exam prep ration 1 (1)
TRANSCRIPT
-
8/3/2019 Exam Prep Ration 1 (1)
1/32
Exam Preparation
-
8/3/2019 Exam Prep Ration 1 (1)
2/32
p
When an auditor has substantial doubt aboutan entity's ability to continue as a going
concern because of the probablediscontinuance of operations, the auditormost likely would express a qualified opinionif:
The effects of the adverse financial conditions likely willcause a bankruptcy filing.
Information about the entity's ability to continue as agoing concern is not disclosed.
Management has no plans to reduce or delay futureexpenditures.
Negative trends and recurring operating losses appearto be irreversible.
-
8/3/2019 Exam Prep Ration 1 (1)
3/32
A client's letter of representation serves what
purpose?
To impress upon auditors its responsibility for theassertions in the financial statements
To remind the auditor of the potential misstatements or
omission in the financial statements
To document the responses from management toinquiries about various aspects
All of the above
-
8/3/2019 Exam Prep Ration 1 (1)
4/32
One of the main objectives of performing
analytical review procedures during the
planning phase of the audit is to identify: Transactions that have not been properly authorized.
Illegal acts undetected as a result of poor internal
controls.
Inefficient operations.
Unusual changes that may signal possible account
misstatements.
-
8/3/2019 Exam Prep Ration 1 (1)
5/32
If a client will not permit access to some of the
companys record which the auditor thinks are
material and pervasive, the auditor's reportordinarily will contain a(an):
Adverse opinion.
Disclaimer of opinion. Unqualified opinion.
Qualified opinion.
-
8/3/2019 Exam Prep Ration 1 (1)
6/32
Which of the following statements is correctconcerning an auditor's responsibility to report
fraud? 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 areinconsequential.
The disclosure of material management fraud to principalstockholders is required when both senior management andthe board of directors fail to acknowledge the fraudulentactivities.
Fraudulent activities involving senior management of which
the auditor becomes aware should be reported directly tothe SEC.
The disclosure of fraudulent activities to parties other thanthe client's senior management and its audit committee isnot ordinarily part of the auditor's responsibility.
-
8/3/2019 Exam Prep Ration 1 (1)
7/32
Which of the following is true? Auditor
perform test of controls:
To determine engagement risk
To determine material misstatement in the particular
account balance
To assess Control Risk
To plan scope, timing and direction of the audit
-
8/3/2019 Exam Prep Ration 1 (1)
8/32
What is the objective of the Financial
Statement Audit performed by the
independent auditor? Tick which is true: To ensure that Financial Statements are free of material
misstatements
To express an opinion on Financial Statements
To identify misstatements due to frauds
To advise investors on Financial Statements
All of above
None of above
-
8/3/2019 Exam Prep Ration 1 (1)
9/32
In assessing the competence of a client's
internal auditor, an independent auditor most
likely would consider the: Internal auditor's compliance with professional internal
auditing standards.
Client's policies that limit the internal auditor's access
to management salary data.
Evidence supporting a further reduction in the assessed
level of control risk.
Results of ratio analysis that may identify unusual
transactions and events.
-
8/3/2019 Exam Prep Ration 1 (1)
10/32
Auditee Risk refers to a combination of:
Inherent Risk, Control Risk and Detection Risk
Business Risk and Inherent Risk Control Risk, Business Risk and Inherent Risk
Control Risk and Inherent Risk
-
8/3/2019 Exam Prep Ration 1 (1)
11/32
Which of the following statement is true?
Audit Risk is the risk that the auditor may express a
qualified opinion when the financial statements arefree of material misstatement?
Audit Risk is the risk that the auditor may express an
adverse opinion when the financial statements are free
of material misstatement?
None of above
-
8/3/2019 Exam Prep Ration 1 (1)
12/32
Which of the following is not the responsibility
of Auditor:
Performing audit procedures on the financialstatements
Preparation of financial statements
Compliance with applicable auditing framework
Expressing an opinion based on the audit
-
8/3/2019 Exam Prep Ration 1 (1)
13/32
Which type of risk does an auditor have
control over through substantive auditing
procedures? Control Risk
Engagement Risk
Detection Risk
Business Risk
Inherent Risk
-
8/3/2019 Exam Prep Ration 1 (1)
14/32
When an auditor increases the assessed level
of control risk because certain control
activities were determined to be ineffective,the auditor most likely would increase the:
Level of detection risk.
Extent of tests of details.
Level of inherent risk.
Extent of tests of controls.
-
8/3/2019 Exam Prep Ration 1 (1)
15/32
Which of the following events would be a
subsequent period event which would require
adjustments to current year's financialstatements?
Sale of investments at a price below record cost
Change in depreciation estimate
Sale of goods
Collection of accounts receivable
-
8/3/2019 Exam Prep Ration 1 (1)
16/32
Which of the following statements ordinarily isnot included among the written client
representations made by the chief executiveofficer and the chief financial officer? "Sufficient evidential matter has been made available
to the auditor to permit the issuance of an unqualifiedopinion."
"There are no unasserted claims or assessments thatour lawyer has advised us are probable of assertion andmust be disclosed."
"We have no plans or intentions that may materially
affect the carrying value or classification of assets andliabilities."
"No events have occurred subsequent to the balancesheet date that would require adjustment to, ordisclosure in, the financial statements."
-
8/3/2019 Exam Prep Ration 1 (1)
17/32
An auditor believes that there is substantial
doubt about an entity's ability to continue as a
going concern for a reasonable period of time.In evaluating the entity's plans for dealing
with the adverse effects of future conditions
and events, the auditor most likely wouldconsider, as a mitigating factor, the entity's
plans to:
Repurchase the entity's stock at a price below its book
value.
Issue stock options to key executives.
Lease rather than purchase operating facilities.
Accelerate the due date of an existing mortgage.
-
8/3/2019 Exam Prep Ration 1 (1)
18/32
Analytical procedures performed during an auditindicate that accounts receivable doubled sincethe end of the prior year. However, the allowance
for doubtful accounts as a percentage of accountsreceivable remained about the same. Which ofthe following client explanations would satisfythe auditor?
A greater percentage of accounts receivable are listed in the"more than 120 days overdue" category than in the prioryear.
Internal control activities over the recording of cash receiptshave been improved since the end of the prior year.
The client opened a second retail outlet during the current
year and its credit sales approximately equaled the olderoutlet.
The client tightened its credit policy during the current yearand sold considerably less merchandise to customers withpoor credit ratings.
-
8/3/2019 Exam Prep Ration 1 (1)
19/32
Which of the following statements is correct
about the sample size in statistical sampling
when testing internal controls? The auditor should consider the tolerable rate of
deviation from the controls being tested in determining
sample size.
As the likely rate of deviation decreases, the auditorshould increase the planned sample size.
The allowable risk of assessing control risk too low has
no effect on the planned sample size.
Of all the factors to be considered, the population size
has the greatest effect on the sample size.
-
8/3/2019 Exam Prep Ration 1 (1)
20/32
Which of the following factors would most
likely be considered an inherent limitation to
an entity's internal control? The complexity of the information processing system.
Human judgment in the decision making process.
The ineffectiveness of the board of directors.
The lack of management incentives to improve the
control environment.
-
8/3/2019 Exam Prep Ration 1 (1)
21/32
A successor auditor is required to attempt
communication with the predecessor auditor
prior to: Performing test of controls.
Testing beginning balances for the current year.
Making a proposal for the audit engagement.
Accepting the engagement.
-
8/3/2019 Exam Prep Ration 1 (1)
22/32
The most reliable procedure for an auditor to
use to test the existence of a client's inventory
at an outside location would be to: Observe physical counts of the inventory items.
Trace the total on the inventory listing to the general
ledger inventory account.
Obtain a confirmation from the client indicating
inventory ownership.
Analytically compare the current-year inventory
balance to the prior-year balance.
-
8/3/2019 Exam Prep Ration 1 (1)
23/32
An auditor compared the current-year gross
margin with the prior-year gross margin to
determine if cost of sales is reasonable. Whattype of audit procedure was performed?
Test of transactions.
Analytical procedures.
Test of controls.
Test of details.
-
8/3/2019 Exam Prep Ration 1 (1)
24/32
Which of the following procedures would yield
the most competent evidence?
A scanning of trial balances.
An inquiry of client personnel.
A comparison of beginning and ending retained
earnings.
A recalculation of bad debt expense.
-
8/3/2019 Exam Prep Ration 1 (1)
25/32
Subsequent period events may require an
adjustment of current year's financial
statements. True
False
-
8/3/2019 Exam Prep Ration 1 (1)
26/32
Under which of the following circumstances
would the expression of a disclaimer of
opinion be inappropriate? The auditor is unable to obtain the audited financial
statements of a consolidated investee.
Management does not provide reasonable justification
for a change in accounting principles.
The company failed to make a count of its physical
inventory during the year and the auditor was unable
to apply alternative procedures to verify inventory
quantities. Management refuses to allow the auditor to have
access to the company's canceled checks and bank
statements.
-
8/3/2019 Exam Prep Ration 1 (1)
27/32
In a financial statement audit, inherent risk isevaluated to help an auditor assess which of
the following? The internal audit department's objectivity in reporting
a material misstatement of a financial statementassertion it detects to the audit committee.
The risk that the internal control system will not detect
a material misstatement of a financial statementassertion.
The risk that the audit procedures implemented willnot detect a material misstatement of a financial
statement assertion. The susceptibility of a financial statement assertion to a
material misstatement assuming there are no relatedcontrols.
-
8/3/2019 Exam Prep Ration 1 (1)
28/32
Which of the following represents an inherent
limitation of internal controls?
Bank reconciliations are not performed on a timelybasis.
The CEO can request a check with no purchase order.
Customer credit checks are not performed.
Shipping documents are not matched to sales invoices.
-
8/3/2019 Exam Prep Ration 1 (1)
29/32
An auditor who uses the work of a specialist
may refer to the specialist in the auditor's
report if the: Auditor believes that the specialist's findings are
reasonable in the circumstances.
Specialist's findings support the related assertions in
the financial statements.
Auditor modifies the report because of the difference
between the client's and the specialist's valuations of
an asset.
Specialist's findings provide the auditor with greaterassurance of reliability about management's
representations.
-
8/3/2019 Exam Prep Ration 1 (1)
30/32
What is an auditor's responsibility forsupplementary information, such as disclosure
of pension information, which is outside thefinancial statements? The auditor should engage a specialist, such as an
actuary, to verify that management's assertions arereasonable.
The auditor's only responsibility for supplementaryinformation is to determine that such information hasnot been omitted.
The auditor should perform tests of transactions to the
supplementary information to verify that it isreasonably comparable to the prior-year's information.
The auditor should apply certain limited procedures tothe supplementary information and report deficienciesin, or omissions of, such information.
-
8/3/2019 Exam Prep Ration 1 (1)
31/32
A successor auditor's inquiries of the
predecessor auditor should include questions
regarding: The predecessor's evaluation of audit risk and
judgment about materiality.
Subsequent events that occurred since the
predecessor's audit report was issued.
The predecessor's understanding as to the reasons for
the change in auditors.
The predecessor's knowledge of accounting matters of
continuing significance.
-
8/3/2019 Exam Prep Ration 1 (1)
32/32
Thank You!
I wish best of luck
for your exam and
grade !