Part 1
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.
Question: ENPL2-0002
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?
Question: ENPL2-0003
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.
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.
Question: ENPL2-0004
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 with 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.
Question: ENPL2-0005
An understanding with the client
must include the objectives of the engagement, management’s responsibilities,
and
|
The auditor’s responsibilities |
Limitations of the audit |
|
|
A. |
Yes |
Yes |
|
B. |
Yes |
No |
|
C. |
No |
Yes |
|
D. |
No |
No |
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
A. Answer A is
correct. The professional standards require that both the auditor’s
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 auditor’s responsibilities must be communicated.
D. Answer D is
incorrect. Both the auditor’s responsibilities and limitations of the audit
must be communicated.
Hint
What needs to be communicated to
reduce the likelihood of misunderstandings?
Question: ENPL2-0006
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?
Question: ENPL2-0007
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 auditor’s
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.
Question: ENPL2-0008
Which of the following underlies the
application of generally accepted auditing standards, particularly the
standards of fieldwork and reporting?
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.
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?
Question: ENPL2-0009
Which of the following publications
does not qualify as a source of generally accepted accounting principles?
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.
Question: ENPL2-0010
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 client’s 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.
Question: ENPL2-0011
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 auditor’s 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.
Question: ENPL2-0012
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.
Question: ENPL2-0013
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.
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer explanation.
Hint
Identify the effect of decreasing
the extent of substantive procedures on audit risk.
Question: ENPL2-0014
Which of the following audit risk
components may be assessed in nonquantitative terms?
|
Inherent risk |
Control risk |
Detection risk |
|||
|
A. |
Yes |
Yes |
No |
||
|
B. |
Yes |
No |
Yes |
||
|
C. |
No |
Yes |
Yes |
||
|
D. |
Yes |
Yes |
Yes |
||
Answers
A: A.
B: B.
C: C.
D: D.
Answer Explanations
This answer is incorrect. Refer to the
correct answer explanation.
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer 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.
Question: ENPL2-0015
Use the audit risk model to
calculate audit risk (to the closest percent) in the following circumstance:
Control
risk 40%
Inherent
risk 40%
Detection
risk 40%
Answers
A: 1%.
B: 6%.
C: 13%.
D: 40%.
Answer Explanations
This answer is incorrect. Refer to
the correct answer 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 |
= |
Inherent risk x Control risk x
Detection risk in
this problem |
|
Audit risk |
= |
.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.
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer explanation.
Hint
AR = IR x DR x CR
Question: ENPL2-0016
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.
Question: ENPL2-0017
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.
Question: ENPL2-0018
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 auditor’s consideration of materiality is influenced by
the auditor’s 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?
Question: ENPL2-0019
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.
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer explanation.
Hint
In the planning stage, the auditor
typically makes a conservative assessment of materiality.
Question: ENPL2-0020
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.
Question: ENPL2-0021
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.
Question: ENPL2-0022
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.
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