ACC562 Exam Part 1& 2
ACC 562 EXAM PART 1
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- What analysis best considers the economic relationships among account balances?
Answer
Altman “Z” Analysis
Ratio analysis.
Vertical analysis.
Horizontal analysis.
- The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk?
Answer
Inherent risk
Audit risk
Client risk
Control risk
- Audit risk in the audit risk model concerns the risk that the auditor may issue an unqualified opinion on financial statements that are materially misstated. What is the manner in which the auditor assesses audit risk in using the audit risk model to determine the nature, extent and timing of audit evidence to collect in an audit.
Answer
assessed to maintain low level of audit risk given residual risk
assessed to maintain low level of audit risk given financial statement risk
assessed to maintain a low level of audit risk given engagement risk
assessed to maintain a low level of audit risk given enterprise risk
- The preliminary use of analytical review procedures by the auditor is
Answer
required to identify areas of heightened risk
optional in accordance with auditor judgment.
only used when other planning procedures cannot be applied.
used to assist the auditor in documenting internal control.
- Which is a primary limitation of the audit risk model?
Answer
The audit risk model does not adequately consider external forces on the client organization.
Components of audit risk are treated as independent variables even though many interdependencies exist between them.
The audit technology achieves approximate precision outside of a mathematical model.
Control risk must be adjusted at the hands of the auditor, not by an arbitrary estimation.
- An auditor compares year-to-year account balances in order to perform analytical procedures. This is an example of:
Answer
ratio analysis.
trend analysis.
internal control analysis.
vertical analysis.
- Analytical procedures are used in an audit because it is assumed of financial statements that
Answer
management fraud can be discovered using such procedures.
it is plausible that no relationship among data exists.
analytical procedures are used as tests of controls.
plausible relationships among data may reasonably be expected to exist and continue.
- What is the most important purpose that is achieved by having an auditor write a formal engagement letter that is signed by the client?
Answer
Documented proof of auditor responsibility for financial statements in accordance with GAAP.
Multiple degrees of legal separation of the client from the auditor.
A locking-in of fees and timetable that must be adhered to by the client.
A communication and clarification of the responsibilities and expectations of the auditor and the client.
- When control risk is assessed as high the auditor needs to:
Answer
perform more tests of controls.
perform more direct testing of account balances.
perform significantly fewer tests of controls.
perform significantly less testing of account balances.
- The PCAOB requires auditors of public companies to perform
Answer
a financial statement audit and an attest audit.
a financial statement audit and an assurance audit.
a financial statement audit and agreed upon procedures.
a financial statement audit and an audit of internal control.
- An auditor of a client company that has multiple locations must:
Answer
increase control risk to moderate or high.
conclude that independent business units of the consolidation are immaterial.
issue multiple audit reports for each segment of the company.
determine the universal application of controls across the company.
- The control environment includes which of the following?
Answer
Control activities.
Management philosophy and operating style.
Assessing activity level risks.
Application level controls.
- Which of the following would result in an adverse report issued by an auditor on an audit of internal control?
Answer
The control risk is assessed at a lower level.
The tests of controls support the documented understanding of controls.
There is a material weakness in the design or operation of controls.
A confirmation is not returned by a customer in a timely manner.
- Which of the following best represents a walk-through?
Answer
The controller reviews the bank reconciliation prepared by the accountant and its resulting journal entries.
The auditor walks the production line to find inefficiencies in the inventory process and reports them to management.
The controller takes a sample of write-offs to ensure they have been adequately documented and recorded.
The auditor traces three purchasing transactions from the purchase order to the financial statement for observation and understanding.
- Which of the following will an auditor perform to better understand a client’s internal control over accounting systems?
Answer
An auditor will re-test subsequent year working papers.
An auditor will review previous year working papers.
An auditor will copy previous year working papers.
An auditor will re-draft subsequent year working papers.
- Which is clearly a test of control?
Answer
Confirmation to a customer of an accounts receivable balance.
Examination of a sample of purchase order records for electronic, authenticated, authorization.
Observing the controller’s use of company owned equipment.
Sending a letter to the client’s attorney to determine litigation that is pending between plaintiff and the defendant.
- An auditor’s test of transaction processing whereby the auditor is evaluating both the operation and effectiveness of controls and the correctness and completeness of processing and posting to an account balance is:
Answer
a test of controls.
a substantive test.
a dual-purpose test.
an analytical review procedure.
- If the audit team discovers that fraud risk factors are present on an engagement, it should then:
Answer
resign from the client and inform the audit committee and regulatory authorities.
modify procedures to actively search for the existence of fraud.
reduce the amount of evidence required and resort to management inquiry.
turn the audit over to forensic accountants.
- The audit team asks management for original documents related to sales contracts. Despite the team’s persistence, management does not supply the documents for over two weeks. With the use of professional skepticism, what should this audit team be most concerned with as it relates to the documents?
Answer
The need to complete the audit within a specified period of time.
Management’s possible use of the time to fabricate the documents.
Discrepancies of the evidence.
Conflicting evidence.
- When is the assessment of fraud risk on a single engagement completed by the audit team?
Answer
Upon completion of the planning stage.
Once internal control is understood.
Only after the audit risk model has been used to design tests.
Once the audit is complete.
- Which of the following are most often involved in perpetrating fraud in financial statement reporting?
Answer
The auditors and the attorneys.
The audit committee members.
The chief executive and chief financial officers.
The accounts payable clerks.
- Which of the following is most likely considered a material omission from the rules of financial statement reporting?
Answer
The company no longer discloses a previously settled contingency.
The company does not present the fair value of all current assets on the balance sheet.
A privately held company does not disclose earnings per share.
A company with a net loss does not present a statement of cash flows.
- What is the primary determinate in the difference between fraud and errors in financial statement reporting?
Answer
The materiality of the misstatement.
The intent to deceive.
The level of management involved.
The type of transaction effected.
- The key elements of the fraud triangle include all of the following except
Answer
Pressure
Materiality
Opportunity
Rationalization
- Audits of financial statements are valuable to the detection of fraud because:
Answer
Auditors are not required to seek out and find all fraud.
Auditors expect that management will make them aware of any fraud in the financial statements.
Society expects that the auditor will ensure that financial statements have not been materially misstated due to fraud.
Society realizes that some fraud is not capable of being discovered by auditors.
ACC 562 FINAL EXAM PART 2
- The responsibility for designing and maintaining policies and procedures to identify, evaluate, and account for contingencies rests with whom?
Answer
management.
auditor.
audit committee.
client’s attorney.
- When a subsequent event provides evidence about conditions that did not exist at the balance sheet date, the auditor should do which of the following?
Answer
ensure that any necessary footnote disclosures be included with the statements.
ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures.
give an inappropriate opinion.
provide management with a new engagement letter to document the terms of the revised arrangement.
- The driver of audit quality under the Financial Reporting Council’s Audit Quality Framework that relates to audit methodology and tools applied to the audit is which of the following?
Answer
audit firm culture.
reliability and usefulness of audit reporting.
effectiveness of the audit process.
factors outside the control of auditors.
- Where would the auditor make mention of issues noted during audit procedures that are not of audit significance?
Answer
Engagement letter.
Management letter.
Representation letter.
Attorney letter.
- If the auditor concludes that there may be a going concern problem, the auditor should do which of the following?
Answer
withdraw from the engagement.
issue a qualified or adverse opinion.
identify and assess management’s plan to overcome the problem.
communicate this fact with management one level above the controller.
- For registration statements filed with the SEC preparatory to selling securities, the subsequent events review goes from
Answer
the balance sheet date to the date the audit report is issued.
the balance sheet date to the end of field work.
the balance sheet date to the date of subsequent discovery of omitted procedures.
the balance sheet date to the effective date of the registration statement.
- Management of Megadile, Inc. refuses to sign the management representation letter given to them in the course of the audit on the grounds that it invades the company’s privacy. Such actions will be considered by the auditors to be
Answer
a violation of full and fair disclosure.
securities law violation.
a scope limitation.
a breakdown in internal controls.
- When a subsequent event provides evidence about conditions that existed at the balance sheet date, the auditor should do which of the following?
Answer
assign a specialist.
ensure that the financial statements are adjusted to reflect the information, including any necessary footnote disclosures.
shop for an opinion that fits the desired type of event.
provide management with a new engagement letter to document the terms of the revised arrangement.
- A legal concept that is not significant to the doctrine of privity is that of
Answer
negligence.
ultramares.
scienter.
engagement letters.
- In a lawsuit brought under the Securities Act of 1933, which of the following must the plaintiff show?
Answer
Reliance on financial statements.
Auditors guilt.
Due diligence.
That a loss was sustained.
- Which of the following terms refers to an intentional concealment or misrepresentation of a material fact that causes damage to those deceived?
Answer
gross negligence.
fraud.
ordinary negligence.
breach of contract.
- The Securities Exchange Act of 1933 places the burden of proof on which of the following?
Answer
third-party plaintiff.
attorney defendant.
auditor defendant.
client plaintiff.
- An example of a case that subjected an auditor to criminal charges is
Answer
the McKesson & Robbins case.
the Citizens Timm case.
the Bily v. Arthur Young & Co. case.
the Equity Funding case.
- In order to reduce the auditor’s liability exposure, engagement letters should include which of the following?
Answer
a clearly stated scope of the work to be done.
a statement that a trial by jury is acceptable.
the guaranteed fee structure for the engagement.
a statement that the auditor is not liable to the SEC.
- When the client and the auditor are both sued and judgment is rendered against both, the auditor will be required to settle the entire judgment if the client is bankrupt. Which of the following is a representation of the above?
Answer
Private Litigation Reform.
Joint and several liability statutes.
Comparative fraud.
The Securities Acts.
- Which aspect of statutory law places the burden of proof onto the auditor?
Answer
Scienter.
Securities Act of 1933.
Joint and Several Liability.
Ultramares.
- The court case that established the precedent that an auditor can be held liable to third parties for fraud and gross negligence, but limited auditor liability for ordinary negligence to those who are in privity of contract, is the
Answer
McKesson and Robbins case.
1136 Tenants Corporation case.
CIT Financial Corporation case.
Ultramares Corporation case.
- The adjustments arising from the audit that were considered to be material should be informed by the auditor to the:
Answer
audit staff.
management.
audit committee.
internal auditors.
- The primary scope of services performed in external auditing (CPA) is:
Answer
risk analysis.
control analysis.
operations analysis.
audit of financial statements.
- The primary scope of services performed in external auditing (CPA) is:
Answer
risk analysis.
control analysis.
operations analysis.
audit of financial statements.
- The partial or complete outsourcing of internal audit activities is made to public accounting firms or to other specialized firms that perform which of the following types of services?
Answer
primarily risk, control, and audit activities.
attestation services as demanded by market place.
operations analysis and risk analysis.
analytical and substantial procedures.
- External assurance over sustainability reports must be provided by which of the following:
Answer
Certified Public Accountants in conjunction with the annual financial audit.
those with competence in the subject matter and assurance practices.
Certified Sustainability Experts.
individuals that are not independent with the company issuing the sustainability report.
- Which method focuses on the materiality of current year misstatements and the reversing effect of prior-year misstatements on the income statement?
Answer
Rollover method
Iron curtain method
Percentage approach
Judgmental method
- The two general types of assurance that can be provided to sustainability reports include which of the following:
Answer
Reasonable assurance and Limited assurance.
Material assurance and Reasonable assurance.
Limited assurance and material assurance.
Reasonable assurance and Compliance assurance
- Which of the following is needed by a client while estimating fair value?
Answer
A systematic process to identify each asset that is subject to realizable value or at cost.
A process to identify relevant historical values.
An analysis of whether the organization has the ability to hold the asset to maturity and whether the decline in value is permanent.
A realistic process to estimate future cash flows to discount back to a present value.
- For the same client, SEC prohibits a CPA firm from providing which of the following services?
Answer
tax and external audit services
internal and external audit services.
management letter and audit services.
internal control and financial statement audits.
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