take the appropriate remedial action. CPA-02872

Choice "d" is correct. An auditor should consider withdrawing from an engagement when the client does not take appropriate remedial action, even if the illegal act is immaterial. This would occur because the implications of management's failure to act appropriately may affect the auditor's ability to rely on management's representations.

Choice "a" is incorrect. Violation of client policies would not result in the auditor's withdrawal, as long as management takes the appropriate remedial action.

Choice "b" is incorrect. The assistance received from the federal government does not affect the auditor's decision to withdraw.

Choice "c" is incorrect. Lack of documentation proving the illegal act occurred might make the auditor less inclined to withdraw.


Class Questions


12. CPA-02386

When the auditor's risk assessment is based on the effective operation of controls, the audit will most likely involve: a. Performing more extensive substantive tests with larger sample sizes than originally planned. b. Reducing inherent risk for most of the assertions relevant to significant account balances. c. Changing the timing of substantive tests by omitting interim-date testing and performing the tests at

year-end. d. Identifying specific internal controls relevant to specific assertions. CPA-02386

Choice "d" is correct. When the auditor's risk assessment is based on the effective functioning of internal control, the auditor should identify specific internal controls relevant to specific assertions that are likely to prevent or detect material misstatements in those assertions.

Choice "a" is incorrect. When the auditor's risk assessment is based on the effective functioning of internal control, the auditor is likely to utilize less extensive substantive tests with smaller sample sizes.

Choice "b" is incorrect. Inherent risk is evaluated independently of any consideration of internal controls. Therefore, whether or not the auditor's risk assessment is based on the effective functioning of internal control does not affect his or her assessment of inherent risk.

Choice "c" is incorrect. The fact that the auditor's risk assessment is based on the effective functioning of internal control would not cause the auditor to shift tests from interim to year-end. Substantive tests performed at year-end would be more consistent with a situation in which controls were not operating effectively. 13. CPA-02322

An auditor is required to document the auditor's understanding of the I. Entity's control activities that help ensure management directives are carried out. II. Entity's control environment factors that help the auditor plan the engagement.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-02322

Choice "c" is correct. The auditor is required to document key elements of the understanding of the entity and its environment, including each of the five components of internal control. The five components include the entity's control activities and the entity's control environment.

Choices "a", "b", and "d" are incorrect. The understanding of both the entity's control activities and the entity's control environment should be documented.


Class Questions


14. CPA-02498

An auditor's flowchart of a client's information system relevant to financial reporting is a diagrammatic representation that depicts the auditor's: a. Assessment of control risk. b. Identification of weaknesses in the system. c. Assessment of the control environment's effectiveness. d. Understanding of the system. CPA-02498

Choice "d" is correct. The auditor's flowchart is a diagrammatic representation of the auditor's understanding of the client's information system relevant to financial reporting.

Choice "a" is incorrect. Documentation of the client's information system relevant to financial reporting does not depict the tests of controls that are necessary to assess control risk.

Choice "b" is incorrect. While the flowchart may enable the auditor to identify some weaknesses (especially lack of segregation of duties) in the design of the client's internal control, it would not be as helpful in assessing the operating effectiveness of controls. Such assessment is necessary to identify weaknesses in the system.

Choice "c" is incorrect. A flowchart enables the auditor to assess the design of controls, but tests of controls are needed to assess effectiveness. 15. CPA-02374

In obtaining an understanding of the entity and its environment, including its internal control, an auditor is required to obtain knowledge about the: a. Design of relevant internal controls pertaining to financial reporting in each of the five internal control

components. b. Effectiveness of the internal controls that have been implemented. c. Consistency with which the internal controls are currently being applied. d. Controls related to each principal transaction class and account balance. CPA-02374

Choice "a" is correct. In every audit, the auditor should obtain a sufficient understanding of the design of relevant internal controls pertaining to financial reporting in each of the five internal control components.

Choice "b" is incorrect. The auditor is not required, as a part of obtaining an understanding of the entity and its environment (including its internal control), to determine whether internal controls are operating effectively.

Choice "c" is incorrect. The auditor is not required, as a part of obtaining an understanding of the entity and its environment (including its internal control), to determine the consistency with which a control is applied.

Choice "d" is incorrect. Audit planning does not require an understanding of the controls related to each account balance, transaction class, and disclosure component in the financial statements. For certain items, a primarily substantive approach may be used instead.


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16. CPA-02348

In planning an audit, the auditor's knowledge about the design of relevant internal controls should be used to: a. Identify the types of potential misstatements that could occur. b. Assess the operational efficiency of internal control. c. Determine whether controls have been circumvented by collusion. d. Document the assessed level of control risk. CPA-02348

Choice "a" is correct. Knowledge about the design of relevant internal controls and whether they have been implemented should be used to identify the types of misstatements that could occur.

Choice "b" is incorrect. The operational efficiency of a control is not significant to the auditor; the auditor is concerned with operating effectiveness. Also, the auditor is not required to assess operating effectiveness during the planning stage of the audit.

Choice "c" is incorrect. Determining whether a control has been circumvented by collusion is not a normal part of the audit planning process.

Choice "d" is incorrect. Assessment of control risk (and documentation of that assessment) must be based on tests of controls, and not solely on knowledge about the design of controls. 17. CPA-02482

Which of the following are considered control environment factors? Human resource Detection policies and risk practices a. Yes Yes b. Yes No c. No Yes d. No No CPA-02482

Choice "c" is correct. The control environment represents the collective effect of various factors on establishing, enhancing, or mitigating the effectiveness of specific policies and procedures. Such factors include management's philosophy and operating style, the entity's organizational structure, participation of those charged with governance, methods of assigning authority, responsibility, and accountability, and human resource policies and practices.

Choices "a", "b", and "d" are incorrect, based on the above explanation.


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18. CPA-02506

An auditor should obtain sufficient knowledge of an entity's information system relevant to financial reporting to understand the: a. Safeguards used to limit access to computer facilities. b. Process used to prepare significant accounting estimates. c. Procedures used to assure proper authorization of transactions. d. Policies used to detect the concealment of fraud. CPA-02506

Choice "b" is correct. The auditor should obtain sufficient knowledge of the client's information system relevant to financial reporting to understand the types of transactions processed, and how the transactions are initiated, recorded and summarized. Included in the information system relevant to financial reporting is the preparation of significant accounting estimates.

Choice "a" is incorrect. This is a control activity that is used to provide reasonable assurance that the entity's objectives are being met.

Choice "c" is incorrect. This is a control activity that is used to provide reasonable assurance that the entity's objectives are being met.

Choice "d" is incorrect. This is a control activity that is used to provide reasonable assurance that the entity's objectives are being met. 19. CPA-02473

Proper segregation of duties reduces the opportunities to allow persons to be in positions to both: a. Journalize entries and prepare financial statements. b. Record cash receipts and cash disbursements. c. Establish internal controls and authorize transactions. d. Perpetrate and conceal errors and fraud. CPA-02473

Choice "d" is correct. Segregation of duties reduces the opportunity to allow any person to be in a position to both perpetrate and conceal errors and fraud in the normal course of duties.

Choice "a" is incorrect. Journalizing entries and preparing financial statements are both recording functions and are not incompatible for adequate segregation of duties.

Choice "b" is incorrect. Recording cash disbursements and cash receipts are both recording functions and are not incompatible for adequate segregation of duties.

Choice "c" is incorrect. Establishing internal controls and authorizing transactions are both authorization functions and are not incompatible for adequate segregation of duties.


Class Questions


20. CPA-02372

Which of the following types of evidence would an auditor most likely examine to determine whether internal controls are operating as designed? a. Gross margin information regarding the client's industry. b. Confirmations of receivables verifying account balances. c. Client records documenting the use of IT programs. d. Anticipated results documented in budgets or forecasts. CPA-02372

Choice "c" is correct. Client records documenting the use of IT programs would be a relevant item for an auditor to examine while determining if internal control is operating as designed.

Choice "a" is incorrect. Industry gross margin information is evidence an auditor would examine while performing analytical procedures. Analytical procedures may be used as substantive tests, since they deal with dollar amounts rather than with controls.

Choice "b" is incorrect. Confirmation of receivables is evidence an auditor would examine while performing substantive tests, since confirmations deal with dollar amounts rather than with controls.

Choice "d" is incorrect. Budgets and forecasts provide evidence an auditor would examine while performing analytical procedures (e.g., comparison of expected results to actual). Analytical procedures may be used as substantive tests, since they deal with dollar amounts rather than with controls.

2009 a 3 class questions preview

Economy & Finance