Wiley Auditing Reviewer Mockboard

Question: ENPL2-0001
The Sarbanes-Oxley Act of 2002 authorized creation of the

Answers
A: Auditing Standards Board.
B: Public Company Accounting Oversight Board.
C: Financial Accounting Standards Center.
D: Corporate Governance Institute.
Answer Explanations
A. Answer A is incorrect because the Auditing Standards
Board has been involved with auditing standards for many
years and was not established by the Act.
B. Answer B is correct in that the Act authorized creation of
the Public Company Accounting Oversight Board.
C. Answer C is incorrect in that the Act did not establish a
Financial Accounting Standards Center.
D. Answer D is incorrect because while there are several
Corporate Governance Institutes, none were established
by the Act.
Hint
The Act increased governmental involvement.
C: Sufficient competent evidential matter to be obtained.

D: A more efficient audit to be planned.
Answer Explanations
A.
Answer A is incorrect because the overall scope of the
audit must remain the same regardless of appointment date.
B.
Answer B is incorrect because a proper consideration
of internal control may be performed even without early
appointment.
C.
Answer C is incorrect because sufficient competent
evidential matter must be obtained regardless of the
appointment date.
D.
Answer D is correct because the early appointment of
the independent auditor enables the auditor to plan his/her work
so that it may be done expeditiously and to determine the extent
to which it can be done before the balance sheet date. Such
preliminary work by the auditor permits the audit to be
performed in a more efficient manner and to be completed at an
early date after the year-end.
Hint
Planning enhances efficiency.
Which of the following has the lowest authoritative status but
may be useful in assisting the auditor in applying the SASs?
Answers
A: Statements on Auditing Standards.
B: Auditing Statements of Position.
C: Journal of Accountancy articles.
D: Auditing Interpretations.
Answer Explanations
A.
Answer A is incorrect. SASs have the highest level of
authority.
B.
Answer B is incorrect. Statements of Position have
the authority of interpretative guidance.
C.
Answer C is correct. Journal of Accountancy articles
have no authoritative status but may be useful in applying
SASs.
D.
Answer D is incorrect. Auditing Interpretations have
the status of interpretive guidance.
Hint
Which of the publications have no authoritative status?
When establishing an understanding with an audit client, that
understanding should be documented
Answers
A: Through use of an engagement letter.
B: Through a written communication with the client.
C: Either orally or in writing witht the client.
D: In a manner completely based on the auditor's seasoned
professional judgment.
Answer Explanations
A. Answer A is incorrect. While an engagement letter is
frequently used, it is not required.
B. Answer B is correct. The professional standards require a
written communication.
C. Answer C is incorrect. The understanding must be written
not oral.
D. Answer D is incorrect. The professional standards allow
only limited auditor use of professional judgment here in
that a written communication is required.
Hint
Only limited flexibility exists here.
Early appointment of the independent auditor will enable
Answers
A: A more thorough examination to be performed.
B: A proper consideration of internal control to be performed.
An understanding with the client must include the objectives of
the engagement, managements responsibilities, and
The auditors
Limitations
A.
B.
C.
D.
responsibilities
Yes
Yes
No
No
of the audit
Yes
No
Yes
No
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A. Answer A is correct. The professional standards require
that both the auditors responsibilities and limitations of
the audit be communicated.
B. Answer B is incorrect. Limitations of the audit must be
communicated.
C. Answer C is incorrect. The auditors responsibilities must
be communicated.
D. Answer D is incorrect. Both the auditors responsibilities
and limitations of the audit must be communicated.
Hint
What needs to be communicated to reduce the likelihood of
misunderstandings?
The primary responsibility for the adequacy of disclosure in the
financial statements of a publicly held company rests with the
Answers
A: Partner assigned to the audit engagement.
B: Management of the company.
C: Auditor in charge of the fieldwork.
D: Securities and Exchange Commission.
Answer Explanations
A.
Answer A is incorrect because his/her responsibility is
limited to expressing an opinion as to the fairness of the
financial statements.
B.
Answer B is correct because financial statements are
the representations of management, and they have the
responsibility for producing proper financial statements.
C.
Answer C is incorrect because his/her responsibility is
to gather audit evidence regarding the fairness of the financial
statements.
D.
Answer D is incorrect because its responsibility for
enforcing disclosure requirements in financial statements of
publicly held companies is secondary to management's primary
responsibility for the representations included in the financial

statements.
Hint
Who makes the representations in the financial statements?
Which of the following statements best describes the phrase
"generally accepted auditing standards" as it relates to an audit
of a nonpublic company?
Answers
A: They identify the policies and procedures for the conduct of
the audit.
B: They define the nature and extent of the auditors
responsibilities.
C: They provide guidance to the auditor with respect to
planning the audit and writing the audit report.
D: They set forth a measure of the quality of the performance of
audit procedures.
Answer Explanations
A.
Answer A is incorrect because generally accepted
auditing standards give only limited guidance as to specific
policies and procedures for the conduct of the audit.
B.
Answer B is incorrect because generally accepted
auditing standards give only limited guidance as to the nature
and extent of the auditor's responsibilities.
C.
Answer C is incorrect because it only relates to the
standard concerned with planning the audit and writing the audit
report and not to the other standards.
D.
Answer D is correct because generally accepted
auditing standards (GAAS) deal with measures of the quality of
the performance of audit procedures. Auditing standards relate
not only to the auditor's professional qualities but also to the
judgment exercised by the auditor in the performance of the
audit.
Hint
GAAS is a measure of performance.
Answer Explanations
A.
Answer A is correct because the elements of
materiality and audit risk underlie the application of all the
standards, particularly the standards of fieldwork and reporting.
B.
Answer B is incorrect because internal control does
not underlie all GAAS but rather deals specifically with the
second fieldwork standard.
C.
Answer C is incorrect because corroborating evidence
is required to be gathered but does not underlie all GAAS.
Corroborating evidence addresses the third fieldwork standard
directly.
D.
Answer D is incorrect because reasonable assurance is
a basic concept of internal control which recognizes that the
cost of internal control should not exceed the benefits expected
to be derived.
Hint
Which of the following do not underlie the application of all the
standards?
Which of the following publications does not qualify as a source
of generally accepted accounting principles?
Which of the following underlies the application of generally
accepted auditing standards, particularly the standards of
fieldwork and reporting?
Answers
A: Accounting interpretations issued by the FASB.
B: AICPA Concepts Statements.
C: AICPA Practice Bulletins.
D: Statements of Financial Standards issued by the FASB.
Answer Explanations
A.
Answer A is incorrect because interpretations issued
by the FASB are considered as sources of GAAP (AU 411).
B.
Answer B is correct because the AICPA has not issued
concepts statements. The concepts statements issued by the
FASB are considered "other accounting literatures" and are not
sources of generally accepted accounting principles.
C.
Answer C is incorrect because Practice Bulletins are
considered as sources of GAAP (AU 411).
D.
Answer D is incorrect because FASB statements are
considered sources of GAAP (AU 411).
Hint
The AICPA has not issued concepts statements.
Answers
A: The elements of materiality and audit risk.
B: The element of internal control.
C: The element of corroborating evidence.
D: The element of reasonable assurance.
In developing an overall audit strategy, an auditor should
consider
Answers
A: Whether the allowance for sampling risk exceeds the
achieved upper precision limit.
B: Findings from substantive tests performed at interim dates.

C: Whether the inquiry of the clients attorney identifies any
litigation, claims, or assessments not disclosed in the financial
statements.
D: Reporting objectives of the engagement.
Answer Explanations
A. Answer A is incorrect. Any information on the achieved
upper precision limit will generally be obtained after the
overall audit strategy has been developed.
B. Answer B is incorrect. Any information on interim
substantive tests will generally be obtained after the overall
audit strategy has been developed.
C. Answer C is incorrect. Any information pertaining to
attorney's letters will generally be obtained after the overall
audit strategy has been developed.
D. Answer D is correct. An overall audit strategy involves (1)
determining the scope of the audit, (2) determining the
reporting objectives, and (3) considering various other
important factors.
Hint
The preliminary audit strategy occurs very early in the
engagement.
Inherent risk and control risk differ from detection risk in that
inherent risk and control risk are
Answers
A: Elements of audit risk while detection risk is not.
B: Changed at the auditors discretion while detection risk is
not.
C: Considered at the individual account-balance level while
detection risk is not.
D: Functions of the client and its environment while detection
risk is not.
Answer Explanations
A.
Answer A is incorrect. Inherent risk, control risk and
detection risk are all components of audit risk.
B.
Answer B is incorrect. Detection risk, not inherent
risk and control risk, may be changed at the auditor's discretion.
C.
Answer C is incorrect. Auditors consider all of the
component risks at the account level.
D.
Answer D is correct. Inherent risk and control risk
exist independently of the audit of financial statements as
functions of the client and its environment, whereas detection
risk relates to the auditor's procedures and can be changed at his
or her discretion.
Hint
An auditor may change the level of detection risk.
As the acceptable level of detection risk decreases, the
assurance directly provided from
Answers
A: Substantive procedures should increase.
B: Substantive procedures should decrease.
C: Tests of controls should increase.
D: Tests of controls should decrease.
Answer Explanations
A. Answer A is correct. Detection risk is restricted by the
auditor's substantive procedures. As the acceptable level of
detection risk decreases, assurance provided by substantive
procedures must increase. Increased assurance can be
obtained by modifying the nature, timing and/or extent of
the substantive procedures.
This answer is incorrect. Refer to the correct answer
explanation.
C. Answer C is incorrect. The acceptable level of detection
risk is based largely on the assessed levels of control risk
and inherent risk. Accordingly, any tests of controls will
already have been performed.
D. Answer D is incorrect. The acceptable level of detection
risk is based largely on the assessed levels of control risk
and inherent risk. Accordingly, any tests of controls will
already have been performed.
Hint
There is an inverse relationship between detection risk and
substantive procedures.
Holding all other factors constant, decreasing the extent of
substantive audit procedures for accounts payable ordinarily has
what effect on audit risk?
Answers
A: Increases.
B: Decreases.
C: No effect.
D: Indeterminate.
Answer Explanations
A.
Answer A is correct because decreasing the extent of
substantive audit procedures increases detection risk, and this
will increase audit risk when all other factors remain constant.
explanation.

explanation.
explanation.
Hint
Identify the effect of decreasing the extent of substantive
procedures on audit risk.
Which of the following audit risk components may be assessed
in nonquantitative terms?
A.
B.
C.
D.
Inherent
risk
Yes
Yes
No
Yes
Control
risk
Yes
No
Yes
Yes
Detection
risk
No
Yes
Yes
Yes
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
explanation.
explanation.
explanation.
D.
Answer D is correct because all of these risks may be
assessed in quantitative terms such as percentages. They may
also be assessed in nonquantitative terms such as a range from a
minimum to a maximum.
Hint
No tricks here.
Use the audit risk model to calculate audit risk (to the closest
percent) in the following circumstance:
Control risk
Inherent risk
Detection risk
Answers
40%
40%
40%
A: 1%.
B: 6%.
C: 13%.
D: 40%.
Answer Explanations
explanation.
B. Answer B is correct. The requirement is to use the audit
risk model to mathematically calculate audit risk (to the
nearest percent). AU 312 discusses the three components of
the audit risk model presented in this problem which may
be viewed as
Audit risk
Audit risk
=
=
Inherent risk x Control risk x De

in this problem
.40 x .40 x .40
6.4%
Note that a quantitative approach such as this is largely for

demonstrative purposes and few would directly incorporate it
into practice.
explanation.
explanation.
Hint
AR = IR x DR x CR
The risk that an auditor will conclude, based on substantive
procedures, that a material misstatement does not exist in an
account balance when, in fact, such error does exist is referred
to as
Answers
A: Sampling risk.
B: Detection risk.
C: Nonsampling risk.
D: Inherent risk.
Answer Explanations
A.
Answer A is incorrect. Sampling risk arises from the
possibility that, when a test of controls or a substantive test is
restricted to a sample, the auditor's conclusions may be different
from the conclusions he or she would reach if the procedures
were applied in the same way to all items in the account balance
or class of transactions.
B.
Answer B is correct. Detection risk is the risk that the
auditor will not detect a material misstatement that exists in an
assertion.
C.
Answer C is incorrect. Nonsampling risk includes
only those aspects of audit risk that are not due to sampling.
D.
Answer D is incorrect. Inherent risk is the
susceptibility of an assertion to a material misstatement,
assuming that there are no related controls.
Hint
No tricks here.
As a lower acceptable level of materiality is established, the
auditor should plan more work on individual accounts to
Answers
A: Find smaller misstatements.
B: Find larger misstatements.
C: Increase the tolerable misstatement in the accounts.
D: Decrease the risk of assessing control risk too low.
Answer Explanations
A.
Answer A is correct. A decrease in acceptable levels
of materiality requires the auditor to do one or more of the
following: (1) select a more effective auditing procedure, (2)
perform auditing procedures closer to the balance sheet date, or
(3) increase the extent of a particular auditing procedure. By
increasing the extent of a procedure concerning an individual
account and/or selecting a more effective procedure, the auditor
will find the smaller misstatements that in aggregate might
exceed his preliminary judgments about materiality. The auditor,
therefore, must plan to find smaller misstatements as a lower
acceptable level of materiality is established.
B.
Answer B is incorrect. Larger misstatements must be
discovered in any sampling plan regardless of materiality levels.
C.
Answer C is incorrect. A decrease in materiality will
lead to a decrease in tolerable misstatement for an account, not
an increase. Tolerable misstatement is a planning concept and is
related to the auditor's preliminary estimates of materiality
levels in such a way that tolerable misstatement combined for
the entire audit plan, does not exceed those estimates.
D.
Answer D is incorrect. Lower levels of materiality do
not require a reduction in the risk of assessing control risk too
low. The risk of assessing control risk too low pertains to the
planned reliance on specific internal control policies and
procedures, not work on individual accounts.
Hint
As the level of materiality decreases, the amount of evidence
needed increases.
Which of the following statements is not correct about
materiality?
Answers
A: The concept of materiality recognizes that some matters are
important for fair presentation of financial statements in
conformity with GAAP, while other matters are not important.
B: 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.
C: Materiality judgments are made in light of surrounding
circumstances and necessarily involve both quantitative and
qualitative judgments.
D: An auditors consideration of materiality is influenced by the
auditors perception of the needs of a reasonable person who
will rely on the financial statements.
Answer Explanations
A.
Answer A is incorrect. Materiality does recognize that
some matters are important for fair presentation in conformity
with GAAP.
B.
Answer B is correct because the auditor considers
materiality for planning purposes in terms of the smallest, not
the largest, aggregate amount of misstatement that could be
material to any one of the financial statements.
C.
Answer C is incorrect as materiality is a judgment
assessed in quantitative and qualitative terms.
D.
Answer D is incorrect because materiality is a
function of the auditor's perception of user needs.
Hint
What is the definition of materiality?
In considering materiality for planning purposes, an auditor
believes that misstatements aggregating $10,000 would have a
material effect on an entity's income statement, but that
misstatements would have to aggregate $20,000 to materially
affect the balance sheet. Ordinarily, it would be appropriate to
design auditing procedures that would be expected to detect
misstatements that aggregate
Answers
A: $10,000
B: $15,000
C: $20,000
D: $30,000
Answer Explanations
A.
Answer A is correct because it will ordinarily be
difficult to anticipate during the planning stage of an audit
whether all misstatements will affect only one financial
statement. The auditor therefore generally is required to use the
lower financial statement figure for most portions of planning.

explanation.
explanation.
explanation.
Hint
In the planning stage, the auditor typically makes a conservative
assessment of materiality.
Following the Professional Standards which of the following is
not one of the assertions made by management for account
balances?
Answers
A: Completeness.
B: Existence.
C: Valuation and allocation.
D: Relevance and reliability.
Answer Explanations
A. Answer A is incorrect. Completeness is an account balance
assertion.
B. Answer B is incorrect. Existence is an account balance
assertion.
C. Answer C is incorrect. Presentation and disclosure is an
account balance assertion.
D. Answer D is correct. Relevance and reliability is not
included in the professional standards as an account
balance assertion. AU 326 presents as assertions: (1)
Existence, (2) Rights and obligations, (3) Completeness,
and (4) Valuation and allocation.
Hint
No tricks here.
Which of the following, if material, would be fraud as defined
in Statements on Auditing Standards?
Answers
A: Errors in the application of accounting principles.
B: Errors in the accounting data underlying the financial
statements.
C: Misinterpretation of facts that existed when the financial
statements were prepared.
D: Misappropriation of assets.
Answer Explanations
A.
Answer A is incorrect because an error in the
application of accounting principles is an example of "errors" as
defined by Statements on Auditing Standards. An error refers to

an unintentional mistake.
B.
Answer B is incorrect because an error in accounting
data is an example of "errors" as defined by Statements on
Auditing Standards. An error refers to an unintentional mistake.
C.
Answer C is incorrect because a misinterpretation of
facts is an example of "errors" as defined by Statements on
Auditing Standards. An error refers to an unintentional mistake.
D.
Answer D is correct because the term "fraud" refers to
intentional distortions of financial statements such as deliberate
misrepresentations.
Hint
Fraud is an intentional distortion of the financial statements.
Which of the following factors is most important concerning an
auditor's responsibility to detect errors and fraud?
Answers
A: The susceptibility of the accounting records to intentional
manipulations, alterations, and the misapplication of accounting
principles.
B: The probability that unreasonable accounting estimates result
from unintentional bias or intentional attempts to misstate the
financial statements.
C: The possibility that management fraud, defalcations, and the
misappropriation of assets may indicate the existence of illegal
acts.
D: The risk that mistakes, falsifications, and omissions may
cause the financial statements to contain material misstatements.
Answer Explanations
A.
Answer A is incorrect. The susceptibility of the
accounting records to intentional manipulations, alterations, and
the misapplication of accounting principles are examples of
factors that may influence the auditor's consideration of risk of
material misstatement. This answer is incorrect because it is
incomplete.
B.
Answer B is incorrect. The probability that
unreasonable accounting estimates result from unintentional
bias or intentional attempts to misstate the financial statements
is an example of a factor that may influence the auditor's
consideration of risk of material misstatements in the financial
statements. This answer is incorrect because it is incomplete.
C.
Answer C is incorrect. The possibility that
management fraud, defalcations, and the misappropriation of
assets indicating the existence of illegal acts is one factor the
auditor can use to assess the risk of management
misrepresentation in the financial statements. Answer C is
incorrect because it is incomplete.
D.
Answer D is correct. The auditor should assess the
risk that errors and fraud (which include mistakes, falsifications
and omissions) may cause the financial statements to contain
material misstatements.
Hint
Three of these answers are incorrect because they are
incomplete. The correct answer is the broadest in scope.
What assurance does the auditor provide that errors, fraud, and
direct effect illegal acts that are material to the financial
statements will be detected?
A.
B.
C.
D.
Errors
Limited
Limited
Reasonable
Reasonable
Fraud
Negative
Limited
Limited
Reasonable
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
explanation.
explanation.
explanation.
D.
Answer D is correct. AU 316 requires the auditor to
design the audit to provide reasonable assurance of detecting
material errors, fraud and direct effect illegal acts.
Hint
Direct effect illegal acts require the same assurance as errors
and fraud.
The independent auditor's plan for an examination in
accordance with generally accepted auditing standards is
influenced by the possibility of material misstatements. The
auditor will therefore conduct the examination with an attitude
of
Answers
A: Professional skepticism.
B: Subjective mistrust.
C: Objective indifference.
D: Professional responsiveness.
Answer Explanations
A.
Answer A is correct because the auditor should plan
and perform the audit with an attitude of professional
skepticism, recognizing that the application of auditing
procedures may produce evidential matter indicating the
possibility of errors or fraud.
explanation.
explanation.
explanation.
Hint
Controlled doubt increases the likelihood of detecting material
misstatements due to errors and fraud.
Which of the following statements best describes the auditor's
responsibility regarding the detection of material errors and
fraud?
Answers
A: The auditor is responsible for the failure to detect material
errors and fraud only when such failure results from the
nonapplication of generally accepted accounting principles.
B: Auditing procedures may or may not need to be extended if
the auditors analysis indicates the existence of fraud risk
factors.
C: The auditor is responsible for the failure to detect material
errors and fraud only when the auditor fails to confirm
receivables or observe inventories.
D: Extended auditing procedures are required to detect
unrecorded transactions even if there is no evidence that
material errors and fraud may exist.
Answer Explanations
A.
Answer A is incorrect. The auditor should design the
audit to provide reasonable assurance of detecting errors and
fraud that is material to the financial statements. This
responsibility for detection is not limited to circumstances
arising from the nonapplication of generally accepted
accounting principles.
B.
Answer B is correct. When fraud risk factors exist, the
auditor should consider whether already designed procedures
adequately consider the existence of fraud. When they do not,
audit procedures must be extended.
C.
Answer C is incorrect. The auditor may be held
responsible for failures to detect misstatements due to errors and
fraud because of inadequate planning, performance or

judgment. Not confirming receivables or not observing
inventories are only two of the many possible situations in
which the auditor may be held responsible for a failure to detect
associated errors and fraud.
D.
Answer D is incorrect. The extended auditing
procedures are necessary when normal procedures indicate
evidence that misstatements due to errors and fraud may exist,
not when there is no such evidence.
Hint
An existing material misstatement due to error or fraud suggests
that other such misstatements may exist.
Which of the following is an example of fraudulent financial
reporting?
Answers
A: Company management improperly records as revenue the
proceeds of a loan.
B: The treasurer diverts customer payments to his personal use,
concealing his actions by debiting an expense account, thus
overstating expenses.
C: An employee steals inventory and the "shrinkage" is
recorded in cost of goods sold.
D: An employee bills his company for products not received,
using the name of a fictitious supplier.
Answer Explanations
A.
Answer A is correct because fraudulent financial
reporting involves intentional misstatements or omissions of
amounts or disclosures in financial statements to deceive
financial statement users and improperly recording the revenue
results in such misstatements.
explanation.
explanation.
explanation.
Hint
Differentiate between fraudulent financial reporting and
misappropriation of assets.
Which of the following is correct concerning a "fraud risk
factor?"
Answers
A: Its presence indicates that the risk of fraud is high.

B: It has been observed in circumstances where frauds have
occurred.
C: It requires modification of planned audit procedures.
D: It is also a material weakness in internal control.
Answer Explanations
A.
Answer A is incorrect because the risk of fraud may or
may not be high when a risk factor is present.
B.
Answer B is correct because AU 316 suggests that
while fraud risk factors do not necessarily indicate the existence
of fraud, they often have been observed in circumstances where
frauds have occurred.
C.
Answer C is incorrect because the current audit
program may in many circumstances appropriately address a
fraud risk factor.
D.
Answer D is incorrect because a fraud risk factor may
or may not represent a material weakness in internal control; see
AU 325 for information on reportable conditions and material
weaknesses in internal control.
Hint
Fraud risk factors are present in most audits.
Which of the following is correct concerning requirements
about auditor communications about fraud?
Answers
A: All fraud that causes a material misstatement of the financial
statements should be reported directly to the audit committee.
B: Fraud that causes an immaterial misstatement of the financial
statements need not be reported to the audit committee.
C: Fraud with a material effect on the financial statements
should be reported directly by the auditor to the Securities and
Exchange Commission.
D: The auditor has no responsibility to disclose fraud outside
the entity under any circumstances.
Answer Explanations
A.
Answer A is correct because all fraud involving senior
management and all other material fraud should be reported
directly to the audit committee.
B.
Answer B is incorrect because fraud resulting in an
immaterial misstatement of the financial statements with which
management is involved must be communicated to the audit
committee.
C.
Answer C is incorrect because auditors are only
required to report fraud to the Securities and Exchange
Commission under particular circumstances.
D.
Answer D is incorrect because under certain
circumstances auditors must disclose fraud outside the entity.
AU 316 provides information on the CPA's responsibility

relating to fraud.
Hint
What party do CPAs frequently report significant matters to?
Which of the following is not required when considering fraud
in a financial statement audit?
Answers
A: Conduct a continuing assessment of the risks of material
misstatment due to fraud throughout the audit.
B: Conduct an audit team discussion of the risk of material
misstatment due to fraud.
C: Conduct the audit with professional skepticism, which
includes an attitude that assumes balances are incorrect until
documented by the auditor.
D: Inquire of the audit committee as to their views about the
risks of fraud and their knowledge of any fraud or suspected
fraud.
Answer Explanations
A.
Answer A is incorrect because an assessment of the
risks of material misstatement of fraud is required by AU 316.
B.
Answer B is incorrect because such a staff discussion
is required by AU 316.
C.
Answer C is correct because professional skepticism
is an attitude that includes a questioning mind and a critical
assessment of audit evidenceit does not assume that balances
are incorrect until documented by the auditor. AU 316 provides
guidance on considering fraud during a financial statement
audit.
D.
Answer D is incorrect because such inquiries of an
audit committee are required by AU 316.
Hint
What are the major requirements of SAS 99?
Which of the following need not be documented in relation to
the auditor's consideration of fraud?
Answers
A: Nature of communications about fraud made to management.
B: Procedures performed to obtain information to identify and
assess risks of material misstatement due to fraud.
C: Specific risks of material misstatment due to fraud that were
identified.
D: The assessed level of the risk of management override of
controls.
Answer Explanations
A.
Answer A is incorrect because AU 316 requires such
communications.
B.
Answer B is incorrect because AU 316 requires such
communications.
C.
Answer C is incorrect because AU 316 requires such
communications.
D.
Answer D is correct because while auditors must
consider the risk of management override of controls, no such
assessment need be made as part of an audit.
Hint
Think about an auditor's overall approach to considering fraud.
Which of the following is most likely to be an overall response
to fraud risks identified in an audit?
Answers
A: Supervise members of the audit team less closely and rely
more upon judgment.
B: Increase consideration of management's selection and
application of accounting principles.
C: Use only accountants with multiple years of experience on
the engagement.
D: Increase emphasis on the audit of transactions in all areas of
the audit.
Answer Explanations
A.
Answer A is incorrect because closer supervision, not
less close supervision, is more likely to be appropriate.
B.
Answer B is correct because AU 316 indicates that
overall responses to the risk of material misstatement due to
fraud include (1) assigning personnel with particular skills
relating to the area and considering the necessary extent of
supervision to the audit, (2) increasing the consideration of
managements selection and application of accounting
principles, and (3) making audit procedures less predictable.
C.
Answer C is incorrect because no such requirement
for experience of all staff members exists.
D.
Answer D is incorrect because it is unlikely that
increased emphasis on transactions in all areas of the audit will
be necessary.
Hint
Think about an approach that will make identifying
misstatements more likely.
D.
No
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A.
Answer A is incorrect because professional skepticism
is not ordinarily necessary.
B.
Answer B is correct because AU 316 suggests that the
three conditions generally present when fraud occurs are that
individuals have an (1) incentive or pressure, (2) opportunity,
and (3) ability to rationalize.
C.
Answer C is incorrect because an incentive is
ordinarily necessary and professional skepticism is not.
D.
Answer D is incorrect because an incentive is
ordinarily necessary.
Hint
Consider whether the options seem to relate to committing as
opposed to detecting fraud.
No
C.
Answer C is incorrect because it states that inquiry of
management is unnecessary.
D.
Answer D is incorrect because it states that neither
inquiry of management nor a consideration of fraud risk factors
is necessary.
Hint
Think about various approaches to detecting fraud, none of
which are perfect.
Professional skepticism, when exercised during the
consideration of the risk of misstatement due to fraud
Answers
A: Should only be exercised during the planning stage of the
audit.
B: Is based on the notion that the client is dishonest.
C: Is an attitude that includes a questioning mind.
D: Ordinarily includes the use of an outside expert in most
audits.
Answer Explanations
A.
Answer A is incorrect because professional skepticism
is exercised during all stages of the audit.
An auditor gathers information necessary to identify risks of
B.
Answer B is incorrect because the auditor does not
material misstatement due to fraud by
assume that the client is either honest or dishonest.
C.
Answer C is correct because AU 230 defines
Inquiry of
Considering professional skepticism as an attitude that includes a
management
fraud risk factors
questioning mind and a critical assessment of audit evidence.
A.
Yes
Yes
D.
Answer D is incorrect because no outside expert is
B.
Yes
No
ordinarily consulted relating to the professional skepticism
C.
No
Yes
requirement.
D.
No
No
Hint
Define professional skepticism.
Answers
A: A.
B: B.
Which of the following is not a likely response when an auditor
C: C.
has determined that a misstatement is, or may be, the result of
D: D.
fraud, and has determined that the effect on the financial
Answer Explanations
statements may be material?
A.
Answer A is correct because, when obtaining
information needed to identify risks of material misstatement
Answers
due to fraud, AU 316 requires inquiries of management,
A: Consider the implications for other aspects of the audit.
consideration of results of analytical procedures, consideration
Individuals who commit fraud are ordinarily able to rationalize
B: Discuss the matter and approach to further investigation with
of fraud risk factors, and consideration of certain other
the act and have
an appropriate level of management.
information. In addition, a discussion among engagement
C: Attempt to obtain additional evidential matter to determine
personnel regarding the risks of material misstatement due to
Incentive
Professional skepticism
whether material fraud has occurred or is likely to have
fraud is required.
A.
Yes
Yes
occurred.
B.
Answer B is incorrect because it states that a
B.
Yes
No
D: Suggest that the client contact a local law enforcement
consideration of fraud risk factors is unnecessary.
C.
No
Yes
authority to report the possible fraud.
Answer Explanations
explanation.
explanation.
explanation.
D.
Answer D is correct because in most circumstances of
fraud it is unlikely that a CPA would suggest to a client that a
local law enforcement authority be contacted.
Hint
When considering material implications of fraud, whom is the
auditor least likely to suggest the client contact?
In which of the following circumstances is it least likely that the
auditor will have a responsibility to disclose a fraudulent act to
parties other than the client's senior management and its audit
committee?
Answers
A: In response to a successor auditor.
B: To comply with legal and regulatory requirements.
C: In response to question raised by an analyst who follows the
stock of the company.
D: To a funding agency in accordance with requirement for
audit of entities that receive governmental financial assistance.
Answer Explanations
explanation.
explanation.
C.
Answer C is correct because an auditor will not
ordinarily disclose a fraudulent act in response to a question
raised by an analyst.
explanation.
Hint
An auditor is responsible to disclose information to successor
auditors, legal and regulatory agencies, and funding agencies.
Which of the following is a risk factor relating to the
misappropriation of assets?
Answers
A: Large amounts of cash on hand.
B: High turnover of legal counsel.
C: Inability to generate positive cash flows from operations.
D: Overly complex organizational structure involving numerous

legal entities.
Answer Explanations
A.
Answer A is correct because the existence of large
amounts of cash on hand may lead to the misappropriation of
assets.
explanation.
explanation.
explanation.
Hint
Think in terms of assets on the balance sheet.
Which of the following is not typically a characteristic of fraud?
Answers
A: Collusion.
B: Concealment.
C: Falsified documentation.
D: Unintentional.
Answer Explanations
explanation.
explanation.
explanation.
D.
Answer D is correct because fraud is intentional, not
unintentional.
Hint
No tricks here.
Which of the following statements is correct concerning fraud
risk factors that an auditor considers when performing a
financial statement audit?
Answers
A: They can easily be ranked in order of importance.
B: They must be considered individually, and not in
combination, when conducting an audit.
C: They must be combined into models before they are effective
in identifying the existence of fraud.
D: Their existence in an audit does not necessarily indicate the
existence of fraud.
Answer Explanations

explanation.
explanation.
explanation.
D.
Answer D is correct because AU 316 makes clear that
while fraud risk factors do not necessarily indicate the existence
of fraud, they often have been observed in circumstances where
frauds have occurred.
Hint
Does a sample necessarily represent the population as a whole?
Which of the following factors most likely would heighten an
auditor's concern about the risk of fraudulent financial
reporting?
Answers
A: Inability to generate cash flows from operations while
reporting substantial earnings growth.
B: Management's lack of interest in increasing the entity's stock
trend.
C: Large amounts of liquid assets that are easily convertible into
cash.
D: Inability to borrow necessary capital without granting debt
covenants.
Answer Explanations
A.
Answer A is correct because the inability to generate
cash flows from operations while reporting earnings and growth
is explicitly included as a risk factor in AU 316; such a situation
causes one to question whether the earnings being reported are
proper.
B.
Answer B is incorrect because while many
managements share an interest in increasing the entitys stock
trend (e.g., increase price), the lack of such an interest does not
indicate particularly high risk of fraudulent financial reporting.
C.
Answer C is incorrect because large amounts of liquid
assets are often relatively easily to audit, and not indicative of
fraudulent financial reporting.
D.
Answer D is incorrect because the granting of debt
covenants is often necessary and appropriate when obtaining
debt financing.
Hint
Which seems the most risky?
When an auditor becomes aware of a possible client illegal act,
the auditor should obtain an understanding of the nature of the
act to
Answers
A: Increase the assessed level of control risk.
B: Recommend remedial actions to the audit committee.
C: Evaluate the effect on the financial statements.
D: Determine the reliability of managements representations.
Answer Explanations
A.
Answer A is incorrect. Discovery of an illegal act will
not necessarily increase the assessed level of control risk.
B.
Answer B is incorrect. While the occurrence of illegal
acts will be communicated to the audit committee, the auditor
will not necessarily recommend remedial actions.
C.
Answer C is correct. When an auditor becomes aware
of information concerning a possible illegal act, he or she
should obtain an understanding of the nature of the act, the
circumstances in which it occurred, and sufficient other
information to evaluate its effect on the financial statements.
D.
Answer D is incorrect. Obtaining an understanding of
the nature of the act will not necessarily affect the reliability of
management's representations.
Hint
Illegal acts are communicated to the audit committee after their
effects are evaluated.
Which of the following is not a procedure performed primarily
for the purpose of expressing an opinion on the financial
statements, but may bring possible illegal acts to the auditor's
attention?
Answers
A: Obtain an understanding of internal control.
B: Review of policies concerning effectiveness of management
decision making policies.
C: Tests of transactions.
D: Tests of balances.
Answer Explanations
A.
Answer A is incorrect because obtaining an
understanding of internal control is performed to lead to the
expression of an opinion on the financial statements.
B.
Answer B is correct because the review of
effectiveness of decision making policies is not a procedure
when expressing an opinion on the financial statements.
External auditors are primarily concerned with internal controls
that affect recording, processing, summarizing, and reporting
financial data.
C.
Answer C is incorrect because tests of transactions
(substantive tests) are performed for the purpose of expressing
an opinion on the financial statements.
D.
Answer D is incorrect because tests of balances
(substantive tests) are performed for the purpose of expressing
an opinion on the financial statements.
Hint
An auditor must obtain an understanding of the internal control
and perform substantive procedures.
An auditor of a manufacturer would most likely question
whether that client has committed illegal acts if the client has
Answers
A: Been forced to discontinue operations in a foreign country.
B: Been an annual donor to a local political candidate.
C: Failed to correct material weaknesses in internal control that
were reported after the prior years audit.
D: Disclosed several subsequent events involving foreign
operations in the notes to the financial statements.
Answer Explanations
A.
Answer A is correct because being forced to
discontinue operations in a foreign country is consistent with
the existence of an illegal act, although other conditions may
have forced such discontinuance.
B.
Answer B is incorrect because such political
contributions made by companies are generally not illegal.
C.
Answer C is incorrect because failure to correct a
material weakness is not necessarily indicative of violation of a
law (e.g., the Foreign Corrupt Practices Act).
D.
Answer D is incorrect because disclosure of
subsequent events, whether involving foreign operations or
other information, is a normal acceptable disclosure which need
not directly relate to illegal acts.
Hint
A forced dismissal from a country is often due to the company's
conduct.
An auditor who finds that the client has committed an illegal act
would be most likely to withdraw from the engagement when
the
Answers
A: Illegal act affects the auditors ability to rely on management
representations.
B: Illegal act has material financial statement implication.
C: Illegal act has received widespread publicity.
D: Auditor can not reasonably estimate the effect of the illegal
act on the financial statements.
Answer Explanations
A.
Answer A is correct. The requirement is to determine
the circumstances under which an auditor's discovery of an
illegal act would be most likely to result in withdrawal from the
engagement. The auditor must consider the effects of illegal acts
on his/her ability to rely on management's representations and
the possible effects of continuing his/her association with the
client.
B.
Answer B is incorrect because a material illegal act
need not always result in resignation.
C.
Answer C is incorrect because according to the
professional standards (AU 328), publicity is not directly related
to a decision to withdraw.
D.
Answer D is incorrect because while an inability to
estimate the effect of an illegal act may lead to report
modification, it need not lead to withdrawal.
Hint
The FS are the representations of management. The auditor does
not want to be associated with a client that lacks integrity.
Hawkins requested permission to communicate with the
predecessor auditor and review certain portions of the
predecessor auditor's working papers. The prospective client's
refusal to permit this will bear directly on Hawkins' decision
concerning the
Answers
A: Adequacy of the preplanned audit program.
B: Ability to establish consistency in application of accounting
principles between years.
C: Apparent scope limitation.
D: Integrity of management.
Answer Explanations
A.
Answer A is incorrect since such a program will not
exist before the prospective client is accepted.
B.
Answer B is incorrect because the availability of prior
year financial statements and accounting records normally
provides sufficient evidence concerning consistency.
C.
Answer C is incorrect since the potential successor
has not yet accepted the prospective client.
D.
Answer D is correct since obtaining evidence relative
to the integrity of management is one of the objectives to be
accomplished during such a review.
Hint
Why might management refuse the communication?
When a CPA is approached to perform an audit for the first
time, the CPA should make inquiries of the predecessor auditor.
This is a necessary procedure because the predecessor may be

able to provide the successor with information that will assist
the successor in determining
Answers
A: Whether the predecessors work should be utilized.
B: Whether the company follows the policy of rotating its
auditors.
C: Whether in the predecessors opinion internal control of the
company has been satisfactory.
D: Whether the engagement should be accepted.
Answer Explanations
A.
Answer A is incorrect because the auditor may review
the predecessor auditor's work papers only to help isolate
matters of continuing accounting significance.
B.
Answer B is incorrect because the requirement that
the successor auditor communicate with the predecessor auditor
discourages the process of rotating auditors, especially due to
client-auditor disagreements about accounting principles and
audit procedures.
C.
Answer C is incorrect because the predecessor's
opinion of the client's internal control is not relevant to the
successor auditor.
D.
Answer D is correct because the successor auditor is
required to communicate with the predecessor auditor to obtain
information concerning the client to help determine whether the
engagement should be accepted.
Hint
Think about the questions asked by a successor auditor.
What is the responsibility of a successor auditor with respect to
communicating with the predecessor auditor in connection with
a prospective new audit client?
Answers
A: The successor auditor has no responsibility to contact the
predecessor auditor.
B: The successor auditor should obtain permission from the
prospective client to contact the predecessor auditor.
C: The successor auditor should contact the predecessor
regardless of whether the prospective client authorizes contact.
D: The successor auditor need not contact the predecessor if the
successor is aware of all available relevant facts.
Answer Explanations
A.
Answer A is incorrect because the successor auditor
must attempt to communicate with the predecessor auditor after
permission from the prospective client is obtained.
B.
Answer B is correct because permission must be
obtained from the prospective client before contact with the
predecessor is attempted. The successor auditor must attempt to

communicate with the predecessor auditor after permission
from the prospective client is received.
C.
Answer C is incorrect because the successor auditor
must receive permission from the prospective client before
contact with the predecessor auditor is permitted.
D.
Answer D is incorrect because the successor auditor
must attempt to communicate with the predecessor auditor after
permission from the prospective client is obtained.
Hint
The successor auditor should attempt to communicate with the
predecessor auditor.
Which of the following factors most likely would lead a CPA to
conclude that a potential audit engagement should be rejected?
Answers
A: The details of most recorded transactions are not available
after a specified period of time.
B: Internal control activities requiring the segregation of duties
are subject to management override.
C: It is unlikely that sufficient competent evidence is available
to support an opinion on the financial statements.
D: Management has a reputation for consulting with several
accounting firms about significant accounting issues.
Answer Explanations
A.
Answer A is incorrect because an auditor may be able
to modify the timing of performance of audit procedures to
when such details of recorded transactions are available.
B.
Answer B is incorrect because in many circumstances
controls are subject to management override and an auditor may
still be able to form an opinion on the financial statements.
C.
Answer C is correct because the objective of an audit
of financial statements is the expression of an opinion on the
financial statements; accordingly, when sufficient competent
evidence is not available it is unlikely that an audit will be
performed.
D.
Answer D is incorrect because such shopping for
principles will not necessarily lead to rejection of a potential
audit engagement; see AU 625 for information on requirements
for reporting on the application of accounting principles.
Hint
What is the objective of an audit?
An auditor who accepts an audit engagement and does not
possess the industry expertise of the business entity should
Answers
A: Engage financial experts familiar with the nature of the

business entity.
B: Obtain a knowledge of matters that relate to the nature of the
entitys business.
C: Refer a substantial portion of the audit to another CPA who
will act as the principal auditor.
D: First inform management that an unqualified opinion cannot
be issued.
Answer Explanations
A.
Answer A is incorrect because audit expertise rather
than financial expertise is required. Presumably, the auditor will
be able to obtain competence with respect to the industry of the
business entity.
B.
Answer B is correct because an auditor who accepts
an engagement and does not possess sufficient industry
expertise should attempt to obtain knowledge of the matters that
relate to the nature of the entity's business organization and its
operating characteristics.
C.
Answer C is incorrect because there is no requirement
to refer a substantial portion of the audit to another auditor.
D.
Answer D is incorrect because audit opinions are not
qualified or disclaimed due to lack of capability of the auditor.
If the auditor does not have the competence to undertake the
engagement, the auditor should decline the engagement.
Hint
Important to an effective audit is an understanding of the
information being audited.
Which of the following procedures would an auditor most likely
include in the initial planning of a financial statement audit?
Answers
A: Obtaining a written representation letter from the clients
management.
B: Examining documents to detect illegal acts having a material
effect on the financial statements.
C: Considering whether the clients accounting estimates are
reasonable in the circumstances.
D: Determining the extent of involvement of the clients internal
auditors.
Answer Explanations
A.
Answer A is incorrect because auditors obtain a
written representation letter near the conclusion of an audit.
B.
Answer B is incorrect because examination of
documents related to illegal acts, if available at all, will occur
subsequent to the planning of the audit.
C.
Answer C is incorrect because considering the
reasonableness of accounting estimates will also occur
subsequent to the planning of the audit.
D.
Answer D is correct because SAS 108, which lists
various planning procedures, includes determining the extent of
involvement of the client's internal auditors.
Hint
The auditor would use such information in designing the nature,
extent, and timing of later testing.
The element of the audit planning process most likely to be
agreed upon with the client before implementation of the audit
strategy is the determination of the
Answers
A: Timing of inventory observation procedures to be performed.
B: Evidence to be gathered to provide a sufficient basis for the
auditors opinion.
C: Procedures to be undertaken to discover litigation, claims,
and assessments.
D: Pending legal matters to be included in the inquiry of the
clients attorney.
Answer Explanations
A.
Answer A is correct because the auditor will normally
wish to observe the counting of inventory and there is therefore
a need for coordination of timing between the auditor and the
client.
B.
Answer B is incorrect because the client will not
determine the evidence to be gathered to provide a sufficient
basis for the auditor's opinion.
C.
Answer C is incorrect because procedures relating to
discovery of litigation, claims, and assessments will be
determined subsequent to implementation of the audit strategy.
D.
Answer D is incorrect because procedures relating to
the discovery of pending legal matters will be determined
subsequent to implementation of the audit strategy.
Hint
An auditor must coordinate client assistance prior to the audit.
Which of the following procedures is least likely to be
performed as a part of obtaining an understanding during an
audit engagement of a new audit client previously audited by
another CPA?
Answers
A: Communication with the predecessor auditor.
B: Performing analytical procedures.
C: Obtaining confirmation of cash balances.
D: Considering internal control.
Answer Explanations
A.
B.
C.
D.
Answer A is incorrect. A successor auditor should attempt

communication with the predecessor auditor while
obtaining an understanding of the client.
Answer B is incorrect. Analytical procedures must be
performed while obtaining an understanding of the client.
Answer C is correct. Confirmation of cash balances is a
substantive audit procedure which will be performed
during the audit.
Answer D is incorrect because a tentative audit program
will be designed while obtaining an understanding of the
client.
Hint
Identify the least likely procedure to be performed very early
during the audit.
If, during an audit, the successor auditor becomes aware of
information that may indicate that financial statements reported
on by the predecessor auditor may require revision, the
successor auditor should
Answers
A: Ask the client to arrange a meeting among the three parties to
discuss the information and attempt to resolve the matter.
B: Notify the client and the predecessor auditor of the matter
and ask them to attempt to resolve it.
C: Notify the predecessor auditor who may be required to revise
the previously issued financial statements and auditors report.
D: Ask the predecessor auditor to arrange a meeting with the
client to discuss and resolve the matter.
Answer Explanations
A.
Answer A is correct because the auditor should not
contact the predecessor auditor directly due to the confidential
relationship with the client.
B.
Answer B is incorrect because the auditor should not
contact the predecessor auditor without the client's permission.
C.
Answer C is incorrect because this communication
should not occur without the client's permission.
D.
Answer D is incorrect because the auditor should not
communicate with the predecessor auditor without the client's
permission.
Hint
A confidential relationship exists between a client and auditor.
A predecessor auditor
Answers
A: Must attempt communication with a successor auditor prior

to accepting the engagement.
B: Must attempt communication with a successor auditor after
the engagement has been accepted.
C: Must attempt communication with a successor auditor prior
to acceptance of the engagement and may choose to attempt
communication after the engagement has been accepted.
D: Is not required to attempt communication with a successor
since this is the successors responsibility.
Answer Explanations
A.
Answer A is incorrect because the successor auditor
must attempt communication with a predecessor prior to
accepting the engagement.
B.
Answer B is incorrect because no communication is
required after the engagement has been accepted.
C.
Answer C is incorrect because no communication is
required after the engagement has been accepted.
D.
Answer D is correct because the successor auditor
must attempt communication with the predecessor auditor either
prior to accepting the engagement, or after the engagement has
been accepted, or both. It is the successor's responsibility, not
the predecessor auditor's responsibility.
Hint
Determine who must attempt communication between the
predecessor and successor auditors.
The audit work performed by each assistant should be reviewed
to determine whether it was adequately performed and to
evaluate whether the
Answers
A: Audit has been performed by persons having adequate
technical training and proficiency as auditors.
B: Auditors system of quality control has been maintained at a
high level.
C: Results are consistent with the conclusions to be presented in
the auditors report.
D: Audit procedures performed are approved in the professional
standards.
Answer Explanations
A.
Answer A is incorrect because while determining that
the audit has been performed by persons having adequate
technical training and proficiency as auditors is important, this
is accomplished by numerous procedures in addition to
reviewing audit work.
B.
Answer B is incorrect because CPA firms, not
individual auditors within the firms, have systems of quality
control.
C.
Answer C is correct because AU 311 suggests that the
work performed by each assistant should be reviewed to
determine whether it was adequately performed and to evaluate
whether the results are consistent with the conclusions to be
presented in the auditor's report.
D.
Answer D is incorrect because the professional
standards do not in general approve certain audit procedures.
Hint
Differences of opinion among audit personnel must be resolved
prior to the issuance of an opinion.
With respect to planning of a year-end audit, which of the
following statements is always true?
Answers
A: An engagement should not be accepted after the fiscal yearend.
B: An inventory count must be observed at the balance sheet
date.
C: The clients audit committee should not be told of the
specific audit procedures which will be performed.
D: It is an acceptable practice to carry out substantial parts of
the examination at interim dates.
Answer Explanations
A.
Answer A is incorrect because an audit may be
accepted after the fiscal year-end. However, the auditor should
ascertain whether circumstances are likely to permit an adequate
audit and expression of an unqualified opinion.
B.
Answer B is incorrect because the inventory count
need not be observed if it is impracticable; however, the auditor
must bear in mind that s/he has the burden of justifying the use
of alternate procedures. It is also incorrect because the auditor's
observation procedures may be performed either during or after
the end of the period under audit in cases of well-kept perpetual
inventory records.
C.
Answer C is incorrect because in certain
circumstances the audit committee may be told of specific audit
procedures.
D.
Answer D is correct because it is an acceptable
practice for the auditor to carry out substantial parts of the
examination at interim dates.
Hint
To lessen an auditor's seasonal workload, procedures may be
performed before the balance sheet date.
Which of the following is least likely to be included in the

auditors risk assessment process to identify and assess the risks
of material misstatement?
Answers
A: Identify risks.
B: Relate risks to what can go wrong at the relevant assertion
level.
C: Consider whether risks are of a magnitude that could result
in a misstatement that could be material.
D: Consider the likelihood that risks could result in
misstatements of an amount which is less than material.
Answer Explanations
A. Answer A is incorrect. The risk assessment includes
identification of risks.
B. Answer B is incorrect. An auditor should relate risks to
what can go wrong at the relevant assertion level.
C. Answer C is incorrect. An auditor should consider whether
risks are of a magnitude that could cause a material
misstatement.
D. Answer D is correct. An auditor must consider the
likelihood of risks of material misstatements, not
misstatements less than material.
Hint
Find an inconsistency in the replies.
Which of the following is most likely to be considered a
further audit procedure?
Answers
A: Communication with the predecessor auditor.
B: Preparation of an engagement letter.
C: Preparation of a flowchart of the sales function.
D: Performance of tests of controls.
Answer Explanations
A. Answer A is incorrect. The communication with the
predecessor auditor occurs while establishing an
understanding with the client, which is prior to the
performance of further audit procedures.
B. Answer B is incorrect. The preparation of an engagement
letter occurs during audit planning, which is prior to the
C. Answer C is incorrect. The preparation of a flowchart of
the sales function relates most directly to obtaining an
understanding of the client, which is prior to the
D. Answer D is correct. Tests of controls and substantive
procedures are further audit procedures.
Hint
Further audit procedures are performed after risk assessment.
In which circumstance is the confirmation of receivables on
October 31 most likely for a client with a December 31 yearend?
Answers
A: Tests of controls have revealed that the disbursements cycle
is operating effectively.
B: The receivables balance is material.
C: Accounts were confirmed as of December 31 for the
preceding years audit.
D: Appropriate audit tests indicate that control risk for
receivables is low.
Answer Explanations
A.
Answer A is incorrect because auditors will ordinarily
only confirm receivables prior to year-end in circumstances
where internal control over receivables, not disbursements, is
operating effectively.
B.
Answer B is incorrect because confirmation prior to
year-end may be performed when balances are material or
immaterial.
C.
Answer C is incorrect because having confirmed
receivables at year-end the preceding year need not affect this
year's decision.
D.
Answer D is correct because when control risk for
receivables is low the auditor may be more likely to confirm
receivables at an interim date.
Hint
Identify the circumstance in which the confirmation is most
likely prior to year-end.
A CPA is required to comply with the provisions of Statements
on Standards for Accounting and Review Services when
A.
B.
C.
D.
Answers
A: A.
B: B.
C: C.
Processing financial
data for clients of
other CPA firms
Yes
Yes
No
No
Consulting
accounti
matters
Yes
No
Yes
No
D: D.
Answer Explanations
explanation.
explanation.
explanation.
D.
Answer D is correct because the SSARS requirements
do not apply to either the processing of financial data for clients
of other CPA firms or to consulting on accounting matters. See
AR 100 for these and additional services to which the SSARS
do not apply.
Hint
No tricks here.
Statements on Standards for Accounting and Review Services
establish standards and procedures for which of the following
engagements?
Answers
A: Assisting in adjusting the books of account for a partnership.
B: Reviewing interim financial data required to be filed with the
SEC.
C: Processing financial data for clients of other accounting
firms.
D: Compiling an individuals personal financial statement to be
used to obtain a mortgage.
Answer Explanations
A.
Answer A is incorrect. The SSARS do not apply when
the CPA is assisting in adjusting the books of account for a
partnership or other organization.
B.
Answer B is incorrect. The SSARS only apply to
nonpublic entities.
C.
Answer C is incorrect. The SSARS do not apply when
processing the financial data for clients of other accounting
firms.
D.
Answer D is correct. The SSARS apply when a CPA
either compiles or reviews the financial statements of a
nonpublic entity.
Hint
SSARS apply to nonpublic entities.
Blue Co., a privately held entity, asked its tax accountant, Cook,
a CPA in public practice, to reproduce Blue's internally prepared
interim financial statements on Cook's microcomputer when
Cook prepared Blue's quarterly tax return. Cook should not
submit these financial statements to Blue unless, as a minimum,

Cook complies with the provisions of
Answers
A: Statements on Responsibilities in Tax Practice.
B: Statements on Standards for Accounting and Review
Services.
C: Statements on Responsibilities in Unaudited Financial
Services.
D: Statements on Standards for Attestation Engagements.
Answer Explanations
A.
Answer A is incorrect because Statements on
Responsibilities in Tax Practice do not represent enforceable
standards in this situation and also because they do not directly
address such interim financial statements (TX 102).
B.
Answer B is correct because Statements on Standards
for Accounting and Review Services apply (AR 100) and
require that the CPA who wishes to submit such financial
statements to a client must, at a minimum, meet the compilation
requirements.
C.
Answer C is incorrect because there are no statements
referred to as "Statements on Responsibilities in Unaudited
Financial Services."
D.
Answer D is incorrect because no attest engagement is
involved in this situation.
Hint
What is the minimum CPA service for financial statements?
A CPA should not submit unaudited financial statements of a
nonpublic company to a client or others unless, as a minimum,
the CPA complies with the provisions applicable to
Answers
A: Compilation engagements.
B: Review engagements.
C: Statements on auditing standards.
D: Attestation standards.
Answer Explanations
A.
Answer A is correct. An accountant should not submit
such information unless he has, at a minimum, complied with
the provisions applicable to a compilation engagement.
B.
Answer B is incorrect. Reviews represent attestation
services with procedures and responsibilities in excess of the
minimum provisions necessary.
C.
Answer C is incorrect. Statements on Auditing
Standards relate primarily to audits and represent procedures
and responsibilities in excess of the minimum provisions
necessary.
D.
Answer D is incorrect. Attestation standards represent
procedures and responsibilities in excess of the minimum
provisions necessary.
Hint
Which of the answers results in no assurance?
An accountant who is not independent of a client is precluded
from issuing a
Answers
A: Compilation report on historical financial statements.
B: Compilation report on prospective financial statements.
C: Special report on compliance with contractual agreements.
D: Report on consulting services.
Answer Explanations
A.
Answer A is incorrect. Compilations are considered
accounting services, not attestation services and therefore do not
preclude an accountant who is not independent from issuing this
type of report.
B.
Answer B is incorrect. Compilations are considered
accounting services, not attestation services and therefore do not
preclude an accountant who is not independent from issuing this
type of report.
C.
Answer C is correct because providing special reports
is an attestation service and therefore requires the accountant to
be independent.
D.
Answer D is incorrect because while objectivity is
required when performing consulting services, independence is
not required.
Hint
An attestation service includes special reports.
Which of the following replies does not include a portion of the
"Special Committee on Assurance Services" definition of
assurance services?
Answers
A: A consulting service.
B: Improve the quality of information.
C: Improve the context of information.
D: For decision makers.
Answer Explanations
A.
Answer A is correct because the Special Committee
on Assurance Services, also referred to as the Elliott Committee,
defined assurance services as independent professional services
not "a consulting service"that improve the quality of
information, or its context, for decision makers.

explanation.
explanation.
explanation.
Hint
Recall the broadness of the Committee's definition.
In connection with the element of inspection, a CPA firm's
system of quality control should ordinarily provide for the
maintenance of
Answers
A: A file of minutes of staff meetings.
B: Updated personnel files.
C: Documentation to demonstrate compliance with its policies
and procedures.
D: Documentation to demonstrate compliance with peer review
directives.
Answer Explanations
explanation.
explanation.
C.
Answer C is correct. The requirement is to determine
what inspection, an element of quality control, should include.
Answer C is the most accurate because it provides for
maintenance of documentation of the various quality control
policies and procedures. Thus, it is all encompassing. Answers
A, B, and D, while desirable, relate to more specific areas and
are thus less complete than C.
explanation.
Hint
One answer is more complete than the others.
Which of the following is not an element of quality control for a
CPA firm?
Answers
A: Independence, integrity and objectivity.
B: Acceptance and continuance of clients and engagements.
C: Engagement supervision.
D: Monitoring.
Answer Explanations
A.
Answer A is incorrect. Independence, integrity, and
objectivity are elements of quality control.
B.
Answer B is incorrect. Acceptance and continuance of
clients and engagements is an element of quality control.
C.
Answer C is correct. Engagement supervision is not
an element of quality control. The five elements of quality
control are (1) independence, integrity, and objectivity, (2)
personnel management, (3) acceptance and continuance of
clients and engagements, (4) engagement performance, and (5)
monitoring.
D.
Answer D is incorrect because Statements on Quality
Control Standards provide guidance for CPA firms in meeting
their responsibility to provide professional services that
conform with professional standards.
Hint
Recall the quality control standards.
As guidance for measuring the quality of the performance of an
auditor, the auditor should refer to
Answers
A: Statements of the Financial Accounting Standards Board.
B: Generally accepted auditing standards.
C: Interpretations of the Statements on Auditing Standards.
D: Statements on Quality Control Standards.
Answer Explanations
A.
Answer A is incorrect because Statements of the
Financial Accounting Standards Board deal with GAAP which
are used to prepare financial statements, but do not address the
auditor's examination of the statements.
B.
Answer B is correct because auditors are responsible
for compliance with generally accepted auditing standards and
comparison of their performance against these standards is
appropriate.
C.
Answer C is incorrect because while Interpretations of
the Statements on Auditing Standards provide timely guidance
on the application of certain pronouncements of the Auditing
Standards Board, their coverage is less complete than the
standards.
D.
Answer D is incorrect because Statements on Quality
Control Standards provide guidance for CPA firms in meeting
their responsibility to provide professional services that
conform with professional standards.
Hint
Which standards govern the work of an auditor?
A basic objective of a CPA firm is to provide professional

services to conform with professional standards. Reasonable
assurance of achieving this basic objective is provided through
Answers
A: Continuing professional education.
B: A system of quality control.
C: Compliance with generally accepted reporting standards.
D: A system of peer review.
Answer Explanations
A.
Answer A is incorrect because a system of quality
control is necessary to provide the CPA firm with reasonable
assurance that it is conforming to professional standards.
Continuing professional education is only a part of a firm's
system of quality control.
B.
Answer B is correct because a system of quality
control is necessary to provide a CPA firm with reasonable
assurance that it is conforming to generally accepted auditing
standards.
C.
Answer C is incorrect because it relates only to
reporting standards.
D.
Answer D is incorrect because a system of quality
control is necessary to provide the CPA firm with reasonable
assurance that it is conforming to professional standards. A
system of peer review is only a part of a firm's system of quality
control.
Hint
Which of the answer choices has the broadest focus?
Which of the following types of services is most directly
designed to improve the quality of information, or its context,
for decision makers?
Answers
A: Assurance services
B: Attestation services
C: Audit services
D: Consulting services
Answer Explanations
A.
Answer A is correct because the Special Committee
on Assurance Services (the Elliott Committee), defined
assurance services as independent professional services that
improve quality of information, or its context, for decision
makers.
B.
Answer B is incorrect because attestation services are
defined as written conclusions about the reliability of the written
assertions of another party.
C.
Answer C is incorrect because audit services are
defined as examinations of financial statements that result in an
opinion of those financial statements.
D.
Answer D is incorrect because consulting services are
defined as recommendations based on the objectives of the
engagement.
Hint
Recall the Elliott Committee.
In performing an attestation engagement, a CPA typically
Answers
A: Supplies litigation support services.
B: Assesses control risk at a low level.
C: Expresses a conclusion about the assertion on the subject
matter.
D: Provides management consulting advice.
Answer Explanations
A.
Answer A is incorrect because most litigation support
services are not attest engagements.
B.
Answer B is incorrect because control risk need not
generally be assessed at a low level on attestation engagements;
also, control may not be of major importance on some attest
engagements.
C.
Answer C is correct because, when performing an
attest engagement, a CPA expresses a conclusion about the
assertion on the subject matter.
D.
Answer D is incorrect because most management
consulting engagements are not attestation engagements.
Hint
Recall the definition of an attestation engagement.
Which of the following professional services would be
considered an attest engagement?
Answers
A: A management consulting engagement to provide
computerized advice to a client.
B: An engagement to report on compliance with statutory
requirements.
C: An income tax engagement to prepare federal and state tax
returns.
D: The compilation of financial statements from a clients
accounting records.
Answer Explanations
A.
Answer A is incorrect because management
consulting engagements are not considered attest engagements.
B.
Answer B is correct because a report on compliance
with statutory requirements might be structured as an attest
engagement in which the required "written assertion" relates to
such compliance.
C.
Answer C is incorrect because tax returns
preparations are not considered attest engagements.
D.
Answer D is incorrect because compilations are
considered nonattest engagements.
Hint
An attest engagement requires a written assertion.
The technical standards that apply to consulting services
engagements require the practitioner to do all of the following
except
Answers
A: Maintain independence from the client.
B: Give support for and clearly identify as estimates any
quantifiable results that are based on estimates.
C: Obtain an understanding concerning the nature, scope, and
limitations of the consulting advisory services engagement to be
performed.
D: Take no position which might impair the practitioners
objectivity.
Answer Explanations
A.
Answer A is correct because independence is not
required.
B.
Answer B is incorrect because estimates are to be
supported and clearly identified.
C.
Answer C is incorrect because an understanding of the
nature of the engagement must be obtained.
D.
Answer D is incorrect because an accountant is to
maintain objectivity.
Hint
This differs from audit engagements.
A CPA firm's personnel partner periodically studies the CPA
firm's personnel advancement experience to ascertain whether
individuals increased degrees of responsibility. This is evidence
of the CPA firm's adherence to prescribed standards of
Answers
A: Quality control.
B: Due professional care.
C: Supervision and review.
D: Fieldwork.
Answer Explanations
A.
Answer A is correct because the seventh quality
control standard requires that a firm establish policies and
procedures pertaining to personnel advancement.
B.
Answer B is incorrect because due professional care,
the third general standard, pertains to the performance of the
examination and the preparation of the report.
C.
Answer C is incorrect because proper supervision and
review pertains to the first standard of fieldwork which also
focuses on the performance of audits.
D.
Answer D is incorrect because the three fieldwork
standards pertain to planning and supervision (AU 310), the
auditor's study and evaluation of internal control (AU 319), and
the collection of evidential matter (AU 326).
Hint
There is a standard which requires established policies and
procedures pertaining to personnel advancement.
The objective of quality control mandates that a public
accounting firm should establish policies and procedures for
professional development which provide reasonable assurance
that all entry-level personnel
Answers
A: Prepare working papers which are standardized in form and
content.
B: Have the knowledge required to enable them to fulfill
responsibilities assigned.
C: Will advance within the organization.
D: Develop specialties in specific areas of public accounting.
Answer Explanations
A.
Answer A is incorrect because preparing working
papers which are standardized in form and content is an
objective which is more specific than those that are
contemplated in the elements of quality control.
B.
Answer B is correct because one of the quality control
considerations for a firm of independent auditors is that the
policies and procedures for professional development should be
established to provide reasonable assurance that personnel have
the knowledge required to enable them to fulfill responsibilities
assigned.
C.
Answer C is incorrect because it is an objective which
is more specific than those that are contemplated in the elements
of quality control.
D.
Answer D is incorrect because it is an objective which
is more specific than those that are contemplated in the elements
of quality control.
Hint
Which of the answer choices would most directly affect the
quality of the auditor's work?
A CPA establishes quality control policies and procedures for
deciding whether to accept a new client or continue to perform
services for a current client. The primary purpose for
establishing such policies and procedures is
Answers
A: To enable the auditor to attest to the integrity or reliability of
a client.
B: To comply with the quality control standards established by
regulatory bodies.
C: To minimize the likelihood of association with clients whose
management lacks integrity.
D: To lessen the exposure to litigation resulting from failure to
detect irregularities in client financial statements.
Answer Explanations
A.
Answer A is incorrect because auditors attest to the
fairness of financial statements, not the integrity or reliability of
a client.
B.
Answer B is incorrect because while quality control
policies for acceptance of new clients are required by quality
control standards, the primary purpose is to avoid clients whose
C.
Answer C is correct because policies and procedures
should be established for deciding whether to accept or continue
a client in order to minimize the likelihood of association with
clients whose management lacks integrity.
D.
Answer D is incorrect because the primary and
immediate purpose of quality control policies over accepting
new clients is to avoid clients who lack integrity, which may
indirectly lessen exposure to litigation.
Hint
Auditors must rely on the representations of client management.
Within the context of quality control, a primary purpose of
personnel management activities is to enable a CPA firm to
provide personnel within the firm with
Answers
A: Technical training that assures proficiency as an auditor.
B: Professional education that is required in order to perform
with due professional care.
C: Knowledge required to fulfill assigned responsibilities for
consulting engagements.
D: Knowledge required in order to perform a peer review.
Answer Explanations
A.
Answer A is incorrect because quality control
standards apply to all auditing, accounting, and review services,
not only auditing.
B.
Answer B is incorrect because while performing
responsibilities with due professional care is essential, personnel
management policies relate more directly to personnel hiring,
assignment, professional development, and advancement
activities.
C.
Answer C is correct the quality control standards
relate to a firm's accounting and auditing practice.
D.
Answer D is incorrect because the emphasis of such
education is not primarily on obtaining peer review skills.
Hint
Continuing professional education benefits both the individual
and the CPA firm.
A CPA in public practice must be independent in fact and
appearance when providing which of the following services?
A.
B.
C.
D.
Preparation
of a
tax return
Yes
No
No
No
Compilation of
a financial
forecast
No
Yes
No
No
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A.
Answer A is incorrect. Preparing tax returns is not
considered an attestation service, therefore the CPA need not be
independent
B.
Answer B is incorrect. Compiling forecasts is not
considered an attestation service, therefore the CPA need not be
independent.
C.
Answer C is incorrect. Compiling financial statements
is not considered an attestation service, therefore the CPA need
not be independent.
D.
Answer D is correct. An auditor need only be
independent when providing attestation services. Preparing tax
returns and compiling forecasts or financial statements are not
considered attestation services, therefore the CPA need not be
independent.
Hint
Independence is required for audits and reviews.
The first general standard requires that the examination of
financial statements is to be performed by a person or persons
having adequate technical training and
Answers
A: Independence with respect to the financial statements and
supplementary disclosures.
B: Exercising professional care as judged by peer reviewers.
C: Proficiency as an auditor which likely has been acquired
from previous experience.
D: Objectivity as an auditor as verified by proper supervision.
Answer Explanations
A.
Answer A is incorrect because independence pertains
to the second general standard.
B.
Answer B is incorrect because peer reviewers are not
the primary judges of whether professional care is being
exercised.
C.
Answer C is correct because the first general standard
requires that the examination be performed by a person or
persons having adequate technical training and proficiency as an
auditor which has been achieved by formal education and by
previous experience.
D.
Answer D is incorrect because objectivity relates
more directly to the independence standard.
Hint
No tricks here.
Rogers & Co., CPAs, policies require that all members of the
audit staff submit weekly time reports to the audit manager, who
then prepares a weekly summary work report regarding variance
from budget for Rogers' review. This provides written evidence
of Rogers & Co.'s professional concern regarding compliance
with which of the following generally accepted auditing
standards?
Answers
A: Quality control.
B: Due professional care.
C: Adequate review.
D: Adequate planning.
Answer Explanations
A.
Answer A is incorrect because quality control is not an
explicit part of generally accepted auditing standards.
B.
Answer B is incorrect because due professional care,
while certainly relevant to the situation described is less
complete than adequate planning.
C.
Answer C is incorrect because adequate review is not
an explicit part of the generally accepted auditing standards.
D.
Answer D is correct because the weekly time reports
are being used to meet the first standard of fieldwork. The work
is to be adequately planned, and assistants, if any, are to be
properly supervised. Thus, the budget is prepared during the
planning stage of the audit and the analysis of variances from
budget is used as a part of the supervision process.
Hint
The budget is prepared during the planning stage of the audit.
The third general standard states that due care is to be exercised
in the performance of the examination. This standard means that
a CPA who undertakes an engagement assumes a duty to
perform each audit
Answers
A: As a professional possessing the degree of skill commonly
possessed by others in the field.
B: In conformity with generally accepted accounting principles.
C: With reasonable diligence and without fault or error.
D: To the satisfaction of governmental agencies and investors
who rely upon the audit.
Answer Explanations
A.
Answer A is correct because the level of skill
necessary is that commonly possessed by other professionals in
the same employment.
B.
Answer B is incorrect because an audit is performed
in conformity with generally accepted auditing standards, not
generally accepted accounting principles.
C.
Answer C is incorrect because no professional can
guarantee performance without fault or error.
D.
Answer D is incorrect because while various
governmental and user groups should be satisfied with the
nature of audits, the CPA is to possess the requisite skills.
Hint
There is a required level of skill under the third general
standard.
The exercise of due professional care requires that an auditor
Answers
A: Examine all available corroborating evidence.
B: Critically review the judgment exercised at every level of

supervision.
C: Reduce control risk below the maximum.
D: Attain the proper balance of professional experience and
formal education.
Answer Explanations
A.
Answer A is incorrect because auditors generally
sample from the available corroborating evidence and do not
examine all available corroborating evidence.
B.
Answer B is correct because the exercise of due
professional care (the third general standard) requires critical
review at every level of supervision of the work done and the
judgment exercised by those assisting in the audit.
C.
Answer C is incorrect because control risk may be
assessed at the maximum level.
D.
Answer D is incorrect because a proper balance of
professional experience and formal education relates more
directly to the first general standard concerning technical
training and proficiency as an auditor.
Hint
A critical review is required in the exercise of due professional
care.
When an accountant is not independent, the accountant is
precluded from issuing a
Answers
A: Compilation report.
B: Review report.
C: Management advisory report.
D: Tax planning report.
Answer Explanations
A.
Answer A is incorrect because AR 100 states that an
accountant who is not independent may issue a compilation
report.
B.
Answer B is correct because AR 100 requires the
accountant who performs a review to be independent (because it
is an attestation service).
C.
Answer C is incorrect because Article IV of the Code
of Professional Conduct states that the appearance of
independence is not required in the case of management
advisory services.
D.
Answer D is incorrect because Article IV of the Code
of Professional Conduct states that the appearance of
independence is not required in the case of tax practice.
Hint
An accountant must be independent for attestation services.
If requested to perform a review engagement for a nonpublic
entity in which an accountant has an immaterial direct financial
interest, the accountant is
Answers
A: Independent because the financial interest is immaterial and,
therefore, may issue a review report.
B: Not independent and, therefore, may not be associated with
the financial statements.
C: Not independent and, therefore, may not issue a review
report.
D: Not independent and, therefore, may issue a review report,
but may not issue an auditors opinion.
Answer Explanations
A.
Answer A is incorrect because such a financial interest
does impair independence.
B.
Answer B is incorrect because independence is not
required for compilation services, and therefore, an accountant
may be so associated with the financial statements.
C.
Answer C is correct. Reviews are a form of attestation
service, and an accountant may not maintain independence
when an immaterial direct financial interest is held in a client
when performing attestation services.
D.
Answer D is incorrect because neither a review report
nor an auditor's opinion may be issued.
Hint
Recall independence requirements of Code of Professional
Conduct.
The concept of materiality would be least important to an
auditor when considering the
Answers
A: Effects of a direct financial interest in the client upon the
CPAs independence.
B: Decision whether to use positive or negative confirmations of
accounts receivable.
C: Adequacy of disclosure of a clients illegal act.
D: Discovery of weaknesses in a clients internal control
structure.
Answer Explanations
A.
Answer A is correct because the auditor may not have
any direct financial interest in a client, regardless of materiality.
B.
Answer B is incorrect because auditors generally
consider the size (materiality) of account balances when
choosing between the use of positive or negative confirmation.
C.
Answer C is incorrect because materiality is
considered when evaluating the adequacy of disclosures of
illegal acts.
D.
Answer D is incorrect because the materiality of
internal control weaknesses should be considered by the auditor.
Hint
Which of these is an area with an absolute requirement?
Which of the following is correct concerning PCAOB guidance
that uses the term must?
Answers
A: The auditor must fulfill the responsibilities.
B: The auditor must comply with requirements unless s/he
demonstrates that alternative actions were sufficient to achieve
the objectives of the standards.
C: The auditor should consider the guidance; whether the
auditor follows depends on exercise of professional judgment in
the circumstances.
D: The auditor has complete discretion as to whether to perform
the procedure.
Answer Explanations
A. Answer A is correct because terms such as must, shall,
and is required to are used to indicate that the auditor
must fulfill the responsibilities.
B. Answer B is incorrect because the term should means
that the auditor must comply with the requirements unless
he or she can demonstrate that alternative actions were
sufficient to achieve the objectives of the standards.
C. Answer C is incorrect because terms such as may,
might and could are used when the auditor should
consider performing the audit procedure.
D. Answer D is incorrect because no particular terms are used
for the situation in which the auditor has complete
discretion whether to perform the procedure.
Hint
No trick here.
An integrated audit under the Sarbanes-Oxley Act of 2002 and
PCAOB standards includes
Answers
A: An audit of the financial statements and a review of internal
control over financial reporting.
B: An audit of the financial statements and an audit of
compliance with the Sarbanes-Oxley Act and PCAOB
standards.
C: An audit of the financial statements and an audit of controls

over compliance with the Sarbanes-Oxley Act.
D: An audit of the financial statements and an audit of internal
control over financial reporting.
Answer Explanations
A. Answer A is incorrect because the law calls for an audit of
the financial statements and an audit of internal control
over financial reporting.
B. Answer B is incorrect because the law calls for an audit of
C. Answer C is incorrect because the law calls for an audit of
D. Answer D is correct because the law calls for an audit of
Hint
Sarbanes-Oxley deals with the reliability of financial reporting.
Which of the following statements is correct concerning an
auditors responsibility to report fraud?
Answers
A: 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 are inconsequential.
B: The disclosure of material management fraud to principal
stockholders is required when both senior management and the
board of directors fail to acknowledge the fraudulent activities.
C: Fraudulent activities involving senior management of which
the auditor becomes aware should be reported directly to the
SEC.
D: The disclosure of fraudulent activities to parties other than
the client's senior management and its audit committee is not
ordinarily part of the auditor's responsibility.
Answer Explanations
A. Answer A is incorrect. Only minor fraudulent acts
involving management need be disclosed to the audit
committee. See AU 316 for information on an auditors
responsibility relating to fraud.
B. Answer B is incorrect. Auditors do not in general
communicate directly with stockholders. See AU 316 for
information on an auditors responsibility relating to fraud.
C. Answer C is incorrect. Fraudulent activities involving
senior management are reported to the audit committee,
not ordinarily the SEC. See AU 316 for information on an
auditors responsibility relating to fraud.
D.
Answer D is correct. In most circumstances the auditor is
not required to communicate the matter beyond management
and the audit committee. See AU 316 for information on an

auditors responsibility relating to fraud.
Hint
Auditors generally cannot report matters to outsiders.
Which of the following procedures would least likely result in
the discovery of possible illegal acts?
Answers
A: Reading the minutes of the board of directors' meetings.
B: Making inquiries of the client's management.
C: Performing tests of details of transactions.
D: Reviewing an internal control questionnaire.
Answer Explanations
A. Answer A is incorrect. It may lead to discovery of illegal
acts. See AU 317 for information on illegal acts.
B. Answer B is incorrect. It might lead to the discovery of
illegal acts in that a question to management about the
existence of the acts may be answered with an
acknowledgement that such acts have occurred. See AU
317 for information on illegal acts.
C. Answer C is incorrect. It may lead to discovery of possible
illegal acts when the auditor analyzes the details of the
transactions and finds evidence of illegal acts. See AU 317
for information on illegal acts.
D. Answer D is correct. While the internal control
questionnaire may reveal weaknesses in the design of
internal control, it will have little or no information on
whether an illegal act has occurred. See AU 317 for
information on illegal acts.
Hint
No trick here.
Which of the following circumstances most likely would cause
an auditor to suspect that there are material misstatements in an
entitys financial statements?
Answers
A: Senior financial management participates in the selection of
accounting principles and the determination of significant
estimates.
B: Supporting accounting records and files that should be
readily available are not produced promptly when requested.
C: Related-party transactions take place in the ordinary course
of business with an entity that is audited by another CPA firm.
D: Senior management has an excessive interest in upgrading
the entity's information technology capabilities.
Answer Explanations
A.
B.
C.
D.
Answer A is incorrect. Senior financial management might

be expected to select accounting principles and determine
significant estimates.
Answer B is correct. Unavailability of records when
requested might indicate fraudulent entries lacking proper
support.
Answer C is incorrect. Related-party transactions often do
take place in the ordinary course of business; significant
related-party transactions not in the ordinary course of
business may be an indicator of material misstatements.
Answer D is incorrect. An excessive interest in upgrading
the entitys information technology capabilities has not in
the past been found to be indicative of fraud.
Hint
No trick here.
The primary purpose of establishing quality control policies and
procedures for deciding whether to accept new clients is to
Answers
A: Minimize the likelihood of association with clients whose
B: Monitor significant deficiencies in the design and operation
of the client's internal control.
C: Identify noncompliance with aspects of contractual
agreements that affect the financial statements.
D: Provide reasonable assurance that personnel will be
adequately trained to fulfill their assigned responsibilities.
Answer Explanations
A. Answer A is correct. The quality control standards (see QC
20) indicate that the primary purpose is to minimize the
likelihood of association with clients whose management
lacks integrity.
Null Null Null
Hint
No trick here.
An auditors engagement letter most likely would include a
statement regarding
Answers
A: Management's responsibility to provide certain written
representations to the auditor.
B: Conditions under which the auditor may modify the
preliminary judgment abut materiality.
C: Internal control activities that would reduce the auditor's
assessment of control risk.
D: Materiality matters that could modify the auditor's

preliminary assessment of fraud risk.
Answer Explanations
A. Answer A is correct. SAS 108 states that information on
managements responsibility to provide certain written
representations is ordinarily included in the understanding
an auditor obtains with management through inclusion in
an engagement letter.
B. Answer B is incorrect. It includes information not
ordinarily included in an engagement letter, presenting
detailed information beyond what is ordinarily included.
C. Answer C is incorrect. It includes information not
D. Answer D is incorrect. It includes information not
Hint
No trick here.
A successor auditor should make specific and reasonable
inquiries of the predecessor auditor regarding the predecessors
Answers
A: Understanding of the reasons for the change in auditors.
B: Methodology used in applying sampling techniques.
C: Opinion on subsequent events that have occurred since the
balance sheet date.
D: Perception of the competency and reliance on the client's
internal audit function.
Answer Explanations
A. Answer A is correct. Inquiries ordinarily include questions
on integrity of management, disagreements with
management, and communications with the audit
committee regarding fraud, illegal act, and internal control
related matters. See AU 315 for information on the
communications between predecessor and successor
auditors.
B. Answer B is incorrect. It represents information much less
frequently obtained. See AU 315 for information on the
auditors.
C. Answer C is incorrect. It represents information much less
auditors.
D. Answer D is incorrect. It represents information much less
auditors.
Hint
Which inquiry relates to client acceptance?
Which of the following activities would most likely be
considered an attestation engagement?
Answers
A: Consulting with management representatives of a firm to
provide advice.
B: Issuing a report about a firm's compliance with laws and
regulations.
C: Advocating a client's position on tax matters that are being
reviewed by the IRS.
D: Preparing a client's tax returns
Answer Explanations
A. Answer A is incorrect. It represents a consulting
engagement.
B. Answer B is correct. The attest standards provide for issuance of a report about a firms compliance with laws and
regulationssee AT 601.
C. Answer C is incorrect. It represents a tax engagement.
D. Answer D is incorrect. It represents a tax engagement.
Hint
Attestation involves providing assurance about some matter.
An auditor reviews a clients accounting policies and procedures
when considering which of the following planning matters?
Answers
A: Method of sampling to be used.
B: Preliminary judgments about materiality levels.
C: Nature of reports to be rendered.
D: Understanding of the client's operations and business.
Answer Explanations
A. Answer A is incorrect. The general nature of the policies
and procedures is unlikely to provide adequate information
for sampling or materiality levels.
B. Answer B is incorrect. The general nature of the policies
and procedures is unlikely to provide adequate information
for sampling or materiality levels.
C. Answer C is incorrect. The accounting policies and
procedures will not provide adequate information to
determine the nature of reports to be rendered.
D. Answer D is correct. Such information provides overall
guidance to help an auditor understand the clients
operations and business.
Hint
No trick here.
An auditor confirmed accounts receivable as of an interim date,
and all confirmations were returned and appeared reasonable.
Which of the following additional procedures most likely
should be performed at year-end?
Answers
A: Send confirmations for all new customer balances incurred
from the interim date to year-end.
B: Resend confirmations for any significant customer balances
remaining at year-end.
C: Review supporting documents for new large balances
occurring after the interim date, and evaluate any significant
changes in balances at year-end.
D: Review cash collections subsequent to the interim date and
the year-end.
Answer Explanations
A.
Answer A is incorrect. It is unlikely that confirmations
will be sent again, particularly given the positive results
obtained. Also, one ordinarily confirms accounts receivable at
an interim date so as to avoid confirming accounts at year-end.
See AU 330 for information on the confirmation process.
B.
Answer B is incorrect. It is unlikely that confirmations
will be sent again, particularly given the positive results
obtained. Also, one ordinarily confirms accounts receivable at
an interim date so as to avoid confirming accounts at year-end.
See AU 330 for information on the confirmation process.
C.
Answer C is correct. An auditor will review significant
changes in balances. See AU 330 for information on the
confirmation process.
D. Answer D is incorrect. It is less complete than reply C. See
AU 330 for information on the confirmation process.
Hint
The auditor must perform tests on intervening transactions.
A successor auditor is required to attempt communication with
the predecessor auditor prior to
Answers
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.
Answer Explanations
A.
Answer A is incorrect because no such
communication is required prior to performing tests of controls.
B.
Answer B is incorrect because, while the successor
may communicate with the predecessor to obtain information on
beginning balances, this is not required.
C.
Answer C is incorrect because a proposal may be
made prior to communicating with the predecessor auditor
however, final acceptance of the client is not appropriate prior

to attempting such communication. See AU 315 for information
on a successors responsibilities.
D.
Answer D is correct. The requirement is to determine
when a successor auditor is required to attempt communication
with a predecessor auditor. Answer D is correct because prior to
accepting an engagement the successor should attempt such
communication.
Hint
The communication is performed in part to help the successor to
learn about the integrity of management.
Which of the following factors most likely would lead a CPA to
conclude that a potential audit engagement should not be
accepted?
Answers
A: There are significant related-party transactions that
management claims occurred in the ordinary course of business.
B: Internal control activities requiring the segregation of duties
C: Management continues to employ an inefficient system of
information technology to record financial transactions.
D: It is unlikely that sufficient appropriate evidence is available
to support an opinion on the financial statements.
Answer Explanations
A.
Answer A is incorrect because the simple existence of
related-party transactions, while often indicating a high-risk
situation, is less likely to result in nonacceptance of an
engagement.
B.
Answer B is incorrect because virtually all controls
C.
Answer C is incorrect because inefficient information
technology may still be technology that lends itself to auditing
and the forming of an opinion on the companys financial
statements.
D.
Answer D is correct. The requirement is to identify
the factor that is most likely to lead a CPA to conclude that a
potential audit engagement should not be accepted. Answer D is
correct because the lack of sufficient appropriate evidence
ordinarily negates the purpose of an audit, which is to have the
CPA form an opinion on the financial statements.
Hint
The objective of an audit is the expression of an opinion.
Prior to commencing fieldwork, an auditor usually discusses the
general audit strategy with the clients management. Which of
the following details do management and the auditor usually

agree upon at this time?
Answers
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 significant deficiencies.
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 Explanations
A.
Answer A is incorrect because the information on
specific matters to be included in the communication with the
audit committee is beyond the scope of the general audit
strategy; related, the auditor will not at this early point be aware
of some of the information that will be communicated (e.g.,
specific deficiencies in internal control).
B.
Answer B is incorrect since the discussion will
ordinarily not include comments on a minimum amount of
misstatements that represent a significant deficiency.
C.
Answer C is correct. The requirement is to identify
the matter on which management and the auditor would
ordinarily agree while discussing the general audit strategy prior
to the auditor commencing fieldwork. Answer C is correct
because at this early point in the audit process the auditor will
discuss client assistance in the audit, including schedules and
analyses to be prepared by the clients staff.
D.
Answer D is incorrect because any discussion on
inadequate controls ordinarily will occur later in the audit.
Hint
One of these is a responsibility the client may assume relating to
the audit.
An auditor is required to establish an understanding with a
client regarding the services to be performed for each
engagement. This understanding generally includes
Answers
A: The auditor's responsibility for determining the preliminary
judgments about materiality and audit risk factors.
B: Management's responsibility for identifying mitigating
factors when the auditor has doubt about the entity's ability to
continue as a going concern.
C: The auditor's responsibility for ensuring that the audit
committee is aware of any significant deficiencies that come to
the auditor's attention.
D: Management's responsibility for providing the auditor with
an assessment of the risk of material misstatement due to fraud.
Answer Explanations
A.
Answer A is incorrect because the understanding does
not ordinarily involve preliminary judgments about materiality
and audit risk factors.
B.
Answer B is incorrect because, while management
may identify mitigating factors when a question concerning
going concern status exists, this is not ordinarily discussed
while obtaining an understanding with a client.
C.
Answer C is correct. The requirement is to identify
the information ordinarily included in an auditors
understanding with a client regarding the services to be
performed. Answer C is correct because the auditor must report
to the audit committee significant deficiencies, and accordingly,
the auditor will include such information while establishing an
understanding with a client.
D.
Answer D is incorrect because, while management
must provide auditors with certain information related to fraud,
it is the auditors, not managements, responsibility to assess the
risk of material misstatement due to fraudsee AU 316.
Hint
An auditor must disclose certain information.
Which of the following circumstances would an auditor most
likely consider a risk factor relating to misstatements arising
from fraudulent financial reporting?
Answers
A: Several members of management have recently purchased
additional shares of the entity's stock.
B: Several members of the board of directors have recently sold
shares of the entity's stock.
C: The entity distributes financial forecasts to financial analysts
that predict conservative operating results.
D: Management is interested in maintaining the entity's earnings

trend by using aggressive accounting practices.
Answer Explanations
A.
Answer A is incorrect because managements purchase of additional shares in the entity is not ordinarily a risk
factor.
B.
Answer B is incorrect since board of director members selling shares of stock may well be an ordinary occurrence.
C.
Answer C is incorrect because predicting conservative
operating results is very different from fraudulent financial
reporting. See AU 316 for information on the auditors
consideration of fraud in a financial statement audit. See the
appendix to AU 316 for examples of fraud risk factors.
D.
Answer D is correct. The requirement is to identify
the circumstance an auditor most likely would consider a risk
factor relating to misstatements arising from fraudulent
financial reporting. Answer D is correct because aggressive
accounting practices used to maintain an earnings trend
represent such a risk factor.
Hint
One of these seems much more risky in terms of fraudulent
financial reporting than the others.
Managements emphasis on meeting projected profit goals most
likely would significantly influence an entitys control
environment when
Answers
A: Internal auditors have direct access to the entity's board of
directors.
B: A significant portion of management compensation is
represented by stock options.
C: External policies established by parties outside the entity

affect accounting policies.
D: The audit committee is active in overseeing the entity's
financial reporting policies.
Answer Explanations
A.
Answer A is incorrect because when internal auditors
have direct access to the entitys board of directors, this may
decrease the likelihood of overly aggressive accounting to meet
projected profit goals and is less likely to affect the control
environment.
B.
Answer B is correct. The requirement is to identify
the situation in which managements emphasis on meeting
projected profit goals would be most likely to significantly
influence an entitys control environment. Answer B is correct
because when a significant portion of managements
compensation is represented by stock options, risk may be
involved in that management is under great pressure to report
earnings that meet projected profit goals; this will ordinarily
increase management compensation significantly and, under
some circumstances, create a pressure to report overstated earnings to meet those projections.
C.
Answer C is incorrect because such external policies
are ordinarily beyond managements control and would have a
limited effect on the control environment.
D.
Answer D is incorrect because an active audit
committee is likely to control managements aggressive
reporting, and thereby is less likely to affect the entitys control
environment.
Hint
Implicit here is that one of the replies involves an increase in the
risk of material misstatement.

Wiley Auditing Reviewer Mockboard

Загружено:

Сведения о документе

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Wiley Auditing Reviewer Mockboard

Загружено:

Авторское право:

Доступные форматы

Question: ENPL2-0001

The Sarbanes-Oxley Act of 2002 authorized creation of the

C: Sufficient competent evidential matter to be obtained.

responsibility for the representations included in the financial

B: Findings from substantive tests performed at interim dates.

This answer is incorrect. Refer to the correct answer

Inherent risk x Control risk x De

Note that a quantitative approach such as this is largely for

This answer is incorrect. Refer to the correct answer

defined by Statements on Auditing Standards. An error refers to

fraud because of inadequate planning, performance or

A: Its presence indicates that the risk of fraud is high.

AU 316 provides information on the CPA's responsibility

D: Overly complex organizational structure involving numerous

This answer is incorrect. Refer to the correct answer

This is a necessary procedure because the predecessor may be

predecessor is attempted. The successor auditor must attempt to

A: Engage financial experts familiar with the nature of the

Answer A is incorrect. A successor auditor should attempt

A: Must attempt communication with a successor auditor prior

Which of the following is least likely to be included in the

submit these financial statements to Blue unless, as a minimum,

This answer is incorrect. Refer to the correct answer

A basic objective of a CPA firm is to provide professional

B: Critically review the judgment exercised at every level of

C: An audit of the financial statements and an audit of controls

and the audit committee. See AU 316 for information on an

Answer A is incorrect. Senior financial management might

D: Materiality matters that could modify the auditor's

however, final acceptance of the client is not appropriate prior

the following details do management and the auditor usually

D: Management is interested in maintaining the entity's earnings

C: External policies established by parties outside the entity

Вам также может понравиться