All changes in the audit program from the prior year should be reported to the entity's audit Choice "c" is incorrect.. The external auditor's assessment of control risk might be based i
Trang 1Following are multiple choice questions recently released by the AICPA These questions were released by the AICPA with letter answers only Our editorial board has provided the accompanying explanations
Please note that the AICPA generally releases questions that it does NOT intend to use again These questions and content may or may not be representative of questions you may see on any upcoming exams
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An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers This test of controls most likely is performed to support management's financial statement assertions of:
Choice "a" is incorrect Observing the mailing of monthly statements and reviewing evidence of follow-up
on errors reported by customers does not provide any assurance regarding how receivables are
presented and disclosed in the financial statements
Choice "b" is incorrect Observing the mailing of monthly statements and reviewing evidence of follow-up
on errors reported by customers provides support for the existence or occurrence assertion, but does not provide evidence of proper financial statement presentation and disclosure, as discussed in the
explanations for items "c" and "a" above
Choice "d" is incorrect Observing the mailing of monthly statements and reviewing evidence of follow-up
on errors reported by customers provides evidence supporting the existence or occurrence assertion, as discussed in the explanation for item "c" above
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When a company's stock record books are maintained by an outside registrar or transfer agent, the auditor should obtain confirmation from the registrar or transfer agent concerning the:
a Amount of dividends paid to related parties
b Expected proceeds from stock subscriptions receivable
c Number of shares issued and outstanding
d Proper authorization of stock rights and warrants
ANSWER:
Choice "c" is correct If a client uses a stock transfer agent, confirmations should be used to provide evidence of shares authorized, issued, and outstanding, as well as to provide evidence of the individual transactions
Choice "a" is incorrect It is the auditor's responsibility to identify, examine, and evaluate the disclosure of related party transactions The stock transfer agent would not necessarily know which parties are related
to the client
Choice "b" is incorrect The auditor should recalculate, or should review management's calculations of, stock subscriptions receivable Confirmation from the stock transfer agent would not be necessary to review this information
Choice "d" is incorrect Proper authorization of stock rights and warrants would best be verified by reviewing the minutes of Board of Director meetings Confirmation from the stock transfer agent would not be necessary to review this information
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The GAO standards of reporting for governmental financial audits incorporate the AICPA standards of reporting and prescribe supplemental standards to satisfy the unique needs of governmental audits Which of the following is a supplemental reporting standard for governmental financial audits?
a Auditors should report the scope of their testing of compliance with laws and regulations and of internal controls
b Material indications of illegal acts should be reported in a document distributed only to the entity's senior officials
c All changes in the audit program from the prior year should be reported to the entity's audit
Choice "c" is incorrect Although GAO standards require that the auditor communicate information regarding the nature, timing and extent of planned testing to officials of the audited entity and to
individuals contracting for the audit, reporting of all changes is not required (For example, immaterial
changes to the audit program need not be reported.)
Choice "d" is incorrect Certain privileged or confidential information may be prohibited from general disclosure and should not be included in the audit report The report should, however, disclose the nature
of the information omitted and the requirement that makes an opinion necessary
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Which of the following statements ordinarily is not included among the written client representations
made by the chief executive officer and the chief financial officer?
a "Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion."
b "There are no unasserted claims or assessments that our lawyer has advised us are probable of
assertion and must be disclosed."
c "We have no plans or intentions that may materially affect the carrying value or classification of
assets and liabilities."
d "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."
ANSWER:
Choice "a" is correct The sufficiency of audit evidence and the type of opinion to be rendered are determined by the auditor, who applies professional judgment in making such determinations
Management representations are not necessary for the auditor to make such judgments, but rather would
be used to confirm representations given to the auditor regarding the financial statements, completeness
of information, recognition, measurement, and disclosure, and subsequent events
Choice "b" is incorrect The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that there are no unasserted claims or
assessments that the entity's lawyer has advised are probable of assertion and must be disclosed Choice "c" is incorrect The management representation letter should include information on recognition, measurement, and disclosure, and will generally state that management has no plans or intentions that may materially affect the carrying value or classification of assets and liabilities
Choice "d" is incorrect The management representation letter should include information on subsequent events, and will generally state that no events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements
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When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:
a The effects of the adverse financial conditions likely will cause a bankruptcy filing
b Information about the entity's ability to continue as a going concern is not disclosed
c Management has no plans to reduce or delay future expenditures
d Negative trends and recurring operating losses appear to be irreversible
ANSWER:
Choice "b" is correct In a situation where it is likely that an entity's operations will be discontinued, disclosure of information about the entity's ability to continue as a going concern is required by GAAP Failure to make such disclosure would be a departure from GAAP, resulting in either a qualified or adverse opinion
Choice "a" is incorrect As long as the going concern situation is adequately disclosed, the fact that there will be a bankruptcy filing would not cause the auditor to express a qualified opinion Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report
Choice "c" is incorrect As long as the going concern situation is adequately disclosed, the fact that management does not intend to reduce or delay future expenditures would not cause the auditor to express a qualified opinion Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report
Choice "d" is incorrect As long as the going concern situation is adequately disclosed, the fact that negative trends and recurring operating loses appear to be irreversible would not cause the auditor to express a qualified opinion Generally, an explanatory paragraph would be added following the opinion paragraph of the unqualified report
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To which of the following matters would materiality limits not apply when obtaining written client
representations?
a Violations of state labor regulations
b Disclosure of line-of-credit arrangements
c Information about related party transactions
d Instances of fraud involving management
Choice "a" is incorrect Materiality limits do apply to violations of state labor regulations The
management representation letter generally indicates that there are no violations of regulations "whose effects should be considered for financial statement disclosure"—and only material effects would typically
be considered for disclosure
Choice "b" is incorrect Since GAAP requires disclosure of material line-of-credit arrangements,
materiality limits do apply to representations about such matters
Choice "c" is incorrect Since GAAP requires disclosure of material related party transactions, materiality limits do apply to representations about such matters
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Prior to commencing field work, an auditor usually discusses the general audit strategy with the client's management Which of the following details do management and the auditor usually agree upon at this time?
a The specific matters to be included in the communication with the audit committee
b The minimum amount of misstatements that may be considered to be reportable conditions
c The schedules and analyses that the client's staff should prepare
d The effects that inadequate controls may have over the safeguarding of assets
ANSWER:
Choice "c" is correct Prior to commencing field work, the auditor would likely discuss with management any assistance desired from client staff This is part of establishing an understanding with the client Choice "a" is incorrect Prior to commencing field work, the auditor likely would be unaware of the specific matters to be included in the communication to the audit committee
Choice "b" is incorrect While the auditor may set a preliminary measure of materiality, this is a matter of auditing judgment and would not typically be discussed with the client In addition, significant internal control weaknesses are reported because they indicate a potential for material misstatement, regardless
of whether any actual misstatements exceed a particular threshold
Choice "d" is incorrect Prior to commencing field work, the auditor would be unlikely to have identified inadequate controls or evaluated their possible effects
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An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date The auditor should be aware that this practice:
a Eliminates the use of certain statistical sampling methods that would otherwise be available
b Presumes that the auditor will reperform the tests as of the balance sheet date
c Should be especially considered when there are rapidly changing economic conditions
d Potentially increases the risk that errors that exist at the balance sheet date will not be detected
ANSWER:
Choice "d" is correct Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, as it is possible that errors will occur between the date of interim testing and the balance sheet date For this reason, the auditor generally selects for interim examination only accounts that are reasonably predictable with respect to amount, relative significance, and composition, and must also identify procedures sufficient to extend interim conclusions to year-end
Choice "a" is incorrect The use of statistical sampling methods is not affected by the timing of audit procedures
Choice "b" is incorrect Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, but it does not require all such tests to be reperformed Instead, the auditor should perform procedures designed to extend the interim conclusions to year-end Such procedures should be less in scope than the initial procedures performed at interim; otherwise, it would make more sense to have simply applied the more extensive tests at year-end in the first place
Choice "c" is incorrect Generally, accounts selected for interim examination should be reasonably predictable with respect to amount, relative significance, and composition Rapidly changing economic conditions might affect the valuation, significance, or composition of certain assets or liabilities, and therefore would make testing at interim less likely
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In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:
a Internal auditor's compliance with professional internal auditing standards
b Client's policies that limit the internal auditor's access to management salary data
c Evidence supporting a further reduction in the assessed level of control risk
d Results of ratio analysis that may identify unusual transactions and events
ANSWER:
Choice "a" is correct In assessing the competence of a client's internal auditor, an independent auditor would consider the internal auditor's compliance with professional auditing standards Such compliance could be evaluated by reviewing the audit programs and procedures used by the internal auditor, as well
as by assessing the quality of audit documentation provided
Choice "b" is incorrect The internal auditor's access to management salary data has no bearing on his or her competency
Choice "c" is incorrect The external auditor's assessment of control risk might be based in part on the existence and effectiveness of an internal audit group, but such assessment would not provide
information regarding the competency of the internal auditor
Choice "d" is incorrect Ratio analysis might be used to identify unusual transactions or events, but it would not provide information regarding the competency of the internal auditor
Trang 11Choice "a" is incorrect There is no professional engagement by this name
Choice "b" is incorrect There is no professional engagement by this name
Choice "c" is incorrect There is no professional engagement by this name
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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 would consider, as a mitigating factor, the entity's plans to:
a Repurchase the entity's stock at a price below its book value
b Issue stock options to key executives
c Lease rather than purchase operating facilities
d Accelerate the due date of an existing mortgage
it is not a mitigating factor
Choice "b" is incorrect Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity Issuing stock options does not fall into any of these categories and would not be considered a mitigating factor
Choice "d" is incorrect Mitigating factors in a going concern situation include plans to dispose of assets, plans to borrow money or restructure debt, plans to reduce or delay expenditures, or plans to increase ownership equity Accelerating the due date of an existing mortgage would increase expenditures, and therefore would not be a mitigating factor
Trang 13Choice "c" is correct An understanding between the auditor and the client generally includes the
auditor's responsibilities One of the auditor's responsibilities is to ensure that the audit committee is aware of any reportable conditions noted
Choice "a" is incorrect An understanding between the auditor and the client generally would not include the auditor's responsibility for determining preliminary judgments about materiality and audit risk factors,
as an understanding generally is not obtained with respect to audit methodology, audit procedures, or specific audit assessments
Choice "b" is incorrect Management is not responsible for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern The auditor; however, would look for and evaluate mitigating factors to determine if such factors alleviate doubt about the entity's ability to continue as a going concern
Choice "d" is incorrect Management is not responsible for providing the auditor with an assessment of the risk of material misstatement due to fraud The auditor; however, is responsible for making such an assessment
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When a client engages in transactions involving derivatives, the auditor should:
a Develop an understanding of the economic substance of each derivative
b Confirm with the client's broker whether the derivatives are for trading purposes
c Notify the audit committee about the risks involved in derivative transactions
d Add an explanatory paragraph to the auditor's report describing the risks associated with each
be reported in accordance with their economic substance, even if this differs from their form
Choice "b" is incorrect While the auditor might confirm settled and unsettled transactions with the broker, whether a security is held for trading purposes is based on management intent and would not be
confirmed with the broker
Choice "c" is incorrect There is no requirement that the auditor notify the audit committee about the risks involved in derivative transactions
Choice "d" is incorrect There is no requirement that the auditor add an explanatory paragraph to the auditor's report describing the risks associated with each derivative
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A practitioner's report on agreed-upon procedures that is in the form of procedures and findings should contain:
a Negative assurance that the procedures did not necessarily disclose all reportable conditions
b An acknowledgment of the practitioner's responsibility for the sufficiency of the procedures
c A statement of restrictions on the use of the report
d A disclaimer of opinion on the entity's financial statements
Choice "d" is incorrect The subject matter of an agreed-upon procedures engagement varies, and may
be unrelated to the financial statements
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Analytical procedures performed during an audit indicate that accounts receivable doubled since the end
of the prior year However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same Which of the following client explanations would satisfy the auditor?
a A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year
b Internal control activities over the recording of cash receipts have been improved since the end of the prior year
c The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet
d The client tightened its credit policy during the current year and sold considerably less merchandise
to customers with poor credit ratings
ANSWER:
Choice "c" is correct If a second, similar retail outlet were opened, one would expect sales and accounts receivable to double As long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same
Choice "a" is incorrect If more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts
Choice "b" is incorrect Improved control activities related to the recording of cash receipts might result in
a decrease in accounts receivable in the current year as compared to the prior year, not an increase In addition, improving such controls would not be likely to affect the allowance for doubtful accounts as a percentage of receivables
Choice "d" is incorrect If the client sold less merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should decrease to reflect the lower level
of estimated bad debts
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Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
a The auditor should consider the tolerable rate of deviation from the controls being tested in
determining sample size
b As the likely rate of deviation decreases, the auditor should increase the planned sample size
c The allowable risk of assessing control risk too low has no effect on the planned sample size
d Of all the factors to be considered, the population size has the greatest effect on the sample size
ANSWER:
Choice "a" is correct There is an inverse relationship between the tolerable deviation rate and sample size: as the auditor is willing to accept a greater deviation rate, a smaller sample size can be used Choice "b" is incorrect There is a direct relationship between expected deviation rate and sample size:
as the likely rate of deviation decreases, a smaller sample size can be used
Choice "c" is incorrect There is an inverse relationship between the risk of assessing control risk too low and sample size: as the allowable level of risk increases, the sample size decreases
Choice "d" is incorrect Population size has a relatively small effect on sample size, especially in large populations
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An auditor usually determines whether dividend income from publicly-held investments is reasonable by computing the amounts that should have been received by referring to:
a Stock ledgers maintained by independent registrars
b Dividend records on file with the SEC
c Records produced by investment services
d Minutes of the investee's board of directors
ANSWER:
Choice "c" is correct Investment income from dividends is generally recalculated by comparing recorded income with dividend record books produced by investment advisory services such as "Moody's Dividend Record." These books state the dividend that was declared and paid by the investee
Choice "a" is incorrect Stock ledgers maintained by independent registrars indicate how many shares of stock are issued and outstanding, and identify the shareholders of record, but they do not contain
information concerning dividends
Choice "b" is incorrect Dividend records on file with the SEC would probably include appropriate
information, but it is more efficient to use s single source (such as "Moody's") than to obtain and review SEC records for each investee
Choice "d" is incorrect Annual audited financial statements of the investee companies give the total dividends paid, but there may not be enough information to determine exactly how much went to each type of stock and hence to each stockholder In addition, it is more efficient to use a single source (such
as "Moody's") than to obtain and review the financial statements of each investee
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Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?
a The complexity of the information processing system
b Human judgment in the decision making process
c The ineffectiveness of the board of directors
d The lack of management incentives to improve the control environment
ANSWER:
Choice "b" is correct Human error is an inherent limitation in internal control, because even a properly designed and operating internal control system cannot prevent errors in the use of information provided
by the system
Choice "a" is incorrect The complexity of the information processing system is not an inherent limitation
of internal control, because controls can be adequately designed to take such complexity into account Choice "c" is incorrect An ineffective board of directors is weakness in internal control, but it is one that could and should be corrected It is not an inherent limitation of internal control
Choice "d" is incorrect Lack of appropriate incentives to improve the control environment is a weakness
in internal control, but it is one that could and should be corrected It is not an inherent limitation of internal control
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A successor auditor is required to attempt communication with the predecessor auditor prior to:
a Performing test of controls
b Testing beginning balances for the current year
c Making a proposal for the audit engagement
d Accepting the engagement
Choice "b" is incorrect A successor auditor is required to attempt communication with the predecessor auditor prior to accepting a new engagement This certainly implies that such attempt will be made before any audit tests are performed; however, the requirement is stated in reference to the date of acceptance
Choice "c" is incorrect A successor auditor is not required to attempt communication with the
predecessor auditor prior to making a proposal for the audit engagement (remember that more than one auditor may be bidding for the engagement—and it wouldn't be reasonable to expect the predecessor auditor to respond to all bidders) However, once a successor has been selected, that auditor must attempt communication with the predecessor auditor before actually accepting the engagement
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Which of the following factors would least likely affect the extent of the auditor's consideration of the
client's internal controls?
a The amount of time budgeted to complete the engagement
b The size and complexity of the client
c The nature of specific relevant controls
d The auditor's prior experience with client operations
ANSWER:
Choice "a" is correct The extent of the auditor's consideration of the client's internal controls is affected
by a variety of factors related to the entity, the industry, and the auditor's level of experience, with the primary goal being to obtain a sufficient understanding of internal control The amount of time budgeted
to complete the audit should not be a primary factor in determining the extent of consideration of the client's internal controls—if more time is needed to adequately consider internal control, then the budget should be revised
Choice "b" is incorrect The size and complexity of the client would affect the extent of the auditor's consideration of the client's internal controls
Choice "c" is incorrect The nature of specific relevant controls would affect the extent of the auditor's consideration of the client's internal controls
Choice "d" is incorrect The auditor's prior experience with the client would affect the extent of the auditor's consideration of the client's internal controls
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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:
a Observe physical counts of the inventory items
b Trace the total on the inventory listing to the general ledger inventory account
c Obtain a confirmation from the client indicating inventory ownership
d Analytically compare the current-year inventory balance to the prior-year balance
ANSWER:
Choice "a" is correct The auditor's personal observation is generally one of the most reliable forms of evidence Observing physical inventory counts provides reliable evidence that the inventory actually exists
Choice "b" is incorrect Tracing totals from the inventory listing to the general ledger inventory account provides evidence of completeness, not existence
Choice "c" is incorrect A confirmation from the client indicating ownership provides some evidence regarding rights and obligations, but does not provide evidence of existence
Choice "d" is incorrect Analytical comparisons of current year to prior year inventory balances might provide some evidence regarding completeness, existence, and valuation, but this is not as reliable a procedure for verifying existence as is the auditor's direct personal observation
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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 What type of audit procedure was performed?
Choice "a" is incorrect Tests of transactions involve selecting specific transactions and evaluating whether they were properly recorded Comparing current year and prior year gross margin would not provide information regarding specific transactions
Choice "c" is incorrect Tests of controls are performed to evaluate the effectiveness of controls Comparing current year and prior year gross margin would not provide information regarding controls Choice "d" is incorrect Test of details are audit procedures used to gather evidence to support specific account balances Comparing current year and prior year gross margin does not provide much
information regarding specific account balances, although it might identify an account balance worthy of further consideration
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If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
a Purchase returns and allowances
b Allowance for doubtful accounts
c Common stock
d Noncontrolling interest of a subsidiary purchased during the year
ANSWER:
Choice "b" is correct During an economic downturn, it is more likely that customers will default on
payments owed The auditor should therefore focus increased attention on the allowance for doubtful accounts, to ensure that it has been adjusted to appropriately reflect this increased risk
Choice "a" is incorrect A recession is not likely to affect purchase returns and allowances, though it might result in a decline in purchases
Choice "c" is incorrect A recession is not likely to directly affect the common stock account
Choice "d" is incorrect A recession is not likely to directly affect a pre-existing, noncontrolling interest in a subsidiary
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Which of the following is true regarding reportable conditions?
a Auditors must search for them
b Auditors must communicate them to the audit committee
c They must be included in the financial statements
d They must be disclosed in footnotes
Choice "d" is incorrect Reportable conditions are not typically included in the footnotes to the financial statements, as they relate to controls and not to the presentation and disclosure of financial information
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Which of the following procedures would yield the most competent evidence?
a A scanning of trial balances
b An inquiry of client personnel
c A comparison of beginning and ending retained earnings
d A recalculation of bad debt expense
ANSWER:
Choice "d" is correct The auditor's direct personal knowledge (obtained through observation,
examination, inspection, or recalculation) provides among the most competent of evidence
Choice "a" is incorrect Scanning of trial balances may indicate areas where more attention should be focused (e.g., unusual balances, zero balances, etc.), but would seldom provide competent evidence in and of itself
Choice "b" is incorrect Inquiry of client personnel provides evidence that is not particularly competent, which is why it often needs to be corroborated by the auditor
Choice "c" is incorrect A comparison of beginning and ending retained earnings may provide information about certain transactions and events (e.g., dividends, income, etc.), but would not in and of itself provide evidence supporting those items