Midterm Questions 1. Which of the following presumptions is correct about the reliability of audit evidence? 1. Effective internal control provides more assurance about the reliability of audit evidence. Show
10 of the following is the most reliable analytical procedure to verify the year- end financial statement balances of a wholesale business?
11 of the following client computer systems generally can be audited without examining or directly testing computer programs of the system? 1. A system that performs relatively uncomplicated processes and produces detailed output. 12 auditor’s decision whether to apply analytical procedures as substantive tests usually is determined by the 1. Precision and reliability of the data used to develop expectations. 13 audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? 1. The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. 14 auditor's analytical procedures most likely would be facilitated if the entity 1. Uses a standard cost system that produces variance reports. 15 auditor should consider certain factors in assessing the efficiency and effectiveness of analytical procedures as compared to tests of details. In determining whether and to what extent analytical procedures should be used, which of the following should the auditor consider? 1. The nature of the assertion tested. 16 of the following is not a primary responsibility of an auditor: 1. Provide management with an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework 17 a nonissuer's compliance with laws and regulations, an auditor performing an audit of the entity's financial statements is responsible for 1. Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework. 18, CPA, has been retained to audit the financial statements of Monday Co. Monday's predecessor auditor was Post, CPA, who has been notified by Monday that Post's services have been terminated. Under these circumstances, which party should initiate the communications between Hill and Post? 1. Hill, the successor auditor.
30 upon receipt of cash, a responsible employee should 1. Prepare a remittance listing. 31 of the following would not be considered an analytical procedure? 1. Projecting a deviation rate by comparing the results of a statistical sample with the actual population characteristics. 32 Alltime Dairy (AAD) is an audit client of Thorn Granton's Juneau office. Al is on the audit team. Betsy evaluates Al's work and determines his pay. Carol is a tax professional in the Juneau office, who provided 20 hours of tax advice to AAD during the last audit cycle. Dave is a tax partner in the Juneau office, who has never provided any services to AAD. Which of the following situations would create an independence problem under the new AICPA rules? 1. Betsy's live-in lover owns enough AAD stock that it is material to him, but it does not allow him to exert significant influence over AAD. 33 of the following statements is not correct about materiality? 1. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. 34 procedures used in planning an audit should focus on identifying 1. Areas that may represent specific risks relevant to the audit. 35 a lower acceptable level of materiality is established, the auditor should plan more work on individual accounts to 1. Find smaller misstatements. 36 of the following is a general control that would most likely assist an entity whose systems analyst left the entity in the middle of a major project? 1. Systems documentation. 37 which of the following situations would member Taka not be in a conflict of interest? 1. Taka's firm is bidding to buy a tract of real estate that is owned by a company that was a tax client of the firm more than 10 years before. 38 acceptable level of detection risk is inversely related to the 1. Assurance provided by substantive tests. 39 auditing related party transactions, an auditor ordinarily places primary emphasis on 1. The adequacy of the disclosure of the related party transactions. 40 of the following is an example of a validity check? 1. The computer flags any transmission for which the control field value did not match that of an existing file record. 41 of the following auditing procedures would be most likely to assist an auditor in identifying related party transactions? 1. Reviewing confirmations of loans receivable and payable for indications of guarantees. 42 which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations? 1. The recipients are likely to sign the confirmations without devoting proper attention to them. 43 of the following is a "self review" threat to member independence? 1. An engagement team member prepares invoices for the attest client. 44 the acceptable level of detection risk increases, an auditor may change the 1. Timing of substantive tests from year end to an interim date. 45 of the following acts by a CPA is a violation of professional standards regarding the confidentiality of client information? 1. Releasing financial information to a local bank with the approval of the client's mail clerk. 46 of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer's audit committee? 1. Prior to accepting the engagement, the firm should describe in writing all relationships that, as of the date of the communication, may reasonably be thought to bear on independence. 47 of the following factors is most likely to affect the extent of the documentation of the auditor’s understanding of a client’s system of internal controls? 1. The degree to which information technology is used in the accounting function. 48 appropriate disclosure is made, which of the following fee arrangements generally would be permitted under the ethical standards of the profession? 1. A fee paid to the client's tax accountant for recommending a computer system to the client. 60 of the following management assertions is an auditor most likely testing if the audit objective states that all inventory on hand is reflected in the ending inventory balance? 1. Inventory is complete. 61 of the following factors most likely would cause a CPA to not accept a new audit engagement? 1. The prospective client is unwilling to make all financial records available to the CPA. 62 has a very unusual auditing situation. An unusual transaction has created a situation where following GAAP seems problematic. Kate needs advice. Which of the following is true as Kate considers how to handle the situation? 1. To depart from GAAP, Kate need both demonstrate that following GAAP would mislead investors, and describe the departure, its approximate effects, and the reasons why compliance would mislead. 63 of the following underlies the application of generally accepted auditing standards, particularly the standards for obtaining sufficient appropriate audit evidence? 1. The elements of materiality and audit risk. 64 was on ABC Accounting Firm's audit team for client Bildilly Corporation, a small, privately held company. Bildilly offered Simmie a responsible job in the CFO's office, and she accepted. Which of the following conditions is not one that must be met to ensure that independence is not impaired because of this move? 1. Simmie waits one entire audit cycle before going to work at Bildilly (though she can be paid during the interim). 65 letter issued regarding significant deficiencies relating to an entity's internal control observed during an audit of financial statements should include a 1. Restriction on the distribution of the report. 66 of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? 1. Supporting records that should be readily available are frequently not produced when requested. 67 of the following circumstances most likely would cause an auditor to consider whether material misstatements exist in an entity's financial statements? 1. Supporting records that should be readily available are frequently not produced when requested. 68 key aspect of the “concern for the public interest” definition of a professional is: 1. the fact that there are situations where professionals must put the interest of society ahead of the interest of their clients or their own well-being. 69 gaining an understanding of the client’s sources of financing, the auditor: 1. determines if the client is meeting principal and interest payments when they are due 70 of the following is an example of a qualitative materiality factor? 1. The client is experiencing a slowdown in sales and is struggling to pay vendors on time. 71 gaining an understanding of the client at the industry level, the auditor will: 1. consider the level of demand for the goods provided by companies in the industry. 72 key aspect of testing the completeness of a data set is: 1. checking the numerical continuity of the data. 73 function of internal audit is determined by: 1. those charged with governance and management. 74 to the profession’s ethical standards, an auditor would be considered independent in which of the following instances? 1. A professional employee, who does not work on the audit, has a spouse who is a marketing manager for an audit client. 75 is generally the most reliable form of evidence? 1. Externally generated evidence sent directly to the auditor. 76 of the following are reasons why users would demand an audit of financial statements except: 1. cost. 77 CPA who is a “covered person” purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities were not material to the CPA but were material to the child’s personal net worth. Would the independence of the CPA be considered impaired with respect to the client? 1. Yes, because the stock would be considered a direct financial interest and, consequently, materiality is not a factor. 78 internal control component that addresses how an organization holds an individual accountable for his or her internal control responsibilities in pursuit of objectives is related to: 1. the control environment. 79 external confirmation sent to a bank: 1. All of these answer choices are correct. were audited by Cox & Co., CPAs. Starr had engaged Cox to audit Silo’s financial statements. While performing the audit, Cox failed to discover material fraud, which subsequently caused Starr to suffer substantial losses. For Cox to be liable under common law under the Ultramares decision, Starr, at a minimum, must prove that Cox:
91 audit expectation gap occurs when: 1. user beliefs do not align with what professional standards and regulations expect of auditors. 92 a plaintiff is suing the auditor for damages under Rule 10(b)-5 of the 1934 Securities Act, which of the following is not part of the plaintiff’s burden of proof? 1. The plaintiff relied on the financial statements. 93 of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed pursuant to the Securities Act of 1933 is that: 1. there was a materially false or misleading statement in the financial statements. 94 of the client who perform assurance and consulting activities designed to evaluate and improve the effectiveness of the entity’s governance, risk management, and internal control processes ________. 1. are known as internal auditors 95 of evidence indicating the competency of the internal audit function could be ________. 1. professional certification in a relevant field 96 can a spouse that works for an attestation client still participate in an employee benefit plan that includes employee stock ownership plans or employee stock option plans? 1. When the benefits are offered equitably to all similar employees. 97 two factors lead to the development of an overall strategy? 1. The auditor’s determination of materiality and audit risk 98 auditing procedure of observation ________. 1. only provides evidence of a process at the time auditors observe it being carried out 99 auditor has just prepared and sent a letter to management detailing weaknesses in internal control. A copy of this letter should be ________. 1. placed in the permanent file
When should an auditor perform analytical procedures?It is also mandatory that the auditor should perform analytical procedures near the end of the audit that assess whether the financial statements are consistent with the auditor's understanding of the entity (ISA 520).
Which of the following is an analytical procedure that an auditor?Which of the following is an analytical procedure that an auditor most likely would perform during the final review stage of an audit? Reading the financial statements and considering whether there are any unusual or unexpected balances that were not previously identified.
What type of analytical procedure would an auditor most likely use in developing?What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts? Trend analysis.
How auditors use analytical procedures?Analytical procedures are used for the following purposes: To assist the auditor in planning the nature, timing, and extent of other auditing procedures. As a substantive test to obtain evidential matter about particular assertions related to account balances or classes of transactions.
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An auditors analytical procedures most likely would be facilitated if the entity
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