2014ER AUD Textbook
May 29, 2016 | Author: Ratika Arora | Category: N/A
Short Description
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Description
Auditing
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PRO FE 5 5 ION A LE Due A T I 0 N®
BECKER PROFESSIONAL EDUCATION COURSE DEVELOPMENT TEAM
Timothy F. Gearty, CPA, MBA, JD .........................Editor in Chief, Financial/Regulation (Tax) National Editor Angeline S.Brown, CPA, MAC ................ Director, Accounting Curriculum, Audit/Financial/BEC National Editor Teresa C.Anderson, CPA, CMA ...............................................Manager, Accounting Curriculum Tom Cox, CPA, CMA, CHFP .............................................Financial (GASB & NFP) National Editor Steve Levin, JD ............................................................ Regulation (Law) National Editor John B.Pillatsch, MAS, CPA ......................................... Director, Course Development Operations Pete Console
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Director, Educational Technologies
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Katie Tran .....................................................................Director, Quality Assurance Stephen Bergens ....................................................Manager, Curriculum Quality Assurance James McKimson ......................................................Manager, Software Quality Assurance Anson Miyashiro ..............................................................Course Production Manager AI Glodan ................................................................. Bookstore Purchasing Manager Michelle McCubbins, MBA ............................................... Course Production Project Manager Jeff Rosier
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Course Production Project Manager
Brian Cave ...............................................................Manager, Software Development Tim Munson .................................................................... Course Production Editor Linda Finestone ................................................................. Course Production Editor
CONTRIBUTING EDITORS
Eric J.Brunner, PhD
Michael Meriwether, CPA, MBA
Chris Cocozza, CPA, JD, LLM
Peter Olinto, JD, CPA
Robert A.DeFilippis, CPA, MBA
Mike Potenza, JD
Jennifer B.Deutsch, CPA, MS
Cheryl L.Prachyl, Ph.D., CPA
Mike Farrell, JD
Ray Rigoli, CPA, MBA
Dennis J.Green, CPA, MBA
Joshua M.Rosenberg, CPA, CFA, MBA
John S.Grayson, JD, CPA
Jonathan R .Rubin, CPA, MBA
Liliana Hickman-Riggs, CPA, CITP, CMA, CIA, CFE, MS
Michael Rybak, CPA, CFA
Patrice W. Johnson, CPA
Christopher Severson, MPA
Donald A.Kaniecki, CPA, MBA
Jeffrey Sherman, JD, CPA (inactive)
John B.Kushner, CPA
Roberta Smith, CPA
Cindy Lawrence, CPA, MBA
Karen Tarbet, CPA, JD
Seth Levine, CPA, MPrA, MBA, ABD
Lisa M.Thayer, CPA
Edward McTague, CPA, MBA
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Becker Professional Education
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Auditing
AUDITING progra m attendance record Student:
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AUDITING
Location:
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IMPORTANT NOTES TO STUDENTS REGARDING "THE BECKER PROMISE" •
You must stamp this sheet at the end of each class attended. This is the only acceptable record of your classroom attendance.
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An overall percentage correct of 90% or higher is required of the homework to qualify for The Becker Promise.
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Please fax documentation to 866-398-7375 no later than 45 days following the completion of each section.
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Auditing
AUDITING table of contents Program attendance record ............. ............................................................................................. .................................................... v Introduction ................................................................................................................................................................................ Intro-l
AUDITING 1: Audit Reports 1.
Audited financial statements: The basics ............................................................................................................................... Al-3
2.
Professional standards ...................................................................................................................... ...................................... Al-6
3.
Reports on audited financial statements .................... .................................................................. . . . . .......... ............ ......... ..... Al-12
4.
Reports on comparative financial statements ................................................................................. .....................................Al-45
5.
Events occurring after year-end............................................................................................ ....................... ....................... .. Al-52
6.
Reporting on other information .............................................................................. ................ .................... ......................... Al-57
7.
Appendix: The PCAOB auditor's reporting model................................................................. ....................... ................ .........Al-67
8.
Class questions ............................................ ............... ............................... ............................................ ...... ............ ........... . . Al-69
AUDITING 2: Other Reports 1.
Other engagements, reports, and accounting services ............................................... ......... .................. ..... ........................... A2-3
2.
Compilation and review of financial statements
3.
Reporting on comparative financial statements ..................................................................................................... ..... ......... A2-53
4.
Review of interim financial information ................................... ........... ....... ........... . . . ...... ............ .......................................... A2-57
5.
Letters for underwriters ........................................................... ...................... ....................... ................................................ A2-69
6.
Attest engagements ......................... ........................................................................ ............................................................. A2-71
7.
Class questions ................... .................................................... ................................................ ......... .... .......... ............... ........ A2-91
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............................. ............ .. .............. ............... ........ ........................ ...
A2-24
AUDITING 3: Engagement Acceptance, Planning, and Risk Assessment
1.
Engagement acceptance and understanding the assignment ................................................................. ............................... A3-3
2.
Planning and supervision ........................................................................................................................... .......................... .A3-10
3.
Audit risk ............................................ ................ ............................... ............................................................................. ....... A3-25
4.
Fraud risk . . ................ ....................... .. ......................................... ............. ..... ........................... .. ............. . .................. ........... A3-29
5.
Compliance with laws and regulations ................................................................................................... . . ........................ .... A3-37
6.
Assessing the risks of material misstatement .................. .............. ......................................... .. ............... . . .......... ................. A3-40
7.
Internal control ................................................. .............................................................................................................. ...... A3-48
8.
Responding to the assessed risks of material misstatement
9.
Class questions
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.... A3-66
... .............................................. . ............ . ......... ..............
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. A3-77
.............. ........................................................................ ................... ... ............. ........... ............ ............ ..
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AUDITING 4: Audit Evidence
1.
Audit evidence ........................................................................................................................................................................ A4-3
2.
Audit procedures by transaction cycle............................................................ . .................................... ................................. A4-19
3.
Other audit procedures ........................................................................................................................................................ A4-50
4.
Evaluating audit findings.......................................................................................................................................................A4-58
5.
Appendix I: Financial ratios ................................................................................................................................................... A4-64
6.
Appendix II: Control procedures and tests of controls
7.
Class questions ............................................ ......................................................................................................................... A4-79
AUDITING
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.......................................................................... ..............................
A4-75
5: Sampling and Communications
1.
Audit sampling ..... ................... . ............................................................................................................................................... A5-3
2.
Internal control communications..........................................................................................................................................A5-22
3.
Communication with those charged with governance .......................... ............................................................................... A5-50
4.
Management representations .............................................................................................................................................. A5-56
5.
Class questions
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As-61
AUDITING 6: Professional Responsibilities, Audit Documentation, Effect of IT, Government Auditing, and Quality Control Standards
1.
Professional responsibilities
2.
Audit documentation............................................................................................................................................................ A6-31
3.
The effect of information technology on the audit.. ............................................................................................................. A6-35
4.
Government auditing . ........................................................................................................................................................... A6-41
5.
Quality control standards
6.
Class questions
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................................................................................................................................ ....................
A6-3
A6-65
. . .. . ...................................................................... ............ ................................................................... A6-75
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Class question explanations ......................................................................................................................................................... CQ-1 Glossary.......................................................................................................................................................... ........................Glossary-1 Index .......................................................................................................................................................................................... Index-1
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COURSE INTRODUCTION 1.
Auditing & attestation content specification outline ......................................................................................................... lntro-3
2.
Becker's CPA Exam Review-Course introduction ............................................................................................................. Intro-6
Introduction ................................................................................................................................................................... Intro-6
Lecture series ................................................................................................................................................................. Intro-6
Textbooks ....................................................................................................................................................................... Intro-6
Course software ............................................................................................................................................................. Intro-7
Study planner ............................................................ ..................................................................................................... Intro-8
Study roadmap ...................... .............................................. . . . . . . . ...... ............................. .................. .............................. Intro-8
Flashcards ........... ...... ..................................................................................................................................................... Intro-9
Becker Community and Support................................................................................................................................... Intro-II
The Uniform CPA Exam-Overview .............................................................................................................................. Intro-ll
Passing the CPA Exam ................................................................................................................................... . . ............. Intro-13
Managing your stress before the examination ............................................................................... . . ........................... Intro-IS
Surviving the examination ........................................................................................................................................... Intro-16
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Intro-2
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Becker Professional Education I CPA Exam Review
A U D IT I N G
Auditing
& ATTESTA T I O N CONTENT SPECIFICATION OUTLINE
A U D ITI N G
&
A TTE S T A T I O N
4 hours 60 Points
or:
Testlet#l
�
+- 40 points
Testlet#3
Testlet#2
Testlet#4
30
30
30
7
MC
MC
MC
Task-based
Questions
Questions
Questions
simulations
50-55 minutes
50-55 minutes
I I
50-55 minutes
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60-75 minutes
I. Auditing and attestation: engagement acceptance and understanding the assignment A. Determine nature and scope of engagement B. Consider the firm's policies and procedures pertaining to client acceptance and continuance
E. Consider other planning matters 1.
possessing specialized skills
3.
Consider the independence, objectivity, and competency of the internal audit function
understanding through an engagement letter or other written communication with the client
Consider using the work of other independent auditors
2. Determine the extent of the involvement of professionals
C. Communicate with the predecessor auditor D. Establish an understanding with the client and document the
12-16%
F. Identify matters related to planning and prepare documentation for communications with those charged with governance
II. Auditing and attestation: understanding the entity and its environment (including internal control) A. Determine and document materiality
2. 3. 4.
C. Consideration of fraud
1.
Identify characteristics of fraud
2.
Document required discussions regarding risk of fraud
misstatements due to fraud
audit of financial statements
5. Identify key risks associated with general controls in a financial IT environment, including change management, backup/recovery, and network access (e.g., administrative rights)
6.
2.
application access control (e.g., administrative access
Identify, conduct, and document appropriate inquiries of
rights); controls over interfaces, integrations, and
management and others within the entity
e-Commerce; and significant algorithms, reports, validation, edit checks, error handling, etc.
Perform appropriate analytical procedures to understand the entity and identify areas of risk
3.
7.
application functionality
and inspection (including reading corporate minutes, etc.)
8.
F. Consider internal control Perform procedures to assess the control environment, including consideration of the COSO framework and identifying entity-level controls
0
07-
$5,000
0
$4,"100
1 007-
$5,000
$'>,000
n/a
$ 1 ,'00
$5,000
$ 1 ,000
$ 1 ,'>00
207-
Projected Error
$�,�'>O
Note that, as with other variables sampling plans, an allowance for sampling risk would be calculated and added to the p rojected error, and the result would be compared to the tolerable misstatement.
VII.
QUALITATI VE CONSIDERATIONS
For all types of sampling, the auditor should consider qualitative aspects of deviations. These include: A.
The Nature and Cause of Deviations
Deviations may be caused by errors, which are unintentional, or fraud , which is intentional. B.
The Possible Relationship of Deviations to Other Phases of the Audit
The discovery of fraud ordinarily requires a broader consideration of possible implications than does the discovery of an error.
VIII. DUAL-PU RPOSE SAMPLES
In some instances, the auditor may use the same sample to perform both tests of controls and tests of details. Dual-purpose samples are generally used only when the auditor believes that there is an acceptably low risk that the deviation rate in the population exceeds the tolerable rate. The size of a sample designed for dual purposes should be the larger of the samples that would otherwise have been designed for the two separate purposes. In evaluating dual-purpose samples, deviations from the control and monetary misstatements should be evaluated separately using the appropriate risk levels. The auditor should consider whether the existence of misstatements is indicative of a control failure; however, the absence of monetary misstatements does not necessarily imply that controls are operating effectively.
ed as substantive tests, since they deal with dollar amounts rather than controls.
1 9. CPA-02704 Choice "b" is correct. Inquiry alone generally will not support a conclusion for a lower assessed level of control risk. Choices "a", "c", and "d" are incorrect, as the following are true: a.
Observation by the auditor provides more assurance than audit evidence obtained by inquiry alone.
c.
Prior audits may be considered by the auditor in assessing control risk in the current audit.
d.
An audit of financial statements is a cumulative process.
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Class Question Explanations
NOTES
CQ-24
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Class Question Explanations
AUDITING 4
1 . CPA·02334 Choice "c" is correct. Substantive tests are concerned with dollar amounts and consist of tests of details of transactions and balances and analytical procedures. The objective of tests of details of transactions performed as substantive tests is to detect material (dollar) misstatements in the financial statements. Choice "a" is incorrect. Tests of details of transactions (performed as substantive tests) are used to evaluate management's assertions. While tests of details of transactions do help the auditor comply with GAAS, such compliance is not the primary objective of the tests. Choice "b" is incorrect. Attaining assurance about the reliability of the information system relevant to financial reporting is an objective of tests of controls rather than of substantive tests. Choice "d" is incorrect. Evaluation of the operating effectiveness of management controls is an objective of tests of controls rather than of substantive tests.
2. CPA·02342 Choice "c" is correct. When audit evidence can be obtained from independent sources outside an entity, it provides greater assurance of reliability for the purposes of an independent audit than does evidence secured solely within the entity. While the bank statement was obtained from the client, it is still more persuasive than any of the other three items because it was not prepared by the client. Choice "a" is incorrect. Prenumbered client purchase orders are client-generated documents; as such , they are not as persuasive as externally generated evidence received through a client. Choice "b" is incorrect. Client work sheets supporting cost allocations are client-generated documents; as such, they are not as persuasive as externally generated evidence received through a client. Choice "d" is incorrect. The client representation letter is a client-generated document; as such, it is not as persuasive as externally generated evidence received through a client.
3. CPA·02373 Choice "b" is correct. Relationships among income statement accounts tend to be more predictable than balance sheet accounts (accounts receivable, accounts payable) because they represent transactions over a period of time rather than at one point in time. In addition , relationships involving transactions subject to management discretion (travel and entertain ment) are less predictable. Choices "a", "c", and "d" are incorrect, per the above explanation.
4. C PA·02354 Choice "c" is correct. To determine whether transactions have been recorded (completeness assertion), the auditor should trace from the source documents to the accounting records (general ledger, trial balances, etc.). Choices "a", "b", and "d" are incorrect. Testing from the accounting records to the source documents provides evidence of existence or occurrence, not completeness.
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CQ-2S
Class Question Explanations
Becker Professional Education I CPA Exam Review
5. C PA-023 1 4 Choice "a" i s correct. Because the employee i s destroying the invoices and related vouchers, the most obvious documentation remaining would be the file of all cash disbursements. The aud itor would select items from this file and then attempt to trace from specific cash disbursements to the related invoices and approved vouchers. Missing documentation might be indicative of fraud. Choices "b" and "d" are incorrect. Because the employee destroys the related invoices and vouchers, selecting items from the file of remaining invoices and vouchers would never identify the fraud. Choice "c" is incorrect. Selecting items from the file of receiving reports will not identify fraudulent purchases that EIre shipped directly to the employees' home addresses.
6. C PA-04627 Choice "d" is correct. Blank forms may result in lower response rates because a greater effort is required for response. Choice "a" is incorrect. Use of the blank form does not necessarily imply that subsequent cash receipts will need to be verified. This is an alternative procedure that might be used to follow up on nonresponses. Choice "b" is incorrect. The decision regarding whether or not to use statistical sampling is independent of the decision regarding what form of accounts receivable confirmation to use. Choice "c" is incorrect. Blank forms provide a greater degree of assurance, since the recipient cannot simply sign off without checking the balance. A greater degree of assurance results in a lower assessed level of detection risk.
CQ-26
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Becker Professional Education I CPA Exam Review
Class Question Explanations
7. TBS-0001 4 I.
Reven ues
Which audit procedure would most likely be used to: 1.
Verify that recorded sales are valid? (2) Select a sample of entries in the sales journal and compare with the related shipping documents. To determine that recorded sales are valid (existence), one starts with recorded sales (which are shown as entries in the sales journal), and then sees if there are appropriate shipping documents (which provide. evidence that a sale occu rred , or was valid). If there is an entry in the sales journal for which there is no related shipping document, this might indicate a fictitious sale.
2.
Verify that all valid sales were recorded? ( 1 ) Select a sample of shipping documents, and identify those for which no related invoice exists. To determine whether all valid sales were recorded (completeness), one must first start with evidence of a valid sale, such as a shipping document, and then verify whether that sale was recorded. Recorded sales generally result in generation of an invoice, so if there is a sh ipping document for which there is no related invoice, this might indicate a failure to record the sale.
3.
Test for proper cutoff of sales? (6) Select shipping documents from just before year-end and verify that the related sale is included in the sales register. If goods were shipped just before year end (assuming title transfers on shipment), one would need to verify that the related sale was properly included in the sales register for the year. If the sale was not included in the sales register for the current year, it might be evidence of an improper cutoff of sales. Note that to fully test for proper cutoff, one would also need to select shipping documents from just after year-end, and verify that the related sale was excluded from the sales register.
II.
Expend itures
Which audit procedure would most likely be used to: 1.
Test for understatement of accounts payable? (3) Select a sample of cash payments made after year-end , and identify those for which there is no related payable at year-end. Cash payments made just after year-end often relate to payables outstanding at year-end. A payment made after year-end for which there is no related year-end payable might be indicative of an unrecorded liability at year-end.
2.
Verify that cash disbursements were properly authorized? (1 ) Select a sample of entries in the cash disbursements journal and compare with related voucher packages. Voucher packages should include a purchase order, receiving report, and vendor invoice. These documents are matched as part of the approval process, prior to making payment. If any items are missing, it might indicate that the cash disbursement was not properly authorized.
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CQ-27
Class Question Explanations
Becker Professional Education I CPA Exam Review
8. CPA-02443 Choice "c" is correct. Tracing from the inventory schedule to the i nventory tags and the auditor's recorded count sheets verifies the validity (existence) of the items. Note that the correct term for the directional test for existence is "vouch ." However, in practice (and on the CPA Exam), the term trace is sometime used interchangeably with the term vouch. Choice "a" is incorrect. Tracing from inventory tags to the inventory l isting schedule verifies the completeness of the schedule, not the existence (or validity) of the items. Choice "b" is incorrect. Tracing to receiving reports and to vendors' invoices from the inventory tags might be used to verify completeness of purchases or payables. Choice "d" is incorrect. Tracing from receiving reports and vendors' invoices to the inventory listing are cutoff procedures used to verify completeness of the inventory listi ng.
9. C PA-02447 Choice "a" is correct. In a search for unrecorded d isposals, the auditor would vouch a sample of assets on the property ledger to those on hand in the cl ient's facility. Choice "b" is incorrect. By touring the facility first, and then comparing assets found to those recorded on the property ledger, the auditor is testing the completeness of the property ledger, a procedure used to search for unrecorded additions. Choice "c" is incorrect. Analysis of the repair and maintenance account is useful in identifying transactions that should have been capitalized versus expensed (i.e., unrecorded additions). Choice "d" is incorrect. Analysis of the repair and maintenance account is useful in identifying transactions that should have been capitalized versus expensed (i.e., unrecorded additions).
1 0. CPA-0241 6 Choice "b" is correct. By vouching to time card data, the auditor is testing the occurrence assertion for hours worked. Choice "a" is incorrect. Vouching to approved clock card data would provide evidence about hours worked , not pay rates. Pay rates would be tested by comparing to person nel records. Choice "c" is incorrect. Vouching to approved clock card data does not provide evidence about segregation of d uties. Choice "d" is incorrect. Vouching to approved clock card data does not provide evidence about internal controls related to unclaimed paychecks. The auditor would need to observe a payroll distribution to evaluate these controls.
CQ-28
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Becker Professional Education I CPA Exam Review
Class Question Explanations
1 1 . CPA-02536 Choice "c" is correct. Reviewing confirmations of loans receivable and payable is useful for determining the existence of related party transactions because guarantees are commonly provided by or for related parties. Choice "a" is incorrect. Detection of unreported contingent liabilities is not a procedure that would assist the auditor in identifying related party transactions. Choice "b" is incorrect. Recurring transactions after year-end are a usual business occurrence. Related party transactions would most likely be nonrecurring. Choice "d" is incorrect. While financial difficulties may be associated with related party transactions, it is unlikely that analytical procedures would assist the auditor in identifying such transactions.
1 2. CPA-04722 Choice "c" is correct. I n evaluating the reasonableness of an estimate, the auditor must first obtain an understanding of how management developed its estimate. Choices "a", "b", and "d" are incorrect. After obtaining an understanding of how management developed its estimate, the auditor would perform one or a combination of the following procedures: 1.
2. 3.
Review subsequent events and transactions (occurring prior to completion of fieldwork) that corroborate the value of the estimate (choice "a"). Develop an independent estimate of the item for comparative purposes (choice "b"). Review and test the procedures used by management to develop the estimate (choice "d").
1 3. CPA-02500 Choice "b" is correct. The auditor would consider subsequent events and transactions occurring before the completion of the aud it, not after. The auditor is not responsible for predicting the future, and would not be expected to evaluate the effect of conditions arising subsequent to the audit, that, if known at the time of the aud it, might have affected fair value measurements and disclosures. Choice "a" is incorrect. The auditor is responsible for understanding relevant controls. Segregation of duties between those committing the entity to certain transactions and those responsible for undertaking the valuations related to those transactions is a relevant control. Choice "c" is incorrect. The auditor is responsible for understanding the entity's process for determining fair value measurements and disclosures. Considering the role of information technology in determining fair value measurements and disclosures is part of understanding this process. Choice "d" is incorrect. The auditor should evaluate whether the valuation model is appropriate given the entity's circumstances. As part of this evaluation, the auditor should consider whether the valuation method is appropriate in relation to the business, industry, and environment in which the entity operates.
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CQ-29
Class Question Explanations
Becker Professional Education I CPA Exam Review
14. CPA-02529 Choice "c" is correct. The independent auditor's procedures with respect to litigation, claims, and assessments should include discussing with management the controls adopted for identifying, evaluating, and accounting for litigation, claims, and assessments. Choice "a" is incorrect. The evaluation of going concern issues is the auditor's responsibility. Choice "b" is incorrect. The auditor should examine documents in the client's possession concerning litigation, claims, and assessments, including correspondence and invoices from lawyers. The auditor does not generally examine documents held by the client's lawyer. Choice "d" is incorrect. The client's lawyer would only know about matters that he or she has been engaged to hand le, which might not include all litigation, claims, and assessments. In addition, it is the auditor's responsibility (not the lawyer's) to determine whether litigation, claims, and assessments have been adequately recorded or disclosed in the financial statements.
1 5. CPA-04622 Choice "d" is correct. If a second, similar retail outlet were opened, one would expect sales and accounts receivable to double. As long as the collection rates for the new outlet's receivables were expected to be similar to those of the original outlet, however, the allowance for doubtful accounts as a percentage of accounts receivable would remain the same. Choice "a" is incorrect. If the client sold more merchandise to customers with poor credit ratings, the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts. Choice "b" is incorrect. Write off of a specific account receivable reduces both the allowance and the receivable by the amount written off. If there were twice as many write-offs in the previous year than in the current year (and this were the only difference), the allowance for doubtful accounts as a percentage of receivables would not stay the same. Choice "c" is incorrect. If more receivables are potentially uncollectible in the current year (as opposed to the prior year), the allowance for doubtful accounts as a percentage of receivables should increase to reflect the greater level of estimated bad debts.
1 6. CPA-0231 0 Choice "b" i s correct. I f control accounts i n the general ledger d o not reconcile to the subsidiary ledgers, there may be a problem in the way transactions were recorded and posted. Failure to investigate such differences implies that, if such a problem exists, it has not been identified and corrected. The auditor would therefore suspect that material misstatements exist in the client's financial statements. Choice "a" is incorrect. The assumptions used in developing accounting estimates generally do change as new information becomes available or as situations or conditions change. This would not necessarily indicate that a material misstatement exists. Choice "c" is incorrect. Since responses to negative confirmations are only received when there are discrepancies, a lower response rate likely would be indicative of fewer problems with accounts receivable. This corresponds to a reduced likelihood of material misstatement. Choice "d" is incorrect. Management's consultation with another CPA firm about complex accounting matters indicates proactive steps on the part of management to accurately address those matters. Material misstatements with respect to the complex accounting matters therefore would be less likely to exist.
CQ·30
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Becker Professional Education I CPA Exam Review
Class Question Explanations
1 7. CPA·0681 2 Choice "d" i s correct. The dollar amount of the error i s a quantitative standard , not a qualitative standard. Choice "a" is incorrect. The effect of misclassifications is a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement. Choice "b" is incorrect. The sign ificance of the misstatement relative to the needs of users is a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement. Choice "c" is incorrect. The cost of the correction is a qualitative standard that should be considered when evaluating the materiality of an uncorrected misstatement.
1 8. CPA·06701 Choice "a" is correct. The auditor should document the errors in the summary of uncorrected errors, and document the conclusion that the errors do not cause the financial statements to be misstated. '0
Choice "b" is incorrect. The aud itor is required to document both his/her conclusion and summarize uncorrected errors in the working papers. Choice "c" is incorrect. The aud itor is required to summarize the uncorrected errors in the working papers and document whether the errors cause the financial statements to be misstated. Choice "d" is incorrect. The auditor is required to perform both of these procedures.
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CQ031
Becker Professional Education I CPA Exam Review
Class Question Explanations
NOTES
CQ-32
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Becker Professional Education I CPA Exam Review
Class Question Explanations
A� UDITING 5
-----------------------------------
1 . CPA·02588 Choice "b" is correct. Attribute sampling is used to test controls. I nspecting employee time cards for proper approval by supervisors is a test of controls. Controls often relate to authorization , validity, completeness, accuracy, appropriate classification, accounting in conformity with GAAP, and proper period. Look for these terms in identifying which option is a test of controls. Words such as account balance, amount, valuation , presentation, and d isclosure are more likely to relate to substantive tests. Choice "a" is incorrect. Selecting accounts receivable for confirmation of accou nts balances is a substantive test. Choice "c" is incorrect. Making an independent estimate of the amount of a LIFO inventory is a substantive test. Choice "d" is incorrect. Examining invoices in support of the valuation of fixed asset additions is a substantive test.
2. CPA·02602 Choice "d" is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based on the sample, control risk will be understated, since the control will be less effective than sample results would indicate. Choice "a" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low. Choice "b" is incorre�t. If the true deviation rate is lower than the deviation rate in the sample, control risk may be assessed at a rate that is too high, potentially lead ing to audit inefficiencies. Choice "c" is incorrect. No comparison should be made between the true deviation rate and the risk of assessing control risk too low.
3. CPA·02620 Choice "c" is correct. Erroneously concluding that an account balance is materially misstated is an example of incorrect rejection. Choice "a" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testi ng). Choice "b" is incorrect. The assessment of control risk relates to tests of controls, not to tests of details (substantive testing). Choice "d" is incorrect. If the auditor had concluded that the account was fairly presented when, in fact, it was not, it would be an example of incorrect acceptance.
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CQ-33
Class Question Explanations
Becker Professional Education I CPA Exam Review
4. CPA·02594 Choice "d" is correct. The auditor will reduce reliance on a control if the upper deviation rate exceeds the tolerable rate. The upper deviation rate consists of the sample deviation rate plus an allowance for sampling risk. Therefore, if the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate, that is equivalent to the upper deviation rate exceeding the tolerable rate. Choice "a" is incorrect. If the sample deviation rate plus the allowance for sampling risk equals the tolerable rate, the aud itor may still place the planned amount of reliance on the control. Choice "b" is incorrect. Whether the actual sample deviation rate is less than the expected deviation rate is irrelevant for making decisions about planned reliance levels. Choice "c" is incorrect. If the tolerable rate less the allowance for sampling risk exceeds the sample rate of deviation, then the upper deviation rate is less than the tolerable rate. This situation supports the planned reliance, and no reduction in plan ned reliance would be necessary.
5. CPA·02607 Choice "b" is correct. The auditor may be able to reduce the required sample size by separating items subject to sampling into relatively homogenous groups on the basis of some characteristic related to the specific audit objective. Choice "a" is incorrect. While PPS sampling results in a stratified sample, it is a result of the sampling method employed and does not require the auditor to perform stratification since it occurs automatically. Choice "c" is incorrect. The estimated tolerable misstatement does not affect the decision to stratify. Choice "d" is incorrect. The standard deviation of the recorded amounts represents the population's variability. Therefore, the auditor would be most likely to stratify when the standard deviation is high, not low.
6. CPA·0261 7 Choice "b" i s correct. When planning a particu lar sample for a substantive test of details, the auditor should consider how much monetary misstatement in the account might exist without causing the financial statements to be materially misstated (tolerable misstatement) as wel l as the expected size and frequency of misstatements. Choices "a", "c", and "d" are i ncorrect, per the above explanation.
7. C PA·02584 Choice "b" is correct. The sample error of $ 1 ,000 ($5,000 - $4,000) is projected to the entire interval through use of a "tainting factor" of 20% ($1 ,000 / $5,000). If this were the only misstatement discovered by the auditor, the projected misstatement of this sample would be 20% of $ 1 0,000, or $2,000. Choice "a" is incorrect, as the sample error of $1 ,000 needs to be projected to the entire interval. Choices "c" and "d" are incorrect, per the above explanation.
CQ-34
© DeVry/Becker Educational Development Corp. All rights reserved.
Becker Professional Education I CPA Exam Review
Class Question Explanations
8. CPA-02596 Choice "d" is correct. The auditor should consider both the qualitative and the quantitative aspects of deviations in tests of controls. Qualitative aspects might include whether deviations are indicative of an error or fraud . Such an evaluation is important because fraud is intentional, has implications beyond the direct monetary effect, and requires consideration of the implications for other aspects of the audit. Thus, a deviation initially concealed by a forged document is very serious and deserves broader consideration than a deviation of the same dollar amount due to an error. Choice "a" is incorrect. The fact that a deviation was the only one discovered would have no importance beyond its impact on the computation of the upper deviation rate. Choice "b" is incorrect. Discovery of a deviation identical to one discovered during the prior year's audit is not necessarily cause for additional concern. Choice "c" is incorrect. Employee misunderstanding of instructions is an inherent limitation of internal control and is not necessarily cause for concern.
9. CPA-02542 Choice "d" is correct. Conditions noted by the auditor that are significant deficiencies or material weaknesses should be reported in writing. Any report issued on such conditions should ( 1 ) indicate that the purpose of the audit was to report on the financial statements and not to provide an opinion on internal control; (2) include the definition of a material weakness and, if applicable, significant deficiency; (3) include a restriction on use (i.e., the report is intended solely for the information and use of management, those charged with governance, etc. ). Choice "a" is incorrect. During an audit, the auditor is not required to design tests specifically to detect significant deficiencies or material weaknesses in internal control. Choice "b" is incorrect. Significant deficiencies in internal control are not generally disclosed in the annual report, and the auditor's letter on internal control matters observed during a financial statement audit is intended solely for the information and use of management, those charged with governance, and others within the organization . Choice "c" is incorrect. Management does not provide an assertion concerning the effectiveness of internal control as part of a financial statement audit of a nonissuer (but would provide such an assertion in a separate engagement related to internal control).
1 0. CPA-02551 Choice "d" is correct. In reporting on a non issuer's internal control over financial reporting in an attest engagement (not an audit), the practitioner's report should include a paragraph stating that, because of inherent limitations of any internal control, errors or fraud may occur and not be detected. Choice "a" is incorrect. Documentary evidence need not be provided in the practitioner's report. Choice "b" is incorrect. The practitioner need not mention any changes in internal control since the last report. Choice "c" is incorrect. The practitioner should not describe any potential benefits that might result from the practitioner's suggested improvements.
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