exam prep ration 1 (1)

8/3/2019 Exam Prep Ration 1 (1)

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Exam Preparation


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When an auditor has substantial doubt aboutan entity's ability to continue as a going

concern because of the probablediscontinuance of operations, the auditormost likely would express a qualified opinionif:

The effects of the adverse financial conditions likely willcause a bankruptcy filing.

Information about the entity's ability to continue as agoing concern is not disclosed.

Management has no plans to reduce or delay futureexpenditures.

Negative trends and recurring operating losses appearto be irreversible.


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A client's letter of representation serves what

purpose?

To impress upon auditors its responsibility for theassertions in the financial statements

To remind the auditor of the potential misstatements or

omission in the financial statements

To document the responses from management toinquiries about various aspects

All of the above


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One of the main objectives of performing

analytical review procedures during the

planning phase of the audit is to identify: Transactions that have not been properly authorized.

Illegal acts undetected as a result of poor internal

controls.

Inefficient operations.

Unusual changes that may signal possible account

misstatements.


5/32

If a client will not permit access to some of the

companys record which the auditor thinks are

material and pervasive, the auditor's reportordinarily will contain a(an):

Adverse opinion.

Disclaimer of opinion. Unqualified opinion.

Qualified opinion.


6/32

Which of the following statements is correctconcerning an auditor's responsibility to report

fraud? The auditor is required to communicate to the client's audit

committee all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved areinconsequential.

The disclosure of material management fraud to principalstockholders is required when both senior management andthe board of directors fail to acknowledge the fraudulentactivities.

Fraudulent activities involving senior management of which

the auditor becomes aware should be reported directly tothe SEC.

The disclosure of fraudulent activities to parties other thanthe client's senior management and its audit committee isnot ordinarily part of the auditor's responsibility.


7/32

Which of the following is true? Auditor

perform test of controls:

To determine engagement risk

To determine material misstatement in the particular

account balance

To assess Control Risk

To plan scope, timing and direction of the audit


8/32

What is the objective of the Financial

Statement Audit performed by the

independent auditor? Tick which is true: To ensure that Financial Statements are free of material

misstatements

To express an opinion on Financial Statements

To identify misstatements due to frauds

To advise investors on Financial Statements

All of above

None of above


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In assessing the competence of a client's

internal auditor, an independent auditor most

likely would consider the: Internal auditor's compliance with professional internal

auditing standards.

Client's policies that limit the internal auditor's access

to management salary data.

Evidence supporting a further reduction in the assessed

level of control risk.

Results of ratio analysis that may identify unusual

transactions and events.


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Auditee Risk refers to a combination of:

Inherent Risk, Control Risk and Detection Risk

Business Risk and Inherent Risk Control Risk, Business Risk and Inherent Risk

Control Risk and Inherent Risk


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Which of the following statement is true?

Audit Risk is the risk that the auditor may express a

qualified opinion when the financial statements arefree of material misstatement?

Audit Risk is the risk that the auditor may express an

adverse opinion when the financial statements are free

of material misstatement?

None of above


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Which of the following is not the responsibility

of Auditor:

Performing audit procedures on the financialstatements

Preparation of financial statements

Compliance with applicable auditing framework

Expressing an opinion based on the audit


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Which type of risk does an auditor have

control over through substantive auditing

procedures? Control Risk

Engagement Risk

Detection Risk

Business Risk

Inherent Risk


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When an auditor increases the assessed level

of control risk because certain control

activities were determined to be ineffective,the auditor most likely would increase the:

Level of detection risk.

Extent of tests of details.

Level of inherent risk.

Extent of tests of controls.


15/32

Which of the following events would be a

subsequent period event which would require

adjustments to current year's financialstatements?

Sale of investments at a price below record cost

Change in depreciation estimate

Sale of goods

Collection of accounts receivable


16/32

Which of the following statements ordinarily isnot included among the written client

representations made by the chief executiveofficer and the chief financial officer? "Sufficient evidential matter has been made available

to the auditor to permit the issuance of an unqualifiedopinion."

"There are no unasserted claims or assessments thatour lawyer has advised us are probable of assertion andmust be disclosed."

"We have no plans or intentions that may materially

affect the carrying value or classification of assets andliabilities."

"No events have occurred subsequent to the balancesheet date that would require adjustment to, ordisclosure in, the financial statements."


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An auditor believes that there is substantial

doubt about an entity's ability to continue as a

going concern for a reasonable period of time.In evaluating the entity's plans for dealing

with the adverse effects of future conditions

and events, the auditor most likely wouldconsider, as a mitigating factor, the entity's

plans to:

Repurchase the entity's stock at a price below its book

value.

Issue stock options to key executives.

Lease rather than purchase operating facilities.

Accelerate the due date of an existing mortgage.


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Analytical procedures performed during an auditindicate that accounts receivable doubled sincethe end of the prior year. However, the allowance

for doubtful accounts as a percentage of accountsreceivable remained about the same. Which ofthe following client explanations would satisfythe auditor?

A greater percentage of accounts receivable are listed in the"more than 120 days overdue" category than in the prioryear.

Internal control activities over the recording of cash receiptshave been improved since the end of the prior year.

The client opened a second retail outlet during the current

year and its credit sales approximately equaled the olderoutlet.

The client tightened its credit policy during the current yearand sold considerably less merchandise to customers withpoor credit ratings.


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Which of the following statements is correct

about the sample size in statistical sampling

when testing internal controls? The auditor should consider the tolerable rate of

deviation from the controls being tested in determining

sample size.

As the likely rate of deviation decreases, the auditorshould increase the planned sample size.

The allowable risk of assessing control risk too low has

no effect on the planned sample size.

Of all the factors to be considered, the population size

has the greatest effect on the sample size.


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Which of the following factors would most

likely be considered an inherent limitation to

an entity's internal control? The complexity of the information processing system.

Human judgment in the decision making process.

The ineffectiveness of the board of directors.

The lack of management incentives to improve the

control environment.


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A successor auditor is required to attempt

communication with the predecessor auditor

prior to: Performing test of controls.

Testing beginning balances for the current year.

Making a proposal for the audit engagement.

Accepting the engagement.


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The most reliable procedure for an auditor to

use to test the existence of a client's inventory

at an outside location would be to: Observe physical counts of the inventory items.

Trace the total on the inventory listing to the general

ledger inventory account.

Obtain a confirmation from the client indicating

inventory ownership.

Analytically compare the current-year inventory

balance to the prior-year balance.


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An auditor compared the current-year gross

margin with the prior-year gross margin to

determine if cost of sales is reasonable. Whattype of audit procedure was performed?

Test of transactions.

Analytical procedures.

Test of controls.

Test of details.


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Which of the following procedures would yield

the most competent evidence?

A scanning of trial balances.

An inquiry of client personnel.

A comparison of beginning and ending retained

earnings.

A recalculation of bad debt expense.


25/32

Subsequent period events may require an

adjustment of current year's financial

statements. True

False


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Under which of the following circumstances

would the expression of a disclaimer of

opinion be inappropriate? The auditor is unable to obtain the audited financial

statements of a consolidated investee.

Management does not provide reasonable justification

for a change in accounting principles.

The company failed to make a count of its physical

inventory during the year and the auditor was unable

to apply alternative procedures to verify inventory

quantities. Management refuses to allow the auditor to have

access to the company's canceled checks and bank

statements.


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In a financial statement audit, inherent risk isevaluated to help an auditor assess which of

the following? The internal audit department's objectivity in reporting

a material misstatement of a financial statementassertion it detects to the audit committee.

The risk that the internal control system will not detect

a material misstatement of a financial statementassertion.

The risk that the audit procedures implemented willnot detect a material misstatement of a financial

statement assertion. The susceptibility of a financial statement assertion to a

material misstatement assuming there are no relatedcontrols.


28/32

Which of the following represents an inherent

limitation of internal controls?

Bank reconciliations are not performed on a timelybasis.

The CEO can request a check with no purchase order.

Customer credit checks are not performed.

Shipping documents are not matched to sales invoices.


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An auditor who uses the work of a specialist

may refer to the specialist in the auditor's

report if the: Auditor believes that the specialist's findings are

reasonable in the circumstances.

Specialist's findings support the related assertions in

the financial statements.

Auditor modifies the report because of the difference

between the client's and the specialist's valuations of

an asset.

Specialist's findings provide the auditor with greaterassurance of reliability about management's

representations.


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What is an auditor's responsibility forsupplementary information, such as disclosure

of pension information, which is outside thefinancial statements? The auditor should engage a specialist, such as an

actuary, to verify that management's assertions arereasonable.

The auditor's only responsibility for supplementaryinformation is to determine that such information hasnot been omitted.

The auditor should perform tests of transactions to the

supplementary information to verify that it isreasonably comparable to the prior-year's information.

The auditor should apply certain limited procedures tothe supplementary information and report deficienciesin, or omissions of, such information.


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A successor auditor's inquiries of the

predecessor auditor should include questions

regarding: The predecessor's evaluation of audit risk and

judgment about materiality.

Subsequent events that occurred since the

predecessor's audit report was issued.

The predecessor's understanding as to the reasons for

the change in auditors.

The predecessor's knowledge of accounting matters of

continuing significance.


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exam prep ration 1 (1)

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