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1

If interim substantive procedures for an account identified no exceptions, which of the following would the auditor not perform on that account at year end?

Tests of details for the entire year under audit.

Tests of details of activity during the period since the interim testing date.

Reconciliation of year-end balances to interim balances.

Substantive analytical procedures of the period since the interim testing date.

Tests of details for the entire year under audit.

When procedures are performed at an interim date and no exceptions were identified, the auditor can rely on the account balance as of that interim date. To obtain assurance about the year-end balance, the auditor may perform tests of details on the activity occurring between the interim date and year-end, may reconcile the interim balance to the year-end balance, or may perform substantive analytical procedures in relation to the period since the interim date. The auditor would not, however, test details for the entire year, which would involve duplicating the testing of the interim period.

2

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events?

Apply analytical procedures to the details of the balance sheet accounts that were tested at interim dates.

Inquire about payroll checks that were recorded before the year end but cashed after the year end.

Examine changes in the quoted market prices of investments purchased since the year end.

Compare the latest available interim financial information with the financial statements being reported upon.



By comparing interim financial statements with those reported on, the auditor can identify any significant changes in financial position that would not be explained by normal operations, indicating the possibility of subsequent events that should be evaluated. The auditor would not be concerned about securities purchased after year end as their value would not affect the audited financial statements. Testing balance sheet accounts would not provide information about subsequent events, nor would inquiries about paychecks recorded before year end as neither relates to events occurring after year-end.

3

The safeguarding of inventory most likely includes


Periodic reconciliation of detailed inventory records with the actual inventory on hand by taking a physical count.

Conducting periodic inventory counts and noting discrepancies with inventory records enables the entity to promptly determine if inventory was misappropriated.

4

An accountant's standard report on a compilation of a projection should not include a statement that

There will usually be differences between the forecasted and actual results.

The hypothetical assumptions used in the projection are reasonable in the circumstances.


The accountant has no responsibility to update the report for future events and circumstances.


The compilation of a projection is limited in scope.

The hypothetical assumptions used in the projection are reasonable in the circumstances.


It is not appropriate for the accountant to provide any assurance in a compilation.

An indication that the assumptions used are reasonable is a form of assurance and should not be included.

AR-C 80 provides that a compilation report should "include a statement that the accountant did not audit or review
the financial statements nor was the accountant required to perform any procedures to verify the accuracy or completeness of the information provided by management and, accordingly, does not express an opinion, a conclusion, nor provide any assurance on the financial statements."

In addition to the requirements associated with a standard compilation report, a report on prospective financial information (i.e., forecasts and projections), will also include (1) a statement that the forecasted or projected results may not be achieved; and (2) a statement that the accountant assumes no responsibility to update the report for events and circumstances occurring after the date of the report.

5

Identify the correct statement(s) regarding analytical procedures conducted while obtaining an understanding of the entity and its environment, including its internal controls, during an audit:

I. Analytical procedures conducted while obtaining an understanding of the entity and its environment are considered risk assessment procedures and are required.

II. As a planning analytical procedure an auditor may plan walkthroughs of internal control processes in order to gather information for risk assessment on the client’s internal control environment.

III. As a planning analytical procedure an auditor may develop an expectation for the current period’s net income on the basis of the client’s interim forecasts and interim financial statements.

I III

The procedures used by an auditor to obtain an understanding of a client and its environment, including its internal controls, which include inquiries, observations, and analytical procedures, are referred to as risk assessment procedures. One analytical procedure may involve developing an expectation of the entity’s net income for the period, which may involve reviewing the client’s forecasts and interim financial statements, and comparing that amount to reported net income to determine, at the highest level, if it appears as if there is a high risk that the financial statements are materially misstated. Although performing walkthroughs of internal control is part of obtaining the understanding of the entity and its environment, it is not an analytical procedure.

6

According to professional standards, which of the following circumstances will impair a CPA’s independence?

rThe CPA’s nondependent stepchild recently inherited, from a party unrelated to the CPA, an immaterial amount of stock in the client.

The CPA’s firm acts as administrator of a trust which owns 5% of the client’s stock, which makes up 7% of the total assets of the trust.

A partner in the firm who works in the same office as the CPA, but performs no services for the client, has a material investment in a mutual fund which invests in the client.

The CPA accepted free pizza from the client for working late hours on the audit.

A partner in the firm who works in the same office as the CPA, but performs no services for the client, has a material investment in a mutual fund which invests in the client.

Ownership in a mutual fund is considered a direct financial interest in the mutual fund and an indirect financial interest in entities in which the mutual fund holds investments. In addition to the CPA performing attest services for a client, independence rules apply to all covered partners, which include those working in the same office as the attest CPA or who have performed nonattest services for the attest client. A close relative, unlike an immediate family member, may have a direct interest in a CPA’s attest client as long as it is not material and the close relative does not hold a key position with the client. Serving as trustee, executor, or administrator of a trust or estate only impairs independence if it owns more than 10% of an attest client or if the investment makes up more than 10% of the trust’s or estate’s total assets. Gifts that are inconsequential, such as free pizza, do not impair independence.

Expanded explanation: A mutual fund is an investment program owned by shareholders which trades in holdings (typically diversified, but some are undiversified) and typically is managed professionally .

A person can own shares in the mutual fund, which are different from the underlying investments owned by the fund. Clearly, by holding shares in the mutual fund, the person has a direct financial interest in the mutual fund itself. (The mutual fund shareholder may not audit the mutual fund.)

A covered member's interest in the underlying investments of the mutual fund is indirect. This indirect interest in the underlying investments of the mutual fund can be considered either immaterial or material, depending on two things: a) the diversification of the mutual fund, and b) the proportion of the mutual fund's outstanding shares that the covered member owns. (In some circumstances, a mutual fund shareholder may be able to audit the companies partially owned by the mutual fund.)

The Code of Conduct gives the following guidelines:

•If a covered member owns 5% or less of a diversified mutual fund's outstanding shares, the underlying investments would be considered immaterial indirect financial interests (which include the potential attest client).

•If a covered member owns more than 5% of a diversified or any of an undiversified mutual fund's outstanding shares, then the covered member should evaluate the mutual fund's underlying investments to determine whether the covered member's holdings constitute a material indirect financial interest in any of the underlying investments (which include the potential attest client).

7

An auditor is establishing procedures for testing management’s assertion regarding rights and obligations in relation to reported investments in marketable securities. The auditor is considering using confirmations or observation. Which of these techniques would be appropriate for obtaining evidence about rights and obligations?

Confirmations only

Observation only

Neither confirmations nor observation

Both confirmations and observation

Both confirmations and observation

When securities are held by an independent custodian on behalf of an entity, the custodian can confirm the existence of the investment securities and their ownership. Custody of securities provides evidence of ownership, which the auditor will obtain by observation of securities on hand.

8

PPS advantages

PPS sampling offers several advantages over variable sampling. Under PPS, sampling can begin before the population is available, and fewer expected errors will result in a smaller sample size. One disadvantage in relation to classical variables sampling is that PPS requires special handling for zero and negative balances. Both PPS and variables sampling require a preliminary judgment about materiality.

9

More about PPS

The purpose of variable estimation sampling, which PPS is an example of, is to measure amounts, which can be compared to client data to identify overstatements. PPS increases the proportion of larger, not smaller items in the sample. PPS is used in substantive testing, not tests of controls, and would not be used to determine if a control was being applied. Since items are chosen based on the relationship of their balances to an interval, zero and negative balances are not a focus.

10

In all agreed-upon procedures engagements, the practitioner must provide a report stating that the procedures may not be sufficient for the purpose intended.

Compilations, reviews, examinations and agree-upon procedures engagements may be performed with respect to pro forma financial information.

Pro forma financial statements are based on historical financial information and are intended to show how results of operations and financial position would differ for an event that actually hadn't occurred.

In a Yellow Book audit, an auditor may, but is not required to, provide recommendations to improve operations. The auditor is required, however, to report on the tests performed to determine compliance with laws and regulations.

11

The standards of reporting for audits performed under Government Auditing Standards require the audit report to include a description of the scope of the auditor’s testing of internal control over financial reporting and of compliance with laws, regulations, and provisions of contracts or grant agreements.

When an auditor is engaged to examine pro forma adjustments to audited historical financial statements, the auditor is not required to reevaluate internal control over financial reporting. The auditor would, however, be required to read the pro forma information and make certain it does not contain any obvious errors, such as mathematical errors.

12

Which of the following items should be included in an auditor's report for financial statements prepared in conformity with an other comprehensive basis of accounting (OCBOA)?

A title that includes the word "independent."

An auditor is required to be independent to perform an audit and the auditor’s report is required to have the word independent in the title

13

If the prescribed Audit Report form of a government agency on behalf of the client differs significantly from Generally Accepted Auditing Standards (GAAS), the auditor may:



Replace the form with a more acceptable form in compliance with GAAS
Reword the prescribed form and sign it
Attach a separate audit report to the form

ii and iii

If the prescribed Audit Report form of a government agency on behalf of the client differs significantly from GAAS, the auditor may reword the prescribed form and sign it, attach a separate audit report to the form, or choose not to accept the audit engagement. The auditor may not replace the form.

14

I love Julian

I am so glad you are home!

15

Which of the following procedures is most likely to provide evidence regarding the completeness of the amount recorded as investments in securities on the balance sheet?

Inspection of securities on hand

Confirmations of loans to determine if securities are pledges as collateral

Review of minutes of board of director meetings

Confirmations with brokers and other third parties holding securities on behalf of the client

A review of minutes of board of directors meetings will inform the auditor as to all purchases of securities that are authorized. This can be compared to those that are reported to make certain that the reporting of securities is complete.

16

An increase in the assessed level of control risk will increase:



Tests of Controls
Detection Risk Substantive Testing
Inherent Risk

No
No
Yes
No

17

When unaudited financial statements of a nonpublic entity, which were neither reviewed nor compiled, are presented in comparative form with audited financial statements in the subsequent year, the unaudited financial statements should be clearly marked to indicate their status and



I. The report on the unaudited financial statements should be reissued.

II. The report on the audited financial statements should include a separate paragraph stating the auditor assumes no responsibility for the prior period financial statements.

When financial statements that were not audited, reviewed, or compiled are presented in comparative form with audited financial information, the unaudited financial statements should be clearly marked as such and an other-matter paragraph should be added to the audit report stating that the auditor has not audited, reviewed, or compiled the prior period financial statements and the auditor assumes no responsibility for them. If the prior period financial statements were not audited, reviewed, or compiled, there would be no report to reissue.

18

In which of the following circumstances would an auditor not express an unmodified opinion?

Quarterly financial data required by the SEC has been omitted.

The auditor wishes to emphasize an unusually important subsequent event.

There has been a material change between periods in accounting principles.

The auditor is unable to obtain audited financial statements of a consolidated investee.

The auditor is unable to obtain audited financial statements of a consolidated investee.

A material change in accounting principles, if justified and properly disclosed, will not result in a qualification of opinion, although the auditor may wish to draw attention to it with an emphasis-of-matter paragraph. The omission of quarterly financial data required by the SEC would result in an other-matter paragraph but would not result in a qualification of opinion since the omission does not affect the statements on which the opinion is expressed. The emphasis of a matter will also result in an emphasis-of-matter paragraph immediately after the opinion paragraph, but would also not result in a qualification of opinion. The auditor's inability to obtain audited financial statements of a consolidated investee represents a scope limitation. Depending on materiality, the auditor may issue a qualified opinion or a disclaimer of opinion.

19

Which of the following statements would not normally be included in a representation letter for a review of interim financial information?

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.

We have made available to you all financial records and related data.

To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require adjustment to or disclosure in the interim financial information.

We understand that a review consists principally of performing analytical procedures and making inquiries about the interim financial information.

The client does not have to represent that they understand what a review consists of. The understanding that the accountant is required to obtain and document in the form of an engagement letter describes what a review is and its limitations. Management would represent regarding subsequent events as it is their responsibility to evaluate them and the accountant will want to ascertain if the financial statements are in need of modification. Management acknowledges its responsibility for the prevention and detection of fraud, largely as a reminder that it is their responsibility, not the accountants’. The client also represents that they have made all financial records and data available to the accountant as not doing so would represent a scope limitation that would preclude providing assurance.

20

An auditor should obtain sufficient knowledge of an entity’s accounting system to understand the

Safeguards used to limit access to computer facilities.

Process used to prepare significant accounting estimates.

Procedures used to assure proper authorization of transactions.

Policies used to detect the concealment of irregularities.

Process used to prepare significant accounting estimates.

When obtaining an understanding of an entity’s accounting system, the auditor must focus on the significant classes of transactions, how these transactions are initiated, the accounting records and supporting documents involved in the processing of transactions, the processing involved from the initiation of a transaction to its inclusion in the financial statements, and the process used to prepare the entity’s financial statements, including significant accounting estimates and disclosures.

21

Which of the following actions is an analytical procedure that an auditor most likely would use while auditing a company’s notes payable?

Sending a confirmation to the lender requesting verification of the loan's outstanding balance.

Performing calculations to determine if the company is in compliance with debt covenants.

Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.

Reviewing the details of the company’s loan and interest expense accounts to determine that all payments were properly recorded.

Multiplying the average outstanding loan balance by the interest rate and comparing the result to interest expense actually recorded.


The auditor will expect that interest expense should be equal to the weighted average loan payable balance multiplied by the entity’s effective interest rate and will perform an analytical procedure to determine if the amount reported is significantly different.

22

Which of the following audit procedures is most likely to be included in an audit program to examine long-term debt?

Comparing the carrying value of debt to its market value as of the balance sheet date.

Sending confirmations to verify the existence of the individual holders of the entity’s bonds.

rPerforming an analytical procedure comparing interest expense to an auditor expectation based on debt balances.

Inspecting the subsidiary ledger for unrecorded liabilities.

Performing an analytical procedure comparing interest expense to an auditor expectation based on debt balances.

he audit of long-term debt will generally include an analytical procedure in which the auditor develops an expectation for interest expense based on the amounts and terms of outstanding debt and compares it to recorded amounts. Debt is not generally reported at fair value and comparing the carrying value to the fair value would not provide meaningful audit evidence. The auditor is more likely to trace debt to original documentation than to send confirmations to bondholders since bonds are securities that are often easily transferrable. Inspecting the subsidiary ledger will provide information about recorded liabilities, not unrecorded liabilities.