GLEIM'S CPA TEST PREP AUDITING

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards? A. A flowchart or narrative of the accounting system describing the recording and classification of transactions for financial reporting. B. An audit program setting forth in detail the procedures necessary to accomplish the engagement's objectives. C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel. D. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved. • Answer (A) is incorrect because the auditor should document the understanding of internal control, but a flowchart or narrative of the information system for financial reporting is just one method. For example, the auditor may use a questionnaire to document the understanding. • Answer (B) is correct. According to AU 311, in planning the audit, the auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit program (or a set of written audit programs) for every audit. The audit program sets forth in reasonable detail the specific audit procedures the auditor believes are necessary to accomplish the audit objectives. • Answer (C) is incorrect because the auditor may request and receive assistance from entity personnel, but a planning memorandum establishing the timing is not required under GAAS. • Answer (D) is incorrect because the auditor should document the understanding of internal control, but a questionnaire is only one method of accomplishing this objective. For example, flowcharts and narratives are other methods. [2] Audit programs should be designed so that A. Most of the required procedures can be performed as interim work. B. Inherent risk is assessed at a sufficiently low level. C. The auditor can make constructive suggestions to management. D. The audit evidence gathered supports the auditor's conclusions. • Answer (A) is incorrect because, depending on the assertion, work may be performed at interim dates or in the subsequent events period. • Answer (B) is incorrect because the auditor must assess inherent risk based upon the characteristics of the client. • Answer (C) is incorrect because suggestions to management are not required in an audit. • Answer (D) is correct. The auditor is responsible for collecting sufficient, competent evidential matter. Audit programs describe the steps involved in that process. The evidence should support the auditor's conclusions. [3] In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the A. Timing of audit procedures. B. Cost-benefit of gathering evidence. C. Selected audit techniques. D. Financial statement assertions. • Answer (A) is incorrect because timing is important in meeting the objectives of the audit but does not relate to the audit objectives themselves. • Answer (B) is incorrect because the cost-benefit of gathering evidence is important to the auditor but is not the primary objective. • Answer (C) is incorrect because audit objectives determine the specific audit techniques. • Answer (D) is correct. Most audit work consists of obtaining and evaluating evidence about financial statement assertions, which are management representations embodied in financial statement components. AU 326 states, "In obtaining evidential matter in support of financial statement assertions, the auditor develops specific audit objectives in light of those assertions." [4] In comparison with the detailed audit program of the independent auditor who is engaged to audit the financial statements of a large publicly held company, the audit client's comprehensive internal audit program is A. More detailed and covers areas that normally are not considered by the independent auditor. B. More detailed although it covers fewer areas than are normally covered by the independent auditor. C. Substantially identical to the audit program used by the independent auditor because both consider substantially identical areas. D. Less detailed and covers fewer areas than are normally considered by the independent auditor. • Answer (A) is correct. The independent auditor's objective is limited to expressing an opinion on the fairness of the financial statements. The internal auditor's work is more comprehensive because (s)he must evaluate and help to improve the effectiveness of the organization's risk management, control, and governance processes. Thus, an internal auditor's scope of work extends to the reliability and integrity of operational as well as financial information; the effectiveness and efficiency of operations; the safeguarding of assets; and compliance with laws, regulations, and contracts. • Answer (B) is incorrect because the internal audit program covers more areas than that of the independent auditor. • Answer (C) is incorrect because the internal audit program is more detailed and covers more areas. • Answer (D) is incorrect because the internal audit program is more detailed and covers more areas. [5] Which of the following is the authoritative body designated to promulgate attestation standards? A. Auditing Standards Board. B. Governmental Accounting Standards Board. C. Financial Accounting Standards Board. D. General Accounting Office. • Answer (A) is correct. Statements on Standards for Attestation Engagements are issued by the Auditing Standards Board, the Accounting and Review Services Committee, and the Management Consulting Services Executive Committee. The Council of the AICPA granted these bodies, which also promulgate SASs, SSARSs, and SSCSs, respectively, the authority to interpret Conduct Rules 201 and 202. The SSAEs are issued pursuant to that authority. • Answer (B) is incorrect because the GASB issues accounting and reporting standards for local and state governments. • Answer (C) is incorrect because the FASB establishes GAAP. • Answer (D) is incorrect because the GAO issues government auditing standards. [6] Which of the following is a conceptual difference between the attestation standards and generally accepted auditing standards? A. The attestation standards provide a framework for the attest function beyond historical financial statements. B. The requirement that the practitioner be independent in mental attitude is omitted from the attestation standards. C. The attestation standards do not permit an attest engagement to be part of a business acquisition study or a feasibility study. D. None of the standards of field work in generally accepted auditing standards are included in the attestation standards. • Answer (A) is correct. Two principal conceptual differences exist between the attestation standards and GAAS. First, the attestation standards provide a framework for the attest function beyond historical financial statements. Second, the attestation standards accommodate the growing number of attest services in which the practitioner expresses assurance below the level that is expressed for the traditional audit (an opinion). • Answer (B) is incorrect because, in any attest engagement, the practitioner must be independent in mental attitude. • Answer (C) is incorrect because attestation services may be provided in conjunction with other services provided to clients. • Answer (D) is incorrect because the attestation standards and GAAS require that work be adequately planned and that assistants be properly supervised. Both also require sufficient evidence. [7] In performing an attest engagement, a CPA typically A. Supplies litigation support services. B. Assesses control risk at a low level. C. Expresses a conclusion about a written assertion. D. Provides management consulting advice. • Answer (A) is incorrect because litigation support services are consulting services. • Answer (B) is incorrect because the CPA assesses control risk in an audit but not necessarily in all attest engagements. Furthermore, the assessment may not be at a low level. • Answer (C) is correct. When a CPA in the practice of public accounting performs an attest engagement, the engagement is subject to the attestation standards. An attest engagement is one in which a practitioner is engaged to issue or does issue an examination, a review, or an agreed-upon procedures report on subject matter, or an assertion about the subject matter, that is the responsibility of another party. Moreover, according to the second attestation standard of reporting, "The report shall state the practitioner's conclusion about the subject matter or the assertion in relation to the criteria against which the subject matter was evaluated." However, the conclusion may refer to that assertion or to the subject matter to which the assertion relates. Furthermore, given one or more material deviations from the criteria, the practitioner should modify the report and ordinarily should express the conclusion directly on the subject matter. • Answer (D) is incorrect because an attest engagement results in a report on subject matter or on an assertion about the subject matter. [8] Which of the following professional services would be considered an attest engagement? A. A consulting service engagement to provide computer advice to a client. B. An engagement to report on compliance with statutory requirements. C. An income tax engagement to prepare federal and state tax returns. D. The compilation of financial statements from a client's accounting records. • Answer (A) is incorrect because the attestation standards explicitly do not apply to consulting services in which the practitioner provides advice or recommendations to a client. • Answer (B) is correct. Attest services have traditionally been limited to expressing an opinion on historical financial statements on the basis of an audit in accordance with GAAS. But CPAs increasingly provide assurance on representations other than historical statements and in forms other than an opinion. Thus, attest services may extend to engagements related to management's compliance with specified requirements or the effectiveness of internal control over compliance. • Answer (C) is incorrect because tax return preparation is not an attest service according to the attestation standards. • Answer (D) is incorrect because a compilation of a financial statement is not an attest service according to the attestation standards. [9] Which of the following is not an attestation standard? A. Sufficient evidence shall be obtained to provide a reasonable basis for the conclusion that is expressed in the report. B. The report shall identify the subject matter or the assertion being reported on and state the character of the engagement. C. The work shall be adequately planned and assistants, if any, shall be properly supervised. D. A sufficient understanding of internal control shall be obtained to plan the engagement. • Answer (A) is incorrect because the evidentiary requirement is contained in the second attestation standard of field work. • Answer (B) is incorrect because the first attestation standard of reporting concerns the character of the engagement. • Answer (C) is incorrect because the first attestation standard of field work concerns planning and supervision. • Answer (D) is correct. No attestation standard mentions internal control. The second standard of field work applicable to audits in accordance with GAAS states, "A sufficient understanding of internal control is to be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed." [10] Which of the following best describes what is meant by generally accepted auditing standards? A. Pronouncements issued by the Auditing Standards Board (ASB). B. Procedures to be used to gather evidence to support financial statements. C. Rules acknowledged by the accounting profession because of their universal application. D. Measures of the quality of the auditor's performance. • Answer (A) is incorrect because, although Statements on Auditing Standards (SASs) issued by the ASB are now deemed to be GAAS, they do not constitute all GAAS. • Answer (B) is incorrect because "auditing procedures are acts that the auditor performs during the course of an audit to comply with auditing standards" (AU 150). • Answer (C) is incorrect because adherence to good practice is not universal. • Answer (D) is correct. According to AU 150, GAAS are concerned with the quality of the auditor's performance, including his/her professional qualities and exercise of judgment in connection with audit engagements. The 10 standards include three general standards, three standards of field work, and four standards of reporting. [11] Which of the following statements is true concerning an auditor's responsibilities regarding financial statements? A. Making suggestions that are adopted about the form and content of an entity's financial statements impairs an auditor's independence. B. An auditor may draft an entity's financial statements based on information from management's accounting system. C. The fair presentation of audited financial statements in conformity with GAAP is an implicit part of the auditor's responsibilities. D. An auditor's responsibilities for audited financial statements are not confined to the expression of the auditor's opinion. • Answer (A) is incorrect because suggestions about the form and content of an entity's financial statements do not impair an auditor's independence as long as management takes responsibility for the financial statements. • Answer (B) is correct. "The independent auditor may make suggestions about the form or content of the financial statements or draft them, in whole or in part, based on information from management's accounting system. However, the auditor's responsibility for the financial statements he or she has audited is confined to the expression of his or her opinion on them" (AU 110). • Answer (C) is incorrect because the presentation of the financial statements in conformity with GAAP is the responsibility of management. • Answer (D) is incorrect because the auditor's responsibilities for audited financial statements are confined to the expression of the opinion. [12] Which of the following accounting services may an accountant most likely be able to perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services? I. Preparing a working trial balance II. Preparing standard monthly journal entries A. I only. B. II only. C. Both I and II. D. Neither I nor II. • Answer (A) is incorrect because preparing standard monthly journal entries or a working trial balance most likely will not require a compilation or review report. • Answer (B) is incorrect because preparing standard monthly journal entries or a working trial balance most likely will not require a compilation or review report. • Answer (C) is correct. An accountant must comply with SSARSs when (s)he submits unaudited financial statements of a nonpublic entity to a client or third parties. A submission of financial statements is defined as "presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software." Standard monthly journal entries and a working trial balance are not financial statements, so a compilation or review report is not necessary (assuming these items are properly characterized). • Answer (D) is incorrect because preparing standard monthly journal entries or a working trial balance most likely will not require a compilation or review report. [13] North Co., a privately held entity, asked its tax accountant, King, a CPA in public practice, to generate North's interim financial statements on King's personal computer when King prepared North's quarterly tax return. King should not submit these financial statements to North unless, as a minimum, King complies with the provisions of A. Statements on Standards for Accounting and Review Services. B. Statements on Standards for Unaudited Financial Services. C. Statements on Standards for Consulting Services. D. Statements on Standards for Attestation Engagements. • Answer (A) is correct. The Statements on Standards for Accounting and Review Services apply to compilations and reviews performed by practitioners. The AICPA bylaws designate the Accounting and Review Services Committee as the senior technical committee authorized to issue pronouncements in connection with the unaudited financial statements or other unaudited financial information of a nonpublic entity. • Answer (B) is incorrect because these standards do not exist. • Answer (C) is incorrect because the practitioner is providing compilation services, not consulting services. • Answer (D) is incorrect because Statements on Standards for Attestation Engagements are appropriate whenever the practitioner is engaged in providing attestation services. A compilation, however, provides no assurance. [14] Blue Co., a privately held entity, asked its tax accountant, Cook, a CPA in public practice, to reproduce Blue's internally prepared interim financial statements on Cook's personal computer when Cook prepared Blue's quarterly tax return. Cook should not transmit these financial statements to Blue unless, as a minimum, Cook complies with the provisions of A. Statements on Standards for Tax Services (SSTSs). B. Statements on Standards for Accounting and Review Services (SSARSs). C. Statements on Standards for Attestation Engagements (SSAEs). D. None of the answers are correct. • Answer (A) is incorrect because SSTSs concern the preparation of tax returns. • Answer (B) is incorrect because SSARSs are not applicable if the accountant is not deemed to have submitted unaudited financial statements. • Answer (C) is incorrect because SSAEs apply to a report that expresses a conclusion about subject matter or an assertion that is the responsibility of another party. • Answer (D) is correct. A submission of financial statements is defined as "presenting to a client or third parties financial statements the accountant has prepared either manually or through the use of computer software." Thus, a submission includes both preparation and presentation. Accordingly, merely reproducing client-prepared financial statements, without modification, as an accommodation to a client most likely does not constitute a submission of financial statements, and the accountant need not comply with SSARSs. [15] Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements? A. Assisting in adjusting the books of account for a partnership. B. Reviewing interim financial information required to be filed by public companies with the SEC. C. Processing financial data for clients of other accounting firms. D. Compiling an individual's personal financial statement to be used to obtain a mortgage. • Answer (A) is incorrect because SSARSs do not apply to assisting in adjusting the books of account. This service is unlikely to constitute a submission of financial statements. • Answer (B) is incorrect because Statements on Auditing Standards apply to reviews of interim financial information filed by public entities with the SEC. SSARs apply only to nonpublic entities. • Answer (C) is incorrect because SSARSs do not apply to processing financial data for clients of other accounting firms. This service is unlikely to constitute a submission of financial statements. • Answer (D) is correct. AR 100 describes the accountant's procedures and reporting responsibilities for compilations and reviews. AR 600 exempts personal financial statements from SSARS under certain conditions. The exemption applies only if the statements (1) are included in written personal financial plans, (2) will not be used to obtain credit (e.g., a mortgage), and (3) will not be used for any purposes other than developing the client's personal financial goals and objectives. [16] An accountant has compiled the financial statements of a nonpublic entity in accordance with Statements on Standards for Accounting and Review Services (SSARSs). Do the SSARSs require that the compilation report be printed on the accountant's letterhead and that the report be manually signed by the accountant? Printed on the Manually Signed Accountant's Letterhead by the Accountant ─────────────────────── ───────────────── A. Yes Yes B. Yes No C. No Yes D. No No • Answer (A) is incorrect because the compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. • Answer (B) is incorrect because the compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. • Answer (C) is incorrect because the compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. • Answer (D) is correct. The compilation report need not be printed on the accountant's letterhead or manually signed by the accountant. However, the report must be signed by the accounting firm or the accountant as appropriate. Hence, the signature may be manual, stamped, electronic, or typed (AR 100 as amended by SSARS 9). [17] May an accountant accept an engagement to compile or review the financial statements of a not-for- profit entity if the accountant is unfamiliar with the specialized industry accounting principles but plans to obtain the required level of knowledge before compiling or reviewing the financial statements? Compilation ─────────── Review ────── A. No No B. Yes No C. No Yes D. Yes Yes • Answer (A) is incorrect because the accountant may accept the engagement but must achieve the required familiarity with the industry prior to completing the engagement. • Answer (B) is incorrect because the accountant may accept the engagement but must achieve the required familiarity with the industry prior to completing the engagement. • Answer (C) is incorrect because the accountant may accept the engagement but must achieve the required familiarity with the industry prior to completing the engagement. • Answer (D) is correct. The accountant may accept a compilation or review engagement for an entity in an industry with which the accountant has no previous experience. Acceptance, however, places upon him/her a responsibility to obtain the required level of knowledge prior to performing the engagement. [18] In a review engagement, the accountant should establish an understanding with the entity, preferably in writing, regarding the services to be performed. The understanding should include all of the following except a A. Description of the nature and limitations of the services to be performed. B. Description of the report the accountant expects to issue. C. Provision that the engagement cannot be relied upon to disclose errors, fraud, or illegal acts. D. Provision that any errors, fraud, or illegal acts that come to the accountant's attention need not be reported. • Answer (A) is incorrect because the description of the nature and limitations of the services to be performed should be included in an understanding with the entity. • Answer (B) is incorrect because the description of the report the accountant expects to render should be included in an understanding with the entity. • Answer (C) is incorrect because a provision that the engagement cannot be relied upon to disclose errors, fraud, or illegal acts should be included in an understanding with the entity. • Answer (D) is correct. Although the engagement cannot be relied upon to disclose errors, fraud, or illegal acts, the accountant should indicate to the client that any such acts discovered will be reported to management or the board of directors (AR 100). [19] A financial forecast consists of prospective financial statements that present an entity's expected financial position, results of operations, and cash flows. A forecast A. Is based on the most conservative estimates. B. Presents estimates given one or more hypothetical assumptions. C. Unlike a projection, may contain a range. D. Is based on assumptions reflecting conditions expected to exist and courses of action expected to be taken. • Answer (A) is incorrect because the information presented is based on expected (most likely) conditions and courses of action rather than the most conservative estimate. • Answer (B) is incorrect because a financial projection (not a forecast) is based on assumptions by the responsible party reflecting expected conditions and courses of action, given one or more hypothetical assumptions (a condition or action not necessarily expected to occur). • Answer (C) is incorrect because both forecasts and projections may be stated either in point estimates or ranges. • Answer (D) is correct. According to AT 301, a financial forecast consists of prospective financial statements "that present, to the best of the responsible party's knowledge and belief, an entity's expected financial position, results of operations, and cash flows." A forecast is based on "the responsible party's assumptions reflecting conditions it expects to exist and the course of action it expects to take." [20] The party responsible for assumptions identified in the preparation of prospective financial statements is usually A. A third-party lending institution. B. The client's management. C. The reporting accountant. D. The client's independent auditor. • Answer (A) is incorrect because management is usually the responsible party. • Answer (B) is correct. Management is usually the responsible party, that is, the person(s) responsible for the assumptions underlying prospective financial statements. However, the responsible party may be a party outside the entity, such as a possible acquirer. • Answer (C) is incorrect because management is usually the responsible party. • Answer (D) is incorrect because management is usually the responsible party. [21] Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity's expected financial position, results of operations, and cash flows. Such prospective financial statements are known as A. Pro forma financial statements.