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Recollection of 10/3/11 AUD

1.  Sample of a nonstatistical sampling

Significant deficiency in internal control

5.  Which of the following would likely be considered a significant deficiency in internal control?
a.  Indications of an impending labor strike
b.  Undue bias or a lack of objectivity exhibited by management.
c.  Recurring cash flow problems indicative of a going concern issue.
d.  Evidence that the company may be in default under the terms of a long-term loan agreement.

Choice b is correct.  Undue bias or a lack of objectivity exhibited by those responsible for accounting decisions constitutes a significant deficiency in internal control.

Choices a, c and d are incorrect.  An impending labor strike, cash flow problems, and default on a loan are not deficiencies in the design or operation of internal control.
Example:
NOSC LA, Commander Luis Perez, Capt. Brian W. Todd, Master Chief Michael Andreen and Lt. Stephen Healey

Auditing and Attestation

4.  Pablo makes extensive use of electronic data processing.  Which of the following does not describe a possible effect on internal control?
a.  Use of information technology makes it more difficult to appropriately monitor internal controls.
b.  An increase in the risk of unauthorized access to accounting data may negatively impact the control environment.
c.  User controls may be dependent on the accuracy of the information technology system.
d.  The use of information technology often provides more timely information, allowing a more effective assessment of risks facing the company.

Choice a is correct.  Use of information technology does not necessarily make it more difficult to monitor internal controls, as long as the information technology system provides accurate information.

Choice b is incorrect.  Extensive use of information technology does increase the risk of unauthorized access.  If management does not appropriately address this increased risk, the control environment may be negatively impacted.

Choice c is incorrect.  User controls are often dependent on the accuracy of the information provided by the information technology system.

Choice d is incorrect.  The use of information technology often enhances an entity's risk assessment by providing more timely information.

Auditing and Attestation Simulation 1

3.  Pablo makes extensive use of controls that are supported by a written audit trail, but such trails exist only for a limited period of time.  Which is a likely auditor response to this situation?
a.  Request that the client maintain the written audit trails until the annual audit has been completed.
b.  Perform audit tests several times throughout the year, to utilize the written audit trails when they exist.
c.  Shift a greater proportion of the testing of controls closer to year-end, to reduce detection risk.
d.  Assess control risk for the related controls at a high level, do not rely on the controls, and perform relatively more substantive testing instead.

Choice b is correct.  The auditor would likely perform testing throughout the year in order to utilize the written documentation while it existed.
Choice a is incorrect.  The auditor would not generally request that the client change its procedures to accommodate the audit.
Choice c is incorrect.  Shifting audit tests to year-end is a strategy used with substantive testing, to reduce detection risk.  In this case, performing tests of controls at year-end would be less effective, since the audit trail would no longer exist.

Auditing and Attestation Simulation 1

2.  Which of the following procedures would most likely be used to test Pablo's controls surrounding cash disbursements?
a.  Confirmation of year-end and cash balances.
b.  Analytical procedures applied to both interim and year-end cash balances.
c.  Observation of cash disbursement procedures coupled with appropriate inquiries.
d.  Review of Pablo's current procedures manual in conjunction with a review of the previous year's audit documentation.

Choice c is correct.  An auditor would likely use inquiry and observation to evaluate controls surrounding cash disbursements.
Choices 1 and 2 are incorrect.  Confirmation and analytical procedures applied

Auditing and Attestation Simulation 1

Pablo's Art and Crafts, a publicly traded company, is being audited by Cook and Cook CPAs. For each of the questions below, select the best answer from the choices provided by clicking on the appropriate button.  Only one answer can be selected for each question.

1. In an audit of Pablo's financial statements in accordance with generally accepted auditing standards, the auditor is required to do all of the following except:

a.  Document his or her understanding of Pablo's internal control.

b.  Understand the design of Pablo's relevant controls.

c.  Determine whether Pablo's internal controls have been implemented.

d.  Evaluate the operating effectiveness of Pablo's internal controls.

Choice d is correct.  An auditor is not required to evaluate the operating effectiveness of internal controls unless the auditor is planning to rely on these controls.

Choices a, b and c are incorrect.  As part of planning, an auditor is required to obtain and document an understanding of internal control  This understanding should include both the design of controls and whether they have been implemented.

Auditing simulated exam

Deficiency exists when

Auditing final exam simulation

11 of 100
An auditor is reporting on condensed financial statements for an annual period that are derived from the audited financial statements of a publicly-held entity.  The auditor's opinion should indicate whether the information in the condensed financial statements is fairly stated in all material respects:
a.  In conformity with accounting principles generally accepted in the United States of America.
b.  In relation to the complete financial statements.
c.  In conformity with an other comprehensive basis of accounting.
d.  In relation to supplementary filings under federal security statutes.

Answer:  "b" is correct.  The auditor should report whether the information in the condensed financial statements is fairly stated, in all material respects, in relation to the financial statements from which it has been derived.

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Audit Reports, Topic 3: Reports on Audited Financial Statements

12.  Under which of the following circumstances would a disclaimer of opinion not be appropriate?

a.  The auditor is unable to determine the amounts associated with an employee fraud scheme.
b.  Management does not provide reasonable justification for a chance in accounting principles.
c.  The client refuses to permit the auditor to confirm certain accounts receivable or apply alternative procedures to verify their balances.
d.  The chief executive officer is unwilling to sign the management representation letter.

Answer:  b.

Audit Reports, Topic 3: Reports on Audited Financial Statements

A scope limitation sufficient to preclude an unqualified opinion always will result when management:
a.  Prevents the auditor from reviewing the audit documentation of the predecessor auditor.
b.  Engages the auditor after the year-end physical inventory is completed.
c.  Requests that certain material accounts receivable not be confirmed.
d.  Refuses to acknowledge its responsibility for the fair presentation of the financial statements in conformity with GAAP.
Answer:  d

Audit Reports

Logan, CPA, audits Go Cars Inc.   Another CPA has audited a wholly-owned subsidiary of Go Cars.  The total assets and revenues of the subsidiary represent 17% and 18%, respectively, of the total assets and revenues of Go Cars.

For each of the situations listed in the table below, identify the appropriate opinion type and report modification by double-clicking on the shaded cells and selecting from the options provided.

Opinion type | Introductory Paragraph | Scope Paragraph | Opinion Paragraph | Explanatory Paragraph
Situation:

1. Assume Logan decides to take responsibility for the work of the other CPA, who previously issued an unqualified opinion.  
2. Assume Logan does not wish to assume responsibility for the work of the other CPA, who previously issued an unqualified opinion.
3. Assume Logan decides to take responsibility for the work of the other CPA, who previously issued a qualified opinion on the subsidiary's financial statements.  The subject of the qualification is very material to the subsidiary, but is not material in relation to the overall consolidated financial statements.
4. Assume Logan does not wish to assume responsibility for the work of the other CPA, who previously issued a qualified opinion on the subsidiary's financial statements.  The subject of the qualification is very material to the subsidiary, but is not material in relation to the overall consolidated financial statements.

1.   Unqualified  |  No change  |  No change  |  No change  |  None required

Involvement of another auditor does not prevent the issuance of an unqualified opinion.

2.   Unqualified  |  Modify  |  Modify  |  Modify  |  None required

A division of responsibility affects all three paragraphs of the auditor's standard opinion, but does not require inclusion of an explanatory paragraph.

3.   Unqualified  |  No change  |  No change  |  No change  |  None required

Involvement of another auditor does not prevent the issuance of an unqualified opinion.  If the other auditor's opinion is qualified, but the subject of the qualification is not material in relation to the overall consolidated statements, Logan need not make reference to the qualification in their report.

4.   Unqualified  |  Modify  |  Modify  |  Modify  |  None required

A division of responsibility affects all three paragraphs of the auditor's standard opinion, but does not require inclusion of an explanatory paragraph.  If the other auditor's opinion is qualified, but the subject of the qualification is not material in relation to the overall consolidated statements, Logan need not make reference to the qualification in their report.

Audit Reports

In auditing the long-term investments account, Levine, CPA, is unable to obtain audited financial statements for an investee located in a foreign country.  Levine concludes sufficient appropriate audit evidence regarding this investment cannot be obtained.

For each of the situations listed below, identify the appropriate opinion type and report modification by double-clicking on the shaded cells and selecting from the options provided.

Opinion Type    Introductory Paragraph     Scope Paragraph     Opinion Paragraph   Explanatory Paragraph

Situation:
1.  Assume the potential effect on the financial statements is immaterial
2.  Assume the potential effect on the financial statements is moderate.
3.  Assume the potential effect on the financial statements is high.

1.   Unqualified | No change | No change | No change | None required

Since the potential effect on the financial statements is immaterial, no change to the standard unqualified opinion is required.

2.   "Except for" qualified | No change | Modify | Modify | Insert preceding opinion

A scope limitation that has a material effect on the financial statements results in a qualified opinion.

3.   Disclaimer | Modify | Omit | Modify | Insert preceding opinion

A scope limitation that has a very material effect on the financial statements results in a disclaimer of opinion.

No sufficient evidence

When a qualified opinion results from a limitation on the scope of the audit

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