Part 4
Question: ENPL2-0084
If requested to perform a review
engagement for a nonpublic entity in which an accountant has an immaterial
direct financial interest, the accountant is
Answers
A: Independent because the financial interest is immaterial
and, therefore, may issue a review report.
B: Not independent and, therefore, may not be associated with
the financial statements.
C: Not independent and, therefore, may not issue a review
report.
D: Not independent and, therefore, may issue a review report,
but may not issue an auditor’s opinion.
Answer Explanations
A. Answer
A is incorrect because such a financial interest does impair independence.
B. Answer
B is incorrect because independence is not required for compilation services,
and therefore, an accountant may be so associated with the financial
statements.
C. Answer
C is correct. Reviews are a form of attestation service, and an accountant may
not maintain independence when an immaterial direct financial interest is held
in a client when performing attestation services.
D. Answer
D is incorrect because neither a review report nor an auditor's opinion may be
issued.
Hint
Recall independence requirements of
Code of Professional Conduct.
Question: ENPL2-0085
The concept of materiality would be
least important to an auditor when considering the
Answers
A: Effects of a direct financial interest in the client upon
the CPA’s independence.
B: Decision whether to use positive or negative confirmations
of accounts receivable.
C: Adequacy of disclosure of a client’s illegal act.
D: Discovery of weaknesses in a client’s internal control
structure.
Answer Explanations
A. Answer
A is correct because the auditor may not have any direct financial interest in
a client, regardless of materiality.
B. Answer
B is incorrect because auditors generally consider the size (materiality) of
account balances when choosing between the use of positive or negative
confirmation.
C. Answer
C is incorrect because materiality is considered when evaluating the adequacy
of disclosures of illegal acts.
D. Answer
D is incorrect because the materiality of internal control weaknesses should be
considered by the auditor.
Hint
Which of these is an area with an
absolute requirement?
Question: ENPL2-0086
Which of the following is correct
concerning PCAOB guidance that uses the term “must”?
Answers
A: The auditor must fulfill the responsibilities.
B: The auditor must comply with requirements unless s/he
demonstrates that alternative actions were sufficient to achieve the objectives
of the standards.
C: The auditor should consider the guidance; whether the
auditor follows depends on exercise of professional judgment in the
circumstances.
D: The auditor has complete discretion as to whether to
perform the procedure.
Answer Explanations
A. Answer A is
correct because terms such as “must,” “shall,” and “is required to” are used to
indicate that the auditor must fulfill the responsibilities.
B. Answer B is
incorrect because the term “should” means that the auditor must comply with the
requirements unless he or she can demonstrate that alternative actions were
sufficient to achieve the objectives of the standards.
C. Answer C is
incorrect because terms such as “may,” “might” and “could” are used when the
auditor should consider performing the audit procedure.
D. Answer D is
incorrect because no particular terms are used for the situation in which the
auditor has complete discretion whether to perform the procedure.
Hint
No trick here.
Question: ENPL2-0087
An integrated audit under the
Sarbanes-Oxley Act of 2002 and PCAOB standards includes
Answers
A: An audit of the financial statements and a review of
internal control over financial reporting.
B: An audit of the financial statements and an audit of compliance
with the Sarbanes-Oxley Act and PCAOB standards.
C: An audit of the financial statements and an audit of
controls over compliance with the Sarbanes-Oxley Act.
D: An audit of the financial statements and an audit of
internal control over financial reporting.
Answer Explanations
A. Answer A is
incorrect because the law calls for an audit of the financial statements and an
audit of internal control over financial reporting.
B. Answer B is
incorrect because the law calls for an audit of the financial statements and an
audit of internal control over financial reporting.
C. Answer C is
incorrect because the law calls for an audit of the financial statements and an
audit of internal control over financial reporting.
D. Answer D is
correct because the law calls for an audit of the financial statements and an
audit of internal control over financial reporting.
Hint
Sarbanes-Oxley deals with the
reliability of financial reporting.
Question: ENPL2-0088
Which of the
following statements is correct concerning an auditor’s responsibility to
report fraud?
Answers
A: The auditor is required to communicate to the client's
audit committee all minor fraudulent acts perpetrated by low-level employees,
even if the amounts involved are inconsequential.
B: The disclosure of material management fraud to principal
stockholders is required when both senior management and the board of directors
fail to acknowledge the fraudulent activities.
C: Fraudulent activities involving senior management of which
the auditor becomes aware should be reported directly to the SEC.
D: The disclosure of fraudulent activities to parties other
than the client's senior management and its audit committee is not ordinarily
part of the auditor's responsibility.
Answer Explanations
A. Answer A is incorrect.
Only minor fraudulent acts involving management need be disclosed to the audit
committee. See AU 316 for information on an auditor’s responsibility relating
to fraud.
B. Answer B is
incorrect. Auditors do not in general communicate directly with stockholders.
See AU 316 for information on an auditor’s responsibility relating to fraud.
C. Answer
C is incorrect. Fraudulent activities involving senior management are reported
to the audit committee, not ordinarily the SEC. See AU 316 for information on
an auditor’s responsibility relating to fraud.
D. Answer D is correct. In most circumstances
the auditor is not required to communicate the matter beyond management and the
audit committee. See AU 316 for information on an auditor’s responsibility
relating to fraud.
Hint
Auditors generally cannot report
matters to outsiders.
Question: ENPL2-0089
Which of the following procedures
would least likely result in the
discovery of possible illegal acts?
Answers
A: Reading the minutes of the board of directors' meetings.
B: Making inquiries of the client's management.
C: Performing tests of details of transactions.
D: Reviewing an internal control questionnaire.
Answer Explanations
A. Answer
A is incorrect. It may lead to discovery of illegal acts. See AU 317 for
information on illegal acts.
B. Answer
B is incorrect. It might lead to the discovery of illegal acts in that a
question to management about the existence of the acts may be answered with an
acknowledgement that such acts have occurred. See AU 317 for information on
illegal acts.
C. Answer
C is incorrect. It may lead to discovery of possible illegal acts when the
auditor analyzes the details of the transactions and finds evidence of illegal
acts. See AU 317 for information on illegal acts.
D. Answer D is
correct. While the internal control questionnaire may reveal weaknesses in the
design of internal control, it will have little or no information on whether
an illegal act has occurred. See AU 317 for information on illegal acts.
Hint
No trick here.
Question: ENPL2-0090
Which of the
following circumstances most likely would cause an auditor to suspect that
there are material misstatements in an entity’s financial statements?
Answers
A: Senior financial management participates in the selection
of accounting principles and the determination of significant estimates.
B: Supporting accounting records and files that should be
readily available are not produced promptly when requested.
C: Related-party transactions take place in the ordinary
course of business with an entity that is audited by another CPA firm.
D: Senior management has an excessive interest in upgrading
the entity's information technology capabilities.
Answer Explanations
A. Answer A is
incorrect. Senior financial management might be expected to select accounting
principles and determine significant estimates.
B. Answer B is
correct. Unavailability of records when requested might indicate fraudulent
entries lacking proper support.
C. Answer C is incorrect.
Related-party transactions often do take place in the ordinary course of
business; significant related-party transactions not in the ordinary course of business may be an indicator of
material misstatements.
D. Answer D is incorrect.
An excessive interest in upgrading the entity’s information technology
capabilities has not in the past been found to be indicative of fraud.
Hint
No trick here.
Question: ENPL2-0091
The primary
purpose of establishing quality control policies and procedures for deciding
whether to accept new clients is to
Answers
A: Minimize the likelihood of association with clients whose
management lacks integrity.
B: Monitor significant deficiencies in the design and
operation of the client's internal control.
C: Identify noncompliance with aspects of contractual
agreements that affect the financial statements.
D: Provide reasonable assurance that personnel will be
adequately trained to fulfill their assigned responsibilities.
Answer Explanations
A. Answer
A is correct. The quality control standards (see QC 20) indicate that the
primary purpose is to minimize the likelihood of association with clients
whose management lacks integrity.
Null Null Null
Hint
No trick here.
Question: ENPL2-0092
An auditor’s
engagement letter most likely would include a statement regarding
Answers
A: Management's responsibility to provide certain written
representations to the auditor.
B: Conditions under which the auditor may modify the
preliminary judgment abut materiality.
C: Internal control activities that would reduce the
auditor's assessment of control risk.
D: Materiality matters that could modify the auditor's
preliminary assessment of fraud risk.
Answer Explanations
A. Answer A is
correct. SAS 108 states that information on management’s responsibility to
provide certain written representations is ordinarily included in the understanding
an auditor obtains with management through inclusion in an engagement letter.
B. Answer
B is incorrect. It includes information not ordinarily included in an
engagement letter, presenting detailed information beyond what is ordinarily
included.
C. Answer
C is incorrect. It includes information not ordinarily included in an
engagement letter, presenting detailed information beyond what is ordinarily
included.
D. Answer
D is incorrect. It includes information not ordinarily included in an
engagement letter, presenting detailed information beyond what is ordinarily
included.
Hint
No trick here.
Question: ENPL2-0093
A successor
auditor should make specific and reasonable inquiries of the predecessor
auditor regarding the predecessor’s
Answers
A: Understanding of the reasons for the change in auditors.
B: Methodology used in applying sampling techniques.
C: Opinion on subsequent events that have occurred since the
balance sheet date.
D: Perception of the competency and reliance on the client's
internal audit function.
Answer Explanations
A. Answer A is
correct. Inquiries ordinarily include questions on integrity of management,
disagreements with management, and communications with the audit committee
regarding fraud, illegal act, and internal control related matters. See AU 315
for information on the communications between predecessor and successor
auditors.
B. Answer
B is incorrect. It represents information much less frequently obtained. See AU
315 for information on the communications between predecessor and successor
auditors.
C. Answer
C is incorrect. It represents information much less frequently obtained. See AU
315 for information on the communications between predecessor and successor
auditors.
D. Answer
D is incorrect. It represents information much less frequently obtained. See AU
315 for information on the communications between predecessor and successor
auditors.
Hint
Which inquiry relates to client
acceptance?
Question: ENPL2-0094
Which of the
following activities would most likely be considered an attestation engagement?
Answers
A: Consulting with management representatives of a firm to
provide advice.
B: Issuing a report about a firm's compliance with laws and
regulations.
C: Advocating a client's position on tax matters that are
being reviewed by the IRS.
D: Preparing a client's tax returns
Answer Explanations
A. Answer
A is incorrect. It represents a consulting engagement.
B. Answer B is
correct. The attest standards provide for issuance of a report about a firm’s
compliance with laws and regulations—see AT 601.
C. Answer
C is incorrect. It represents a tax engagement.
D. Answer
D is incorrect. It represents a tax engagement.
Hint
Attestation involves providing
assurance about some matter.
Question: ENPL2-0095
An auditor
reviews a client’s accounting policies and procedures when considering which of
the following planning matters?
Answers
A: Method of sampling to be used.
B: Preliminary judgments about materiality levels.
C: Nature of reports to be rendered.
D: Understanding of the client's operations and business.
Answer Explanations
A. Answer A is incorrect.
The general nature of the policies and procedures is unlikely to provide
adequate information for sampling or materiality levels.
B. Answer B is
incorrect. The general nature of the policies and procedures is unlikely to
provide adequate information for sampling or materiality levels.
C. Answer C is
incorrect. The accounting policies and procedures will not provide adequate
information to determine the nature of reports to be rendered.
D. Answer D is
correct. Such information provides overall guidance to help an auditor
understand the client’s operations and business.
Hint
No trick here.
Question: ENPL2-0096
An auditor
confirmed accounts receivable as of an interim date, and all confirmations
were returned and appeared reasonable. Which of the following additional
procedures most likely should be performed at year-end?
Answers
A: Send confirmations for all new customer balances incurred
from the interim date to year-end.
B: Resend confirmations for any significant customer balances
remaining at year-end.
C: Review supporting documents for new large balances
occurring after the interim date, and evaluate any significant changes in
balances at year-end.
D: Review cash collections subsequent to the interim date and
the year-end.
Answer Explanations
A. Answer A is incorrect. It is unlikely that
confirmations will be sent again, particularly given the positive results
obtained. Also, one ordinarily confirms accounts receivable at an interim date
so as to avoid confirming accounts at year-end. See AU 330 for information on
the confirmation process.
B. Answer B is incorrect. It is unlikely that
confirmations will be sent again, particularly given the positive results
obtained. Also, one ordinarily confirms accounts receivable at an interim date
so as to avoid confirming accounts at year-end. See AU 330 for information on
the confirmation process.
C. Answer C is correct. An auditor will
review significant changes in balances. See AU 330 for information on the
confirmation process.
D. Answer
D is incorrect. It is less complete than reply C. See AU 330 for information
on the confirmation process.
Hint
The auditor must perform tests on
intervening transactions.
Question: ENPL2-0097
A successor auditor is required to
attempt communication with the predecessor auditor prior to
Answers
A: Performing test of controls.
B: Testing beginning balances for the current year.
C: Making a proposal for the audit engagement.
D: Accepting the engagement.
Answer Explanations
A. Answer
A is incorrect because no such communication is required prior to performing
tests of controls.
B. Answer
B is incorrect because, while the successor may communicate with the
predecessor to obtain information on beginning balances, this is not required.
C. Answer
C is incorrect because a proposal may be made prior to communicating with the
predecessor auditor—however, final acceptance of the client is not appropriate
prior to attempting such communication. See AU 315 for information on a successor’s
responsibilities.
D. Answer
D is correct. The requirement is to determine when a successor auditor is
required to attempt communication with a predecessor auditor. Answer D is
correct because prior to accepting an engagement the successor should attempt
such communication.
Hint
The communication is performed in
part to help the successor to learn about the integrity of management.
Question: ENPL2-0098
Which of the following factors most
likely would lead a CPA to conclude that a potential audit engagement should not be accepted?
Answers
A: There are significant related-party transactions that
management claims occurred in the ordinary course of business.
B: Internal control activities requiring the segregation of
duties are subject to management override.
C: Management continues to employ an inefficient system of
information technology to record financial transactions.
D: It is unlikely that sufficient appropriate evidence is
available to support an opinion on the financial statements.
Answer Explanations
A. Answer
A is incorrect because the simple existence of related-party transactions,
while often indicating a high-risk situation, is less likely to result in
nonacceptance of an engagement.
B. Answer
B is incorrect because virtually all controls are subject to management
override.
C. Answer
C is incorrect because inefficient information technology may still be
technology that lends itself to auditing and the forming of an opinion on the
company’s financial statements.
D. Answer
D is correct. The requirement is to identify the factor that is most likely to
lead a CPA to conclude that a potential audit engagement should not be accepted. Answer D is correct
because the lack of sufficient appropriate evidence ordinarily negates the
purpose of an audit, which is to have the CPA form an opinion on the financial
statements.
Hint
The objective of an audit is the
expression of an opinion.
Question: ENPL2-0099
Prior to commencing fieldwork, an
auditor usually discusses the general audit strategy with the client’s management.
Which of the following details do management and the auditor usually agree upon
at this time?
Answers
A: The specific matters to be included in the communication
with the audit committee.
B: The minimum amount of misstatements that may be considered
to be significant deficiencies.
C: The schedules and analyses that the client's staff should
prepare.
D: The effects that inadequate controls may have over the
safeguarding of assets.
Answer Explanations
A. Answer
A is incorrect because the information on specific matters to be included in
the communication with the audit committee is beyond the scope of the general
audit strategy; related, the auditor will not at this early point be aware of
some of the information that will be communicated (e.g., specific deficiencies
in internal control).
B. Answer
B is incorrect since the discussion will ordinarily not include comments on a
minimum amount of misstatements that represent a significant deficiency.
C. Answer
C is correct. The requirement is to identify the matter on which management and
the auditor would ordinarily agree while discussing the general audit strategy
prior to the auditor commencing fieldwork. Answer C is correct because at this
early point in the audit process the auditor will discuss client assistance in
the audit, including schedules and analyses to be prepared by the client’s
staff.
D. Answer
D is incorrect because any discussion on inadequate controls ordinarily will
occur later in the audit.
Hint
One of these is a responsibility the
client may assume relating to the audit.
Question: ENPL2-0100
An auditor is required to establish
an understanding with a client regarding the services to be performed for each
engagement. This understanding generally includes
Answers
A: The auditor's responsibility for determining the preliminary
judgments about materiality and audit risk factors.
B: Management's responsibility for identifying mitigating
factors when the auditor has doubt about the entity's ability to continue as a
going concern.
C: The auditor's responsibility for ensuring that the audit
committee is aware of any significant deficiencies that come to the auditor's
attention.
D: Management's responsibility for providing the auditor with
an assessment of the risk of material misstatement due to fraud.
Answer Explanations
A. Answer
A is incorrect because the understanding does not ordinarily involve
preliminary judgments about materiality and audit risk factors.
B. Answer
B is incorrect because, while management may identify mitigating factors when
a question concerning going concern status exists, this is not ordinarily
discussed while obtaining an understanding with a client.
C. Answer
C is correct. The requirement is to identify the information ordinarily
included in an auditor’s understanding with a client regarding the services to
be performed. Answer C is correct because the auditor must report to the audit
committee significant deficiencies, and accordingly, the auditor will include
such information while establishing an understanding with a client.
D. Answer
D is incorrect because, while management must provide auditors with certain
information related to fraud, it is the auditor’s, not management’s,
responsibility to assess the risk of material misstatement due to fraud—see AU
316.
Hint
An auditor must disclose certain
information.
Question: ENPL2-0101
Which of the following circumstances
would an auditor most likely consider a risk factor relating to misstatements
arising from fraudulent financial reporting?
Answers
A: Several members of management have recently purchased
additional shares of the entity's stock.
B: Several members of the board of directors have recently
sold shares of the entity's stock.
C: The entity distributes financial forecasts to financial
analysts that predict conservative operating results.
D: Management is interested in maintaining the entity's
earnings trend by using aggressive accounting practices.
Answer Explanations
A. Answer
A is incorrect because management’s purchase of additional shares in the
entity is not ordinarily a risk factor.
B. Answer
B is incorrect since board of director members selling shares of stock may
well be an ordinary occurrence.
C. Answer
C is incorrect because predicting conservative operating results is very
different from fraudulent financial reporting. See AU 316 for information on
the auditor’s consideration of fraud in a financial statement audit. See the
appendix to AU 316 for examples of fraud risk factors.
D. Answer
D is correct. The requirement is to identify the circumstance an auditor most
likely would consider a risk factor relating to misstatements arising from
fraudulent financial reporting. Answer D is correct because aggressive
accounting practices used to maintain an earnings trend represent such a risk
factor.
Hint
One of these seems much more risky
in terms of fraudulent financial
reporting than the others.
Question: ENPL2-0102
Management’s emphasis on meeting
projected profit goals most likely would significantly influence an entity’s
control environment when
Answers
A: Internal auditors have direct access to the entity's board
of directors.
B: A significant portion of management compensation is
represented by stock options.
C: External policies established by parties outside the
entity affect accounting policies.
D: The audit committee is active in overseeing the entity's
financial reporting policies.
Answer Explanations
A. Answer
A is incorrect because when internal auditors have direct access to the entity’s
board of directors, this may decrease the likelihood of overly aggressive
accounting to meet projected profit goals and is less likely to affect the
control environment.
B. Answer
B is correct. The requirement is to identify the situation in which
management’s emphasis on meeting projected profit goals would be most likely to
significantly influence an entity’s control environment. Answer B is correct
because when a significant portion of management’s compensation is represented
by stock options, risk may be involved in that management is under great
pressure to report earnings that meet projected profit goals; this will
ordinarily increase management compensation significantly and, under some
circumstances, create a pressure to report overstated earnings to meet those
projections.
C. Answer
C is incorrect because such external policies are ordinarily beyond
management’s control and would have a limited effect on the control
environment.
D. Answer
D is incorrect because an active audit committee is likely to control management’s
aggressive reporting, and thereby is less likely to affect the entity’s control
environment.
Hint
Implicit here is that one of the
replies involves an increase in the risk of material misstatement.
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