Part 2
Question: ENPL2-0023
What assurance does the auditor
provide that errors, fraud, and direct effect illegal acts that are material to
the financial statements will be detected?
|
Errors |
Fraud |
Direct effect illegal acts |
|
|
A. |
Limited |
Negative |
Limited |
|
B. |
Limited |
Limited |
Reasonable |
|
C. |
Reasonable |
Limited |
Limited |
|
D. |
Reasonable |
Reasonable |
Reasonable |
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. 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.
Question: ENPL2-0024
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.
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
Controlled doubt increases the
likelihood of detecting material misstatements due to errors and fraud.
Question: ENPL2-0025
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 auditor’s 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.
Question: ENPL2-0026
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.
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
Differentiate between fraudulent
financial reporting and misappropriation of assets.
Question: ENPL2-0027
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.
Question: ENPL2-0028
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?
Question: ENPL2-0029
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 evidence—it 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?
Question: ENPL2-0030
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.
Question: ENPL2-0031
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 management’s
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.
Question: ENPL2-0032
Individuals who commit fraud are
ordinarily able to rationalize the act and have
|
Incentive |
Professional skepticism |
|
|
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 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.
Question: ENPL2-0033
An auditor gathers information
necessary to identify risks of material misstatement due to fraud by
|
Inquiry of management |
Considering |
|
|
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 because, when obtaining information needed to identify risks of
material misstatement due to fraud, AU 316 requires inquiries of management,
consideration of results of analytical procedures, consideration of fraud risk
factors, and consideration of certain other information. In addition, a
discussion among engagement personnel regarding the risks of material
misstatement due to fraud is required.
B. Answer
B is incorrect because it states that a consideration of fraud risk factors is
unnecessary.
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.
Question: ENPL2-0034
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.
B. Answer
B is incorrect because the auditor does not assume that the client is either
honest or dishonest.
C. Answer
C is correct because AU 230 defines professional skepticism as an attitude that
includes a questioning mind and a critical assessment of audit evidence.
D. Answer
D is incorrect because no outside expert is ordinarily consulted relating to
the professional skepticism requirement.
Hint
Define professional skepticism.
Question: ENPL2-0035
Which of the following is not a
likely response when an auditor has determined that a misstatement is, or may
be, the result of fraud, and has determined that the effect on the financial
statements may be material?
Answers
A: Consider the implications for other aspects of the audit.
B: Discuss the matter and approach to further investigation
with an appropriate level of management.
C: Attempt to obtain additional evidential matter to
determine whether material fraud has occurred or is likely to have occurred.
D: Suggest that the client contact a local law enforcement
authority to report the possible fraud.
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 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?
Question: ENPL2-0036
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
This answer is incorrect. Refer to
the correct answer explanation.
This answer is incorrect. Refer to
the correct answer 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.
This answer is incorrect. Refer to
the correct answer explanation.
Hint
An auditor is responsible to
disclose information to successor auditors, legal and regulatory agencies, and
funding agencies.
Question: ENPL2-0037
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.
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
Think in terms of assets on the
balance sheet.
Question: ENPL2-0038
Which of the following is not
typically a characteristic of fraud?
Answers
A: Collusion.
B: Concealment.
C: Falsified documentation.
D: Unintentional.
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 fraud is intentional, not unintentional.
Hint
No tricks here.
Question: ENPL2-0039
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
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 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?
Question: ENPL2-0040
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 entity’s 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?
Question: ENPL2-0041
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 management’s 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.
Question: ENPL2-0042
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.
Question: ENPL2-0043
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 year’s 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.
Question: ENPL2-0044
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 auditor’s 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.
Question: ENPL2-0045
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?
Question: ENPL2-0046
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 predecessor’s work should be utilized.
B: Whether the company follows the policy of rotating its
auditors.
C: Whether in the predecessor’s 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.
Question: ENPL2-0047
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.
Question: ENPL2-0048
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?
Question: ENPL2-0049
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 entity’s 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.
Question: ENPL2-0050
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
client’s management.
B: Examining documents to detect illegal acts having a
material effect on the financial statements.
C: Considering whether the client’s accounting estimates are
reasonable in the circumstances.
D: Determining the extent of involvement of the client’s
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.
Question: ENPL2-0051
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 auditor’s opinion.
C: Procedures to be undertaken to discover litigation,
claims, and assessments.
D: Pending legal matters to be included in the inquiry of the
client’s 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.
Question: ENPL2-0052
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. Answer A is
incorrect. A successor auditor should attempt communication with the
predecessor auditor while obtaining an understanding of the client.
B. Answer B is
incorrect. Analytical procedures must be performed while obtaining an
understanding of the client.
C. Answer C is
correct. Confirmation of cash balances is a substantive audit procedure which
will be performed during the audit.
D. 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.
Comments
Post a Comment