In which of the following cases would the auditor be more likely to conclude that all of the items in an account under consideration should be examined rather than tested on a sample basis?
When the measure of tolerable msistatement is Small, and error of frequency is expected to be high. WHY? This answer is correct because a small tolerable misstatement combined with a high misstatement frequency increases the auditor’s required sample size which may lead to the conclusion by the auditor that all items of the account should be examined.
An auditor examining inventory most likely would use variables sampling rather than attributes sampling to
Estimate whether the dollar amount of inventory is reasonable. Why? This answer is correct because variables sampling deals with dollar amounts (or quantities), and accordingly, this answer is correct because it involves the dollar amount of inventory. Attributes sampling addresses deviation rates from various controls.
If certain forms are not consecutively numbered
Systematic sampling may be appropriate. Because systematic sampling is a procedure where a random start is obtained and then every nth item is selected. For example, a sample of forty from a population of a thousand would require selecting every 25th item after obtaining a random start between items 1 through 25. Therefore, although the forms are not consecutively numbered, the use of systematic sampling may be appropriate.
Which of the following is included as part of the definition of audit sampling?
Evaluation of some characteristic. Why?This answer is correct because audit sampling is the application of an audit procedure to less than 100% of the items within an account balance or class of transactions for the purpose of evaluating some characteristic of the balance or class.
If the size of the sample to be used in a particular test of attributes has not been determined by utilizing statistical concepts, but the sample has been chosen in accordance with random selection procedures
The auditor may or may not achieve desired allowance for sampling risk at the desired risk of incorrect acceptance This answer is correct because although the use of random sampling makes it possible to calculate statistical conclusions, the wrong size sample will affect the achieved allowance for sampling risk at the desired risk of incorrect acceptance. For example, a sample which is too small will lead to a larger allowance for sampling risk than desired bc of a larger standard of error of the mean.
For which of the following audit tests would a CPA most likely use attribute sampling?
Identifying entries posted to incorrect accounts. Why? This answer is correct because attribute sampling (used with tests of controls) addresses the frequency with which a control operates effectively—such as the proper posting of accounts.
When performing risk assessment procedures under the International Auditing Standards, the auditor shall consider
Whether there are events or conditions that may cast significant doubt about the entity’s ability to continue as a going concern.
A violation of the profession?s ethical standards least likely would have occurred when a CPA
• Had a public accounting practice and also was president and sole stockholder of a corporation that engaged in data processing services for the public. • Formed an association, not a partnership, with two other sole practitioners and called the association "Adams, Betts and Associates." • Purchased another CPA’s accounting practice and based the price on a percentage of the fees accruing from clients over a 3-year period.
• Received a percentage of the amounts invested by the CPA’s audit clients in a tax shelter with the client’s knowledge and approval.
Purchased another CPA’s accounting practice and based the price on a percentage of the fees accruing from clients over a 3-year period.
Why? This answer is correct because the purchase of another practitioner’s practice is acceptable and the professional standards do not prohibit such a contingent payment.
The Department of Labor (DOL) most frequently conducts financial and performance audits following
Coverage of International Auditing and Assurance Standards Board pronouncements includes
reviews and quality control, as well as audits, other assurance and related engagements.
Under International Auditing Standards (ISA), the time horizon for a going concern consideration is
report.At least twelve months from the date of the audit report.
he following can cause a CPA to receive an automatic expulsion from the AICPA
The CPA’s CPA certificate is revoked by the relevant state board of accountancy. The CPA is convicted of a felony. The CPA intentionally did not file his personal tax return as required by federal law.
Which of the following is true about requirements to send a letter of audit inquiry to the client’s lawyer under International Standards on Auditing?
A lawyer’s letter is only required if the auditor assesses a related risk of material misstatement.
A CPA who is not in public practice is obligated to follow which of the following rules of conduct?
Integrity and objectivity.
Which of the following is not correct relating to the Sarbanes-Oxley Act?
This answer is correct because while the Sarbanes-Oxley Act did create the PCAOB, the PCAOB does not replace the Financial Accounting Standards Board.
Obtain an understanding of the Entity and its Environment (SAS 109 or AU 314)
The procedures to obtain an understanding of the entity are also called risk assessment procedures. It includes: Inquires of mgmt and others within entity -Analytical procedures -Observation and inspection -Other procedures such inquires of others outside of the entity (lawyers, experts) and reviewing of info from external sources such as banks.
Stats that the auditor should obtain sufficient knowledge of the information (including accounting) system to understand the financial reporting process used to prepare the entity's F.S., inclusding significant acct estimates and disclosures. It also states that this knowledge is obtained to help the auditor to understand 1) entity's classes of transactions, 2) how transactions are initiated 3) the acct records and support 4) the acct processing invlovd from initation of transaction to its inclusion in the F.S.
Control risks should be assessed in terms of?
Financial Statement assertions
An auditor assessment of control risks
may be performed concurrently during an audit with obtaining an understanding of the entity's internal control.
Management's Report on Internal Control over Financial Reporting
a report about its internal control (the corporation's process for providing reasonable assurance that its accounting system over financial reports reliable information in its financial statements) reporting in its annual report
The management of the corporation states that it has evaluated the corporation's internal control process for financial reporting and states its conclusions about the effectiveness of this process -stmt that the company auditor has issued an attestation report on mgmt assertion -identification of the framework for evaluating intl ctrls.
if the auditor determines that control risk is too high because the control system is inadequate, the auditor may have to gather more evidence, better evidence, or more timely evidence. Control weaknesses in one area may bea cceptable if there are compensating controls in other areas.
What type of transactions involves establishing a loan loss reserve?
-A walkthrough litterally involves tracing a transaction from its origination through the company's info system until it is reflected in the financial reports. A walkthrough provides evidence to 1- confirm the auditor's understanding of the flow of transactions and the design of ctrls. 2- evaluate the effectiveness of the design of ctrls. 3- to confirm whether ctrls have been placed in operations.
How large must the actuall loss identified by the auditor be for a control deficiency to possibly be considred a material weakness?
A material weakness is determine by whether there is more than a remote likelihood of material loss occurring due to a control deficiency, the actual loss need not to be material. It may either be immaterial or material.
Under PCAOB Standard 5
-An account is significant if there is more than a REMOTE likelihood that it could contain material mistatements.
PCAOB 5 requires an adverse audit report when a material weakness exists at year end, even if client fixed the material weakness after the "as of date", but before the issued date.
In an integrated audit
Communicate in writing material weaknesses, significant deficiencies, and other control deficiencies.
Top down approach
Certain effective entity level controls may allow the auditor to omit additional testing beyong those control. Starting at the top includes consideration of entity levels controls and financial statements. -may no omit controls related to financial stmts
Included in a std unqualified opinion on IC over FR under PCAOB REQ
-Because of inherent limitations, internal control over financial reporting may not prevent or detect mstmts. -In our opinion, company x, maintained, in all material respoects, effective internal control over financial reporting -Our audit included obtaining understanding of internal control over financial reporting -Company X mgmt is responsible for maintaining effective ICFR.
When an examination has been performed on the effectiveness of the entity's internal ctrl over f.r. and a material weakness has been noted, the practitioner's report should express an opinion on
the subject matter to which the assertions relates to.
When an independent auditor reports on internal control based on criteria estb by gov. agencies, the report should:
-Include the agency name -Indicates matters covered by the considerations and whether the auditor's considerations included test of ctrls with the procedures covered by his/her consideration. -The report should describe the obj. and limitations of IC and the accountant's eval. thereof. -Report should state the accountants conclusions based on the agency criteria -Describe the purpose of the report and state that it should not be used for any other purpose.
Auditor suspects that client's cashier is misappropriating cash recpts for personal use by lapping customer checks recived in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the
Dates checks are deposited per bank stmts with teh dates remittance credits are recorded. Because lapping will result in the a delay in the recording of specific remittance credits on the financial records, but the checks will be deposited in the bank as they are received.
Daily sales summary will include all "billed" sales for a particular day. Comparing this summary to the postings to the A/R will provide evidence on whether billed sales are correctly posted
Voucher payable department
-Matches vendor's invoices with the related recieving report -Approving voucher for pmt by having an authrized employee sign the voucher -Indicating the asset and expense accts to be debited -WILL not have access to unsued prenumbered purchase orers and recieving reports
Pre-numbering and accounting for purchase orders, receiving reports, and vouchers will allow a company to determine that purchases are completely recorded. For example, in examining a receiving report, the client might discover that the purchases are completely recorded.
Prenumbering receiving reports and by reconciling them with inventory records, allows you to test the completeness by determining whether all reciepts have been recorded.
Communication on IC matters relating to nonissuers
-must communicate both material weaknesses and significant deficiencies -Must communicate in writing -Communication indicating that no significant deficiencies were identified should not be issued. -Previously communicated weaknesses that have not been corrected need to to be re-communicated.
Comminication of significant deficiencies to GOV and mgmt
an auditor's report on significant deficiencies should include restriction on the distrubution of the report because
Distrubution of auditor's report on significant deficiencies should be restricted to mgmt and the a/c
Want to see the other 41 Flashcards in CPA TEST BANK QUESTIONS?JOIN TODAY FOR FREE!