Grab Bag 1
As specified in Title II of the Sarbanes Oxley Act (SOX), which of the following non-audit services to audit clients are not prohibited from being performed by a registered public accounting firm if the pre-approved by the audit committee and disclosed to the SEC?
- Legal services or expert services unrelated to the audit
- Human resource services
- Internal audit outsourcing services
- Tax services
- Tax services
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
- Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables.
- Claims received from customers for goods returned may be intentionally recorded in other customers' accounts.
- Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
- The failure to prepare shipping documents may cause an overstatement of inventory balances.
- Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
An auditor discovers several immaterial errors that the auditor determines do not, individually or in the aggregate, cause the financial statements to be materially misstated. The auditor proposes adjusting entries to the client, who refuses to correct the errors. Which of the following best summarizes the steps the auditor should take?
- Document the errors and the conclusion that the financial statements are free from material misstatement
- Withdraw from the engagement because the client’s refusal to correct the errors is a scope limitation
- Issue a qualified, “except for” opinion on the financial statements because the client refuses to correct the errors
- Correct the errors on the client’s behalf, and then issue the audit report
- Issue a qualified, “except for” opinion on the financial statements because the client refuses to correct the errors
An opportunity for fraud involving lapping of accounts receivable is more likely when which two duties involving accounts receivable are not segregated?
- Authorization and reconciliation
- Receipt of returned goods and recording
- Opening the mail and recording
- Recording and reconciliation
- Opening the mail and recording
In planning an audit, the auditor's knowledge about the design of relevant internal control activities should be used to
- Identify the types of potential misstatements that could occur.
- Assess the operational efficiency of internal control.
- Determine whether controls have been circumvented by collusion.
- Document the assessed level of control risk.
- Identify the types of potential misstatements that could occur.
What is the most likely opportunity for theft or fraud by employees?
- The belief that the theft is a common practice
- Needlessly complex transactions
- Access to assets that are easily traced
- Stock options that expire soon after the release of financial statements
- Needlessly complex transactions
An entity prepares its financial statements on its income tax basis. The accompanying notes include a summary of significant accounting policies that discusses the basis of presentation and describes how that basis differs from GAAP. The dollar amount of the effects of the difference between the income tax basis and GAAP
- Is required to be included only in the auditor's report.
- Is required to be included only in the notes to the financial statements.
- Is required to be included both in the notes to the financial statements and the auditor's report.
- Need not be quantified and included in either the notes to the financial statements or the auditor's report.
- Need not be quantified and included in either the notes to the financial statements or the auditor's report.
Which of the following financial ratios would be most useful to an auditor seeking information on a company’s ability to cover current obligations?
- Earnings per share
- Quick ratio
- Gross profit margin
- Sales to assets
- Quick ratio
In testing management’s rights and obligations assertion in relation to inventories, which of the following procedures would the auditor most likely consider most reliable?
- Review consignment agreements
- Vouch inventory counts to accounting records
- Trace inventory in accounting records to inventory counts
- Make inquiries and analyze inventory turnover to identify slow-moving or obsolete items
- Review consignment agreements
Prior to commencing the compilation of financial statements of a nonissuer, an accountant is required to
- Verify that the financial information supplied by the entity agrees with the books of original entry.
- Perform preliminary analytical procedures to identify accounts that may represent specific risks relevant to the engagement.
- Make inquiries of management concerning the entity's procedures used in adjusting and closing the books of account.
- Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity's industry.
- Obtain an understanding of any specialized financial reporting frameworks and practices used in the entity's industry.
According to professional standards, which of the following circumstances will impair a CPA’s independence?
- A partner in the CPA’s firm who works in another state and does no work for the client has a material indirect financial interest in the client.
- The CPA has a car loan with a financial institution client.
- The CPA’s non-dependent stepchild has a material indirect financial interest in the client.
- The client recently exceeded the 90-day limit for outstanding unpaid invoices due to the CPA.
- The CPA’s non-dependent stepchild has a material indirect financial interest in the client.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements arising from fraudulent financial reporting?
- The entity's industry is experiencing declining customer demand.
- Employees who handle cash receipts are not bonded.
- Bank reconciliations usually include in-transit deposits.
- Equipment is often sold at a loss before being fully depreciated.
- The entity's industry is experiencing declining customer demand.
X Company prepares a sales invoice, using a pre-printed sequentially numbered form, upon receipt of a copy of a bill of lading from the shipping department indicating that goods have been shipped. An auditor wishes to obtain evidence that all sales that that were recorded during the period actually occurred. Which of the following procedures would likely be most effective for that purpose?
- Trace entries from the sales journal to sales invoices and bills of lading
- Trace a sample of receiving reports to the sales journal
- Trace a sample of sales invoices to bills of lading
- Trace a sample of bills of lading to the sales journal
- Trace entries from the sales journal to sales invoices and bills of lading
An auditor is recalculating depreciation on real property acquired during the year. Which of the following documents will provide the most relevant information regarding a property’s depreciable base?
- Deed
- Bank confirmation of mortgage loan
- Closing statement
- Flood insurance policy
- Closing statement
Which of the following, discovered during an audit, most likely would raise a question concerning possible illegal acts?
- Related party transactions, although properly disclosed, were pervasive during the year.
- The entity prepared several large checks payable to cash during the year.
- Material internal control weaknesses previously reported to management were not corrected.
- The entity was a campaign contributor to several local political candidates during the year.
- The entity prepared several large checks payable to cash during the year.
Which of the following assertions applies to an audit of inventory?
- Occurrence
- Classification
- Cutoff
- Completeness
- Completeness
A CPA has been requested by a former audit client to reissue the auditor's report for the prior period. Before reissuing the report, the CPA should
- Obtain a letter of representation from the former client's management.
- Make inquiries of the former client's attorney regarding pending litigation.
- Review the former client's records to verify its compliance with debt and loan agreements.
- Consider whether there is substantial doubt about the former client's ability to continue as a going concern.
- Obtain a letter of representation from the former client's management.
An auditor observes new equipment while walking around a client’s factory and vouches the new equipment to schedules of property, plant, and equipment that support the information in the financial statements. Which assertion is supported by the evidence obtained?
- Existence
- Rights and obligations
- Completeness
- Valuation and allocation
- Completeness
Watt, CPA, concludes that, while ABC Co. has properly accounted for and disclosed certain significant related party transactions, an emphasis-of-matter paragraph calling attention to these transactions should be added after Watt’s opinion paragraph in the audit report. What should be included in the emphasis-of-matter paragraph?
- A clear reference to the transactions and an indication that Watt’s audit opinion is not modified in light of these transactions.
- A detailed description of the transactions, a clear reference to the transactions, and an indication that Watt’s audit opinion is not modified in light of these transactions.
- A detailed description of the transactions and a clear reference to the transactions.
- A detailed description of the transactions.
- A clear reference to the transactions and an indication that Watt’s audit opinion is not modified in light of these transactions.
If an auditor includes an emphasis-of-matter paragraph to draw users' attention to a matter relevant to the users' understanding of the financial statements of a nonissuer, then the auditor should
- Indicate in the audit report that the emphasis-of-matter paragraph is required by law or regulation.
- Notify the appropriate regulatory authority if the auditor's opinion was modified on the basis of the matter.
- Modify the introductory paragraph to direct the reader to the emphasis-of-matter paragraph.
- Include the paragraph immediately after the opinion paragraph in the audit report.
- Include the paragraph immediately after the opinion paragraph in the audit report.
Which of the following would be considered corroborative evidence?
- Checks, invoices, and contracts
- General and subsidiary ledgers
- Minutes from meetings of the board of directors
- Worksheets and spreadsheets supporting cost allocations
- Minutes from meetings of the board of directors
Which of the following events most likely would indicate the existence of related party transactions?
- Insuring the lives of key executives and listing the entity as beneficiary.
- Selling real estate at a price that differs significantly from its appraised value.
- Making a loan with specific scheduled terms for repayment of the funds.
- Granting stock options to key executives at favorable prices.
- Selling real estate at a price that differs significantly from its appraised value.
An auditor is seeking evidence in an examination of bonds payable. Which of the following procedures would the auditor likely perform?
- Send confirmations to bondholders
- Trace assets purchased with bond proceeds to documentation for evidence of liens
- Evaluate reasonableness of interest expense in relation to bonds payable balances
- Perform analytical procedures relative to bond discount or premium
- Evaluate reasonableness of interest expense in relation to bonds payable balances
Identify the correct statement regarding analytical procedures used in a review conducted at the conclusion of an audit.
- The ultimate purpose of analytical procedures used in a review conducted at the conclusion of the audit is to uncover fraud schemes that may have been missed previously during the audit.
- Typically, a junior member of the engagement team will perform the analytical procedures applied at the conclusion of the audit because less precision is required.
- If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
- Analytical procedures used in the review near the conclusion of the audit are not required.
- If review analytical procedures suggest the presence of misstated account balances, the auditor may have to perform additional substantive tests of details to satisfactorily complete the audit.
During an engagement to review the financial statements of a nonissuer, an accountant becomes aware of several leases that should be capitalized, but are not capitalized. The accountant considers these leases to be material to the financial statements. The accountant decides to modify the standard review report because management will not capitalize the leases. Under these circumstances, the accountant should
- Issue an adverse opinion because of the departure from GAAP.
- Express no assurance of any kind on the entity's financial statements.
- Emphasize that the financial statements are for limited use only.
- Disclose the departure from GAAP in a separate paragraph of the accountant's report.
- Disclose the departure from GAAP in a separate paragraph of the accountant's report.