Auditing and Attestation 5 Class Questions

Transcription

1 1. CPA For which of the following audit tests would an auditor most likely use attribute sampling? a. Selecting accounts receivable for confirmation of account balances. b. Inspecting employee time cards for proper approval by supervisors. c. Making an independent estimate of the amount of a LIFO inventory. d. Examining invoices in support of the valuation of fixed asset additions. CPA Choice "b" is correct. Attribute sampling is used to test controls. Inspecting employee time cards for proper approval by supervisors is a test of controls. Controls often relate to authorization, validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period. Look for these terms in identifying which option is a test of controls. Words such as account balance, amount, valuation, presentation, and disclosure are more likely to relate to substantive tests. Choice "a" is incorrect. Selecting accounts receivable for confirmation of accounts balances is a substantive test. Choice "c" is incorrect. Making an independent estimate of the amount of a LIFO inventory is a substantive test. Choice "d" is incorrect. Examining invoices in support of the valuation of fixed asset additions is a substantive test. 2. CPA As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was: a. Less than the risk of assessing control risk too low, based on the auditor's sample. b. Less than the deviation rate in the auditor's sample. c. More than the risk of assessing control risk too low, based on the auditor's sample. d. More than the deviation rate in the auditor's sample. CPA Choice "d" is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, since the control will be less effective than sample results would indicate. Choice "a" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low. Choice "b" is incorrect. If the true deviation rate is lower than the deviation rate in the sample, control risk may be assessed at a rate that is too high, potentially leading to audit inefficiencies. Choice "c" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low. 1

2 3. CPA While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of: a. Assessing control risk too high. b. Assessing control risk too low. c. Incorrect rejection. d. Incorrect acceptance. CPA Choice "c" is correct. Erroneously concluding that an account balance is materially misstated is an example of incorrect rejection. Choice "a" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing). Choice "b" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing). Choice "d" is incorrect. If the auditor had concluded that the account was fairly presented when, in fact, it was not, it would be an example of incorrect acceptance. 4. CPA An auditor who uses statistical sampling for attributes in testing internal controls should reduce the planned reliance on a prescribed control when the: a. Sample rate of deviation plus the allowance for sampling risk equals the tolerable rate. b. Sample rate of deviation is less than the expected rate of deviation used in planning the sample. c. Tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation. d. Sample rate of deviation plus the allowance for sampling risk exceeds the tolerable rate. CPA Choice "d" is correct. The auditor will reduce reliance on a control if the upper deviation rate exceeds the tolerable rate. The upper deviation rate consists of the sample deviation rate plus an allowance for sampling risk. Therefore, if the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate, that is equivalent to the upper deviation rate exceeding the tolerable rate. Choice "a" is incorrect. If the sample deviation rate plus the allowance for sampling risk equals the tolerable rate, the auditor may still place the planned amount of reliance on the control. Choice "b" is incorrect. Whether the actual sample deviation rate is less than the expected deviation rate is irrelevant for making decisions about planned reliance levels. Choice "c" is incorrect. If the tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation, then the upper deviation rate is less than the tolerable rate. This situation supports the planned reliance, and no reduction in planned reliance would be necessary. 2

3 5. CPA In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if: a. Probability proportional to size (PPS) sampling is used. b. The population has highly variable recorded amounts. c. The auditor's estimated tolerable misstatement is extremely small. d. The standard deviation of recorded amounts is relatively small. CPA Choice "b" is correct. The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of some characteristic related to the specific audit objective. Choice "a" is incorrect. While PPS sampling results in a stratified sample, it is a result of the sampling method employed and does not require the auditor to perform stratification since it occurs automatically. Choice "c" is incorrect. The estimated tolerable misstatement does not affect the decision to stratify. Choice "d" is incorrect. The standard deviation of the recorded amounts represents the population's variability. Therefore, the auditor would be most likely to stratify when the standard deviation is high, not low. 6. CPA Which of the following sample planning factors would influence the sample size for a substantive test of details for a specific account? Expected Measure of amount of tolerable misstatements misstatement a. No No b. Yes Yes c. No Yes d. Yes No CPA Choice "b" is correct. When planning a particular sample for a substantive test of details, the auditor should consider how much monetary misstatement in the account might exist without causing the financial statements to be materially misstated (tolerable misstatement) as well as the expected size and frequency of misstatements. Choices "a", "c", and "d" are incorrect, per the above explanation. 3

4 7. CPA In a probability-proportional-to-size sample with a sampling interval of $10,000, an auditor discovered that a selected account receivable with a recorded amount of $5,000 had an audited amount of $4,000. If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be: a. $1,000 b. $2,000 c. $5,000 d. $10,000 CPA Choice "b" is correct. The sample error of $1,000 ($5,000 $4,000) is projected to the entire interval through use of a "tainting factor" of 20% ($1,000/$5,000). If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be 20% of $10,000, or $2,000. Choice "a" is incorrect, as the sample error of $1,000 needs to be projected to the entire interval. Choices "c" and "d" are incorrect, per the above explanation. 8. CPA In addition to evaluating the frequency of deviations in tests of controls, an auditor should also consider certain qualitative aspects of the deviations. The auditor most likely would give broader consideration to the implications of a deviation if it was: a. The only deviation discovered in the sample. b. Identical to a deviation discovered during the prior year's audit. c. Caused by an employee's misunderstanding of instructions. d. Initially concealed by a forged document. CPA Choice "d" is correct. The auditor should consider both the qualitative and the quantitative aspects of deviations in tests of controls. Qualitative aspects might include whether deviations are indicative of an error or fraud. Such an evaluation is important because fraud is intentional, has implications beyond the direct monetary effect, and requires consideration of the implications for other aspects of the audit. Thus, a deviation initially concealed by a forged document is very serious and deserves broader consideration than a deviation of the same dollar amount due to an error. Choice "a" is incorrect. The fact that a deviation was the only one discovered would have no importance beyond its impact on the computation of the upper deviation rate. Choice "b" is incorrect. Discovery of a deviation identical to one discovered during the prior year's audit is not necessarily cause for additional concern. Choice "c" is incorrect. Employee misunderstanding of instructions is an inherent limitation of internal control and is not necessarily cause for concern. 4

5 9. CPA Which of the following computer-assisted auditing techniques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? a. Integrated test facility. b. Input controls matrix. c. Parallel simulation. d. Data entry monitor. CPA Choice "a" is correct. An integrated test facility uses test data commingled with actual data to test transactions. Choice "b" is incorrect. An input controls matrix is an input control. Choice "c" is incorrect. Parallel simulation involves writing a computer program that duplicates the logic of a client's program, using identical data as input, and comparing output. Choice "d" is incorrect. A data entry monitor is an input control. 10. CPA Which of the following computer-assisted auditing techniques processes client input data on a controlled program under the auditor's control to test controls in the computer system? a. Test data. b. Review of program logic. c. Integrated test facility. d. Parallel simulation. CPA Choice "d" is correct. Parallel simulation is a technique in which the auditor reprocesses the client's data using the auditor's own software. The auditor then compares his or her results to those obtained by the client. Choice "a" is incorrect. The test data approach uses the auditor's input data on the client's system, offline. Choice "b" is incorrect. Reviewing program logic is not a computer-assisted audit technique. Choice "c" is incorrect. An integrated test facility uses the auditor's input data on the client's system, online. 5

6 11. CPA A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an EDP system is that the auditor may: a. Access information stored on computer files while having a limited understanding of the client's hardware and software features. b. Consider increasing the use of substantive tests of transactions in place of analytical procedures. c. Substantiate the accuracy of data through self-checking digits and hash totals. d. Reduce the level of required tests of controls to a relatively small amount. CPA Choice "a" is correct. One of the primary benefits of using generalized audit software is the ability to access client data stored in computer files without having a detailed understanding of the client's hardware and software features. Choice "b" is incorrect. The use of generalized audit software would not affect the auditor's decision with respect to using substantive tests of transactions in place of analytical procedures. Choice "c" is incorrect. Generalized audit software is used to extract and analyze data. Self-checking digits and hash totals are controls embedded in client software applications to ensure accuracy. They are not a part of generalized audit software. Choice "d" is incorrect. The use of generalized audit software does not reduce the need to perform tests of controls if reliance on controls is planned. 12. CPA An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should: a. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses. b. Indicate that the significant deficiencies should be disclosed in the annual report to the entity's shareholders. c. Include a paragraph describing management's assertion concerning the effectiveness of internal control. d. Indicate that the audit's purpose was to report on the financial statements and not to provide assurance on internal control. CPA Choice "d" is correct. Conditions noted by the auditor that are significant deficiencies or material weaknesses should be reported in writing. Any report issued on such conditions should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control; (2) include the definition of significant deficiencies and, if applicable, material weaknesses; (3) include a restriction on use (i.e., the report is intended solely for the information and use of management). Choice "a" is incorrect. During an audit, the auditor is not required to design tests specifically to detect significant deficiencies in internal control. Choice "b" is incorrect. Significant deficiencies in internal control are not generally disclosed in the annual report, and the auditor's letter on such conditions observed during a financial statement audit is intended solely for the information and use of management, those charged with governance, and others within the organization. Choice "c" is incorrect. Management does not provide an assertion concerning the effectiveness of internal control as part of a financial statement audit (but would provide such an assertion in a separate engagement related to internal control). 6

7 13. CPA Brown, CPA, has accepted an engagement to examine and report on Crow Company's written assertion about the effectiveness of Crow's internal control. Crow is a nonissuer. In what form may Crow present its written assertion? I. In a separate report that will accompany Brown's report. II. In a representation letter to Brown. a. I only. b. II only. c. Either I or II. d. Neither I nor II. CPA Choice "c" is correct. An engagement to examine and report on a written assertion by management is an example of an attest engagement. Management may present its written assertion either in 1) a separate report that will accompany the practitioner's report, or 2) a representation letter to the practitioner. Choices "a", "b", and "d" are incorrect, based on the above explanation. 14. CPA In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the: a. Documentary evidence regarding the control environment factors. b. Changes in internal control since the prior report. c. Potential benefits from the practitioner's suggested improvements. d. Inherent limitations of any internal control. CPA Choice "d" is correct. In reporting on a nonissuer's internal control over financial reporting in an attest engagement (not an audit), the practitioner's report should include a paragraph stating that, because of inherent limitations of any internal control, errors or fraud may occur and not be detected. Choice "a" is incorrect. Documentary evidence need not be provided in the practitioner's report. Choice "b" is incorrect. The practitioner need not mention any changes in internal control since the last report. Choice "c" is incorrect. The practitioner should not describe any potential benefits that might result from the practitioner's suggested improvements. 7

8 15. CPA Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true? a. Jackson is not required to audit internal control, but should report any significant deficiencies or material weaknesses noted. b. Saffer is required to obtain an audit of its internal control, but a professional other than Jackson may be hired for this purpose. c. Jackson is required to audit and report on Saffer s internal control. d. If Jackson provides an adverse opinion on the financial statements, an audit of Saffer s internal control is not permitted. 15. CPA Choice "c" is correct. PCAOB Auditing Standard No. 5 requires Jackson to perform an integrated audit, auditing both the financial statements and management's assessment of the effectiveness of internal control. Choice "a" is incorrect. Jackson is required to perform an integrated audit, which includes an audit of internal control. Choice "b" is incorrect. PCAOB Auditing Standard No. 5 requires Saffer to have an audit of internal control. Because the objectives and the work involved in an audit of internal control and in a financial statement audit are so closely related, the two audits must be performed together. Each of these two audits provides information that is relevant to the other. Choice "d" is incorrect. An audit of internal control is required, regardless of the type of opinion rendered on the financial statements. 8

9 16. CPA In auditing a not-for-profit entity that receives governmental financial assistance, the auditor has a responsibility to: a. Issue a separate report that describes the expected benefits and related costs of the auditor's suggested changes to the entity's internal control. b. Assess whether management has identified laws and regulations that have a direct and material effect on the entity's financial statements. c. Notify the governmental agency providing the financial assistance that the audit is not designed to provide any assurance of detecting errors and fraud. d. Render an opinion concerning the entity's continued eligibility for the governmental financial assistance. CPA Choice "b" is correct. The auditor must assess whether management has identified laws and regulations that have a direct and material effect on the determination of amounts in an entity's financial statements and obtain an understanding of the possible effects on the financial statements of such laws and regulations. Choice "a" is incorrect. The auditor must issue a separate report on the consideration of the entity's internal control, not on the expected benefits and related costs. Choice "c" is incorrect. Government Auditing Standards (the Yellow Book) specify that the auditor should design the audit to provide reasonable assurance that material errors and fraud are detected. Choice "d" is incorrect. The auditor may be required to express an opinion on whether the entity has complied with the requirements applicable to its major federal financial assistance programs, but not whether it is still eligible to receive assistance. 17. CPA Which of the following statements is a standard applicable to financial statement audits in accordance with Government Auditing Standards? a. An auditor should assess whether the entity has reportable measures of economy and efficiency that are valid and reliable. b. An auditor should report on the scope of the auditor's testing of internal controls. c. An auditor should briefly describe in the auditor's report the method of statistical sampling used in performing tests of controls and substantive tests. d. An auditor should determine the extent to which the entity's programs achieve the desired level of results. CPA Choice "b" is correct. Auditors should report on the scope of their testing of compliance with laws and regulations and of internal controls. Choice "a" is incorrect. The auditor would assess whether the entity has reportable measures of economy and efficiency that are valid and reliable as part of an economy and efficiency (performance) audit. Choice "c" is incorrect. The auditor may report the methods of statistical sampling used as part of a performance audit. Choice "d" is incorrect. A program audit would determine the extent to which the entity's programs achieve the desired level of results. 9

10 18. CPA In auditing compliance with requirements governing major federal financial assistance programs under the Single Audit Act, the auditor's consideration of materiality differs from materiality under generally accepted auditing standards. Under the Single Audit Act, materiality is: a. Calculated in relation to the financial statements taken as a whole. b. Determined separately for each major federal financial assistance program. c. Decided in conjunction with the auditor's risk assessment. d. Ignored, because all account balances, regardless of size, are fully tested. CPA Choice "b" is correct. Under the Single Audit Act, materiality is determined separately for each major federal financial assistance program. Choice "a" is incorrect. Under a GAAS audit, materiality is determined in relation to the financial statements taken as a whole. Under a GAGAS audit, materiality levels may be lower due to the public accountability of the entity, the various legal requirements, and the visibility and sensitivity of governmental programs, activities, and functions. Choice "c" is incorrect. Materiality must be determined before risk assessments. Choice "d" is incorrect. Under the Single Audit Act, all balances need not be tested. 19. CPA Wolf is auditing an entity's compliance with requirements governing a major federal financial assistance program in accordance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf's report on compliance should express: a. No assurance on the compliance tests. b. Reasonable assurance on the compliance tests. c. A qualified or adverse opinion. d. An adverse or disclaimer of opinion. CPA Choice "c" is correct. If material instances of noncompliance are identified, the auditor should express either a qualified or adverse opinion on compliance. Choice "a" is incorrect. The auditor's report directs the reader to a separate schedule of findings after stating the importance of compliance testing and indicating that providing an opinion on compliance is not an objective of the audit. Choice "b" is incorrect. The auditor's report directs the reader to a separate schedule of findings after stating the importance of compliance testing and indicating that providing an opinion on compliance is not an objective of the audit. Choice "d" is incorrect. If material instances of noncompliance are identified, a disclaimer of opinion is not appropriate. 10

11 20. CPA For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the Statements on Auditing Standards (SAS) that are issued by the AICPA. GAGAS prescribe additional standards on: Direct reporting Reporting on of illegal acts internal controls a. Yes Yes b. Yes No c. No Yes d. No No CPA Choice "a" is correct. Government auditing standards (GAS) prescribe additional standards on the direct reporting of illegal acts. For example, the auditor is required to directly report illegal acts discovered during the audit to federal inspector generals if management fails to disclose such illegal acts to the grantor or fails to take appropriate remedial action. In addition, GAS also prescribe additional standards related to internal control reporting, such as requiring that the auditor provide a written report on internal control in every financial statement audit. Choices "b", "c", and "d" are incorrect, based on the above explanation. 21. CPA Although the scope of audits of recipients of federal financial assistance in accordance with federal audit regulations varies, these audits generally have which of the following elements in common? a. The auditor is to determine whether the federal financial assistance has been administered in accordance with applicable laws and regulations. b. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient. c. The auditor should obtain written management representations that the recipient's internal auditors will report their findings objectively without fear of political repercussion. d. The auditor is required to express both positive and negative assurance that illegal acts that could have a material effect on the recipient's financial statements are disclosed to the inspector general. CPA Choice "a" is correct. Audits of federal financial assistance under the Single Audit Act require that the auditor determine if the auditee has complied with laws, regulations, and provisions of the contracts or grant agreements. Choice "b" is incorrect. Materiality in audits of federal financial assistance is set at the program level and is not determined by the government entities that provided the federal financial assistance to the recipient. Choice "c" is incorrect. If the internal auditors are considered organizationally independent for internal auditing purposes, then they can be considered independent when conducting audits external to the government entity to which they are routinely assigned. Organizationally independent refers to the audit organization being outside of line management, reporting to the chief executive or administrative officer; that is, the internal auditors will report their findings objectively without fear of political repercussion. However, in this case, an external auditor need not be involved in the audit, and no written management representations regarding the internal auditors need be obtained. Choice "d" is incorrect. In audits of federal financial assistance under the Single Audit Act, the auditor does not express negative assurance on those items not tested. 11

12 22. CPA Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity. a. Any matters communicated to those charged with governance also are required to be communicated to the entity's management. b. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. c. Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved. d. Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again. CPA Choice "b" is correct. If those charged with governance are not involved with managing the entity, the auditor should communicate material, corrected misstatements brought to management's attention as a result of the audit. Choice "a" is incorrect. Certain matters communicated to those charged with governance, such as those related to the competence and integrity of management, might not be appropriate for discussion with management. Choice "c" is incorrect. The auditor should communicate disagreements with management, whether or not resolved. Choice "d" is incorrect. Previously communicated significant deficiencies that have not been corrected should be communicated again, in writing, during the current audit. 23. CPA Which of the following matters would an auditor most likely include in a management representation letter? a. Communications with those charged with governance concerning weaknesses in internal control. b. The completeness and availability of minutes of stockholders' and directors' meetings. c. Plans to acquire or merge with other entities in the subsequent year. d. Management's acknowledgment of its responsibility for the detection of employee fraud. CPA Choice "b" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor should include acknowledgment as to the completeness and availability of minutes of stockholders' and directors' meetings. Choice "a" is incorrect. Communications those charged with governance are generally not included in the management representation letter, whereas communications from regulatory agencies regarding noncompliance with, or deficiencies in, financial reporting practices would be included. Choice "c" is incorrect. Management's subsequent plans need not be included in the management representation letter, unless they will affect the carrying value or classification of assets and liabilities. Choice "d" is incorrect. Management acknowledges its responsibility for the fair presentation of the financial statements and states that they are unaware of any employee fraud, but does not acknowledge responsibility for the detection of employee fraud. 12