Exam Preparation

When an auditor has substantial doubt about an entity's ability to continue as a going concern because of the probable discontinuance of operations, the auditor most likely would express a qualified opinion if:
The effects of the adverse financial conditions likely will cause a bankruptcy filing. Information about the entity's ability to continue as a going concern is not disclosed. Management has no plans to reduce or delay future expenditures. Negative trends and recurring operating losses appear to be irreversible.

 A client's letter of representation serves what purpose?

To impress upon auditors its responsibility for the assertions in the financial statements To remind the auditor of the potential misstatements or omission in the financial statements To document the responses from management to inquiries about various aspects All of the above

 One of the main objectives of performing analytical review procedures during the planning phase of the audit is to identify:
Transactions that have not been properly authorized. Illegal acts undetected as a result of poor internal controls. Inefficient operations. Unusual changes that may signal possible account misstatements.

 If a client will not permit access to some of the companys record which the auditor thinks are material and pervasive, the auditor's report ordinarily will contain a(an):
Adverse opinion. Disclaimer of opinion. Unqualified opinion. Qualified opinion.

 Which of the following statements is correct concerning an auditor's responsibility to report fraud?
The auditor is required to communicate to the client's audit committee all minor fraudulent acts perpetrated by lowlevel employees, even if the amounts involved are inconsequential. 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. Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC. 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.

 Which of the following is true? Auditor perform test of controls:

To determine engagement risk To determine material misstatement in the particular account balance To assess Control Risk To plan scope, timing and direction of the audit

 What is the objective of the Financial Statement Audit performed by the independent auditor? Tick which is true:
To ensure that Financial Statements are free of material misstatements To express an opinion on Financial Statements To identify misstatements due to frauds To advise investors on Financial Statements All of above None of above

 In assessing the competence of a client's internal auditor, an independent auditor most likely would consider the:
Internal auditor's compliance with professional internal auditing standards. Client's policies that limit the internal auditor's access to management salary data. Evidence supporting a further reduction in the assessed level of control risk. Results of ratio analysis that may identify unusual transactions and events.

 Auditee Risk refers to a combination of:

Inherent Risk, Control Risk and Detection Risk Business Risk and Inherent Risk Control Risk, Business Risk and Inherent Risk Control Risk and Inherent Risk

 Which of the following statement is true?

Audit Risk is the risk that the auditor may express a qualified opinion when the financial statements are free of material misstatement? Audit Risk is the risk that the auditor may express an adverse opinion when the financial statements are free of material misstatement? None of above

 Which of the following is not the responsibility of Auditor:

Performing audit procedures on the financial statements Preparation of financial statements Compliance with applicable auditing framework Expressing an opinion based on the audit

 Which type of risk does an auditor have control over through substantive auditing procedures?
Control Risk Engagement Risk Detection Risk Business Risk Inherent Risk

 When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the:
Level of detection risk. Extent of tests of details. Level of inherent risk. Extent of tests of controls.

 Which of the following events would be a subsequent period event which would require adjustments to current year's financial statements?
Sale of investments at a price below record cost Change in depreciation estimate Sale of goods Collection of accounts receivable

 Which of the following statements ordinarily is not included among the written client representations made by the chief executive officer and the chief financial officer?
"Sufficient evidential matter has been made available to the auditor to permit the issuance of an unqualified opinion." "There are no unasserted claims or assessments that our lawyer has advised us are probable of assertion and must be disclosed." "We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities." "No events have occurred subsequent to the balance sheet date that would require adjustment to, or disclosure in, the financial statements."

 An auditor believes that there is substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time. In evaluating the entity's plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a mitigating factor, the entity's plans to:
Repurchase the entity's stock at a price below its book value. Issue stock options to key executives. Lease rather than purchase operating facilities. Accelerate the due date of an existing mortgage.

 Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?
A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

 Which of the following statements is correct about the sample size in statistical sampling when testing internal controls?
The auditor should consider the tolerable rate of deviation from the controls being tested in determining sample size. As the likely rate of deviation decreases, the auditor should increase the planned sample size. The allowable risk of assessing control risk too low has no effect on the planned sample size. Of all the factors to be considered, the population size has the greatest effect on the sample size.

 Which of the following factors would most likely be considered an inherent limitation to an entity's internal control?
The complexity of the information processing system. Human judgment in the decision making process. The ineffectiveness of the board of directors. The lack of management incentives to improve the control environment.

 A successor auditor is required to attempt communication with the predecessor auditor prior to:
Performing test of controls. Testing beginning balances for the current year. Making a proposal for the audit engagement. Accepting the engagement.

 The most reliable procedure for an auditor to use to test the existence of a client's inventory at an outside location would be to:
Observe physical counts of the inventory items. Trace the total on the inventory listing to the general ledger inventory account. Obtain a confirmation from the client indicating inventory ownership. Analytically compare the current-year inventory balance to the prior-year balance.

 An auditor compared the current-year gross margin with the prior-year gross margin to determine if cost of sales is reasonable. What type of audit procedure was performed?
Test of transactions. Analytical procedures. Test of controls. Test of details.

 Which of the following procedures would yield the most competent evidence?
A scanning of trial balances. An inquiry of client personnel. A comparison of beginning and ending retained earnings. A recalculation of bad debt expense.

 Subsequent period events may require an adjustment of current year's financial statements.
True False

 Under which of the following circumstances would the expression of a disclaimer of opinion be inappropriate?
The auditor is unable to obtain the audited financial statements of a consolidated investee. Management does not provide reasonable justification for a change in accounting principles. The company failed to make a count of its physical inventory during the year and the auditor was unable to apply alternative procedures to verify inventory quantities. Management refuses to allow the auditor to have access to the company's canceled checks and bank statements.

 In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
The internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee. The risk that the internal control system will not detect a material misstatement of a financial statement assertion. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

 Which of the following represents an inherent limitation of internal controls?

Bank reconciliations are not performed on a timely basis. The CEO can request a check with no purchase order. Customer credit checks are not performed. Shipping documents are not matched to sales invoices.

 An auditor who uses the work of a specialist may refer to the specialist in the auditor's report if the:
Auditor believes that the specialist's findings are reasonable in the circumstances. Specialist's findings support the related assertions in the financial statements. Auditor modifies the report because of the difference between the client's and the specialist's valuations of an asset. Specialist's findings provide the auditor with greater assurance of reliability about management's representations.

 What is an auditor's responsibility for supplementary information, such as disclosure of pension information, which is outside the financial statements?
The auditor should engage a specialist, such as an actuary, to verify that management's assertions are reasonable. The auditor's only responsibility for supplementary information is to determine that such information has not been omitted. The auditor should perform tests of transactions to the supplementary information to verify that it is reasonably comparable to the prior-year's information. The auditor should apply certain limited procedures to the supplementary information and report deficiencies in, or omissions of, such information.

 A successor auditor's inquiries of the predecessor auditor should include questions regarding:
The predecessor's evaluation of audit risk and judgment about materiality. Subsequent events that occurred since the predecessor's audit report was issued. The predecessor's understanding as to the reasons for the change in auditors. The predecessor's knowledge of accounting matters of continuing significance.

Thank You!

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