Auditing Theory - WILEY

Question: ENPL2-0001 The Sarbanes-Oxley Act of 2002 authorized creation of the Answers A: Auditing Standards Board. B: Public Company Accounting Oversight Board. C: Financial Accounting Standards Center. D: Corporate Governance Institute. Answer Explanations A. Answer A is incorrect because the Auditing Standards Board has been involved with auditing standards for many years and was not established by the Act. B. Answer B is correct in that the Act authorized creation of the Public Company Accounting Oversight Board. C. Answer C is incorrect in that the Act did not establish a Financial Accounting Standards Center. D. Answer D is incorrect because while there are several “Corporate Governance Institutes,” none were established by the Act. Hint The Act increased governmental involvement. Question: ENPL2-0002 Which of the following has the lowest authoritative status but may be useful in assisting the auditor in applying the SASs? Answers A: Statements on Auditing Standards. B: Auditing Statements of Position. C: Journal of Accountancy articles. D: Auditing Interpretations. Answer Explanations A. Answer A is incorrect. SASs have the highest level of authority. B. Answer B is incorrect. Statements of Position have the authority of interpretative guidance. C. Answer C is correct. Journal of Accountancy articles have no authoritative status but may be useful in applying SASs. D. Answer D is incorrect. Auditing Interpretations have the status of interpretive guidance. Hint Which of the publications have no authoritative status? Question: ENPL2-0003 Early appointment of the independent auditor will enable Answers A: A more thorough examination to be performed. B: A proper consideration of internal control to be performed. C: Sufficient competent evidential matter to be obtained. D: A more efficient audit to be planned. Answer Explanations

A. Answer A is incorrect because the overall scope of the audit must remain the same regardless of appointment date. B. Answer B is incorrect because a proper consideration of internal control may be performed even without early appointment. C. Answer C is incorrect because sufficient competent evidential matter must be obtained regardless of the appointment date. D. Answer D is correct because the early appointment of the independent auditor enables the auditor to plan his/her work so that it may be done expeditiously and to determine the extent to which it can be done before the balance sheet date. Such preliminary work by the auditor permits the audit to be performed in a more efficient manner and to be completed at an early date after the year-end. Hint Planning enhances efficiency. Question: ENPL2-0004 When establishing an understanding with an audit client, that understanding should be documented Answers A: Through use of an engagement letter. B: Through a written communication with the client. C: Either orally or in writing witht the client. D: In a manner completely based on the auditor's seasoned professional judgment. Answer Explanations A. Answer A is incorrect. While an engagement letter is frequently used, it is not required. B. Answer B is correct. The professional standards require a written communication. C. Answer C is incorrect. The understanding must be written not oral. D. Answer D is incorrect. The professional standards allow only limited auditor use of professional judgment here in that a written communication is required. Hint Only limited flexibility exists here. Question: ENPL2-0005 An understanding with the client must include the objectives of the engagement, management’s responsibilities, and The auditor’s Limitations responsibilities of the audit A. Yes Yes B. Yes No C. No Yes D. No No

Answers A: A. B: B. C: C. D: D. Answer Explanations A. Answer A is correct. The professional standards require that both the auditor’s responsibilities and limitations of the audit be communicated. B. Answer B is incorrect. Limitations of the audit must be communicated. C. Answer C is incorrect. The auditor’s responsibilities must be communicated. D. Answer D is incorrect. Both the auditor’s responsibilities and limitations of the audit must be communicated. Hint What needs to be communicated to reduce the likelihood of misunderstandings? Question: ENPL2-0006 The primary responsibility for the adequacy of disclosure in the financial statements of a publicly held company rests with the Answers A: Partner assigned to the audit engagement. B: Management of the company. C: Auditor in charge of the fieldwork. D: Securities and Exchange Commission. Answer Explanations A. Answer A is incorrect because his/her responsibility is limited to expressing an opinion as to the fairness of the financial statements. B. Answer B is correct because financial statements are the representations of management, and they have the responsibility for producing proper financial statements. C. Answer C is incorrect because his/her responsibility is to gather audit evidence regarding the fairness of the financial statements. D. Answer D is incorrect because its responsibility for enforcing disclosure requirements in financial statements of publicly held companies is secondary to management's primary responsibility for the representations included in the financial statements. Hint Who makes the representations in the financial statements? Question: ENPL2-0007 Which of the following statements best describes the phrase "generally accepted auditing standards" as it relates to an audit of a nonpublic company?

Answers A: They identify the policies and procedures for the conduct of the audit. B: They define the nature and extent of the auditor’s responsibilities. C: They provide guidance to the auditor with respect to planning the audit and writing the audit report. D: They set forth a measure of the quality of the performance of audit procedures. Answer Explanations A. Answer A is incorrect because generally accepted auditing standards give only limited guidance as to specific policies and procedures for the conduct of the audit. B. Answer B is incorrect because generally accepted auditing standards give only limited guidance as to the nature and extent of the auditor's responsibilities. C. Answer C is incorrect because it only relates to the standard concerned with planning the audit and writing the audit report and not to the other standards. D. Answer D is correct because generally accepted auditing standards (GAAS) deal with measures of the quality of the performance of audit procedures. Auditing standards relate not only to the auditor's professional qualities but also to the judgment exercised by the auditor in the performance of the audit. Hint GAAS is a measure of performance.

Corroborating evidence addresses the third fieldwork standard directly. D. Answer D is incorrect because reasonable assurance is a basic concept of internal control which recognizes that the cost of internal control should not exceed the benefits expected to be derived. Hint Which of the following do not underlie the application of all the standards?

B.

Question: ENPL2-0009 Which of the following publications does not qualify as a source of generally accepted accounting principles?

Hint The preliminary audit strategy occurs very early in the engagement.

Question: ENPL2-0008 Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

Answers A: Accounting interpretations issued by the FASB. B: AICPA Concepts Statements. C: AICPA Practice Bulletins. D: Statements of Financial Standards issued by the FASB. Answer Explanations A. Answer A is incorrect because interpretations issued by the FASB are considered as sources of GAAP (AU 411). B. Answer B is correct because the AICPA has not issued concepts statements. The concepts statements issued by the FASB are considered "other accounting literatures" and are not sources of generally accepted accounting principles. C. Answer C is incorrect because Practice Bulletins are considered as sources of GAAP (AU 411). D. Answer D is incorrect because FASB statements are considered sources of GAAP (AU 411). Hint The AICPA has not issued concepts statements.

Answers A: The elements of materiality and audit risk. B: The element of internal control. C: The element of corroborating evidence. D: The element of reasonable assurance. Answer Explanations A. Answer A is correct because the elements of materiality and audit risk underlie the application of all the standards, particularly the standards of fieldwork and reporting. B. Answer B is incorrect because internal control does not underlie all GAAS but rather deals specifically with the second fieldwork standard. C. Answer C is incorrect because corroborating evidence is required to be gathered but does not underlie all GAAS.

Question: ENPL2-0010 In developing an overall audit strategy, an auditor should consider Answers A: Whether the allowance for sampling risk exceeds the achieved upper precision limit. B: Findings from substantive tests performed at interim dates. C: Whether the inquiry of the client’s attorney identifies any litigation, claims, or assessments not disclosed in the financial statements. D: Reporting objectives of the engagement. Answer Explanations A. Answer A is incorrect. Any information on the achieved upper precision limit will generally be obtained after the overall audit strategy has been developed.

C.

D.

Answer B is incorrect. Any information on interim substantive tests will generally be obtained after the overall audit strategy has been developed. Answer C is incorrect. Any information pertaining to attorney's letters will generally be obtained after the overall audit strategy has been developed. Answer D is correct. An overall audit strategy involves (1) determining the scope of the audit, (2) determining the reporting objectives, and (3) considering various other important factors.

Question: ENPL2-0011 Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

Answers A: Elements of audit risk while detection risk is not. B: Changed at the auditor’s discretion while detection risk is not. C: Considered at the individual account-balance level while detection risk is not. D: Functions of the client and its environment while detection risk is not. Answer Explanations A. Answer A is incorrect. Inherent risk, control risk and detection risk are all components of audit risk. B. Answer B is incorrect. Detection risk, not inherent risk and control risk, may be changed at the auditor's discretion. C. Answer C is incorrect. Auditors consider all of the component risks at the account level. D. Answer D is correct. Inherent risk and control risk exist independently of the audit of financial statements as functions of the client and its environment, whereas detection risk relates to the auditor's procedures and can be changed at his or her discretion. Hint An auditor may change the level of detection risk. Question: ENPL2-0012 As the acceptable level of detection risk decreases, the assurance directly provided from

Answers A: Substantive procedures should increase. B: Substantive procedures should decrease. C: Tests of controls should increase.

D: Tests of controls should decrease. Answer Explanations A. Answer A is correct. Detection risk is restricted by the auditor's substantive procedures. As the acceptable level of detection risk decreases, assurance provided by substantive procedures must increase. Increased assurance can be obtained by modifying the nature, timing and/or extent of the substantive procedures. This answer is incorrect. Refer to the correct answer explanation. C. Answer C is incorrect. The acceptable level of detection risk is based largely on the assessed levels of control risk and inherent risk. Accordingly, any tests of controls will already have been performed. D. Answer D is incorrect. The acceptable level of detection risk is based largely on the assessed levels of control risk and inherent risk. Accordingly, any tests of controls will already have been performed. Hint There is an inverse relationship between detection risk and substantive procedures. Question: ENPL2-0013 Holding all other factors constant, decreasing the extent of substantive audit procedures for accounts payable ordinarily has what effect on audit risk?

Answers A: Increases. B: Decreases. C: No effect. D: Indeterminate. Answer Explanations A. Answer A is correct because decreasing the extent of substantive audit procedures increases detection risk, and this will increase audit risk when all other factors remain constant. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint Identify the effect of decreasing the extent of substantive procedures on audit risk.

B. C. D.

A.

Control risk Yes

No Yes Yes

Answers A: A. B: B. C: C. D: D. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. D. Answer D is correct because all of these risks may be assessed in quantitative terms such as percentages. They may also be assessed in nonquantitative terms such as a range from a minimum to a maximum. Hint No tricks here. Question: ENPL2-0015 Use the audit risk model to calculate audit risk (to the closest percent) in the following circumstance: Control risk Inherent risk Detection risk

40% 40% 40%

Answers A: 1%. B: 6%. C: 13%. D: 40%. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. B. Answer B is correct. The requirement is to use the audit risk model to mathematically calculate audit risk (to the nearest percent). AU 312 discusses the three components of the audit risk model presented in this problem which may be viewed as

Question: ENPL2-0014 Which of the following audit risk components may be assessed in nonquantitative terms? Inherent risk Yes

Yes No Yes

Detection risk No

Audit risk

=

Audit risk

=

Inherent risk x Control risk x Detection risk in this problem .40 x .40 x .40

=

6.4%

Yes Yes Yes

Note that a quantitative approach such as this is largely for demonstrative purposes and few would directly incorporate it into practice. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint AR = IR x DR x CR Question: ENPL2-0016 The risk that an auditor will conclude, based on substantive procedures, that a material misstatement does not exist in an account balance when, in fact, such error does exist is referred to as Answers A: Sampling risk. B: Detection risk. C: Nonsampling risk. D: Inherent risk. Answer Explanations A. Answer A is incorrect. Sampling risk arises from the possibility that, when a test of controls or a substantive test is restricted to a sample, the auditor's conclusions may be different from the conclusions he or she would reach if the procedures were applied in the same way to all items in the account balance or class of transactions. B. Answer B is correct. Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion. C. Answer C is incorrect. Nonsampling risk includes only those aspects of audit risk that are not due to sampling. D. Answer D is incorrect. Inherent risk is the susceptibility of an assertion to a material misstatement, assuming that there are no related controls. Hint No tricks here. Question: ENPL2-0017 As a lower acceptable level of materiality is established, the auditor should plan more work on individual accounts to Answers A: Find smaller misstatements. B: Find larger misstatements. C: Increase the tolerable misstatement in the accounts. D: Decrease the risk of assessing control risk too low. Answer Explanations A. Answer A is correct. A decrease in acceptable levels of materiality requires the auditor to do one or more of the following: (1) select a more effective auditing procedure, (2) perform auditing procedures closer to the balance sheet date, or

(3) increase the extent of a particular auditing procedure. By increasing the extent of a procedure concerning an individual account and/or selecting a more effective procedure, the auditor will find the smaller misstatements that in aggregate might exceed his preliminary judgments about materiality. The auditor, therefore, must plan to find smaller misstatements as a lower acceptable level of materiality is established. B. Answer B is incorrect. Larger misstatements must be discovered in any sampling plan regardless of materiality levels. C. Answer C is incorrect. A decrease in materiality will lead to a decrease in tolerable misstatement for an account, not an increase. Tolerable misstatement is a planning concept and is related to the auditor's preliminary estimates of materiality levels in such a way that tolerable misstatement combined for the entire audit plan, does not exceed those estimates. D. Answer D is incorrect. Lower levels of materiality do not require a reduction in the risk of assessing control risk too low. The risk of assessing control risk too low pertains to the planned reliance on specific internal control policies and procedures, not work on individual accounts. Hint As the level of materiality decreases, the amount of evidence needed increases. Question: ENPL2-0018 Which of the following statements is not correct about materiality?

Answers A: The concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with GAAP, while other matters are not important. B: An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements. C: Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments. D: An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements. Answer Explanations A. Answer A is incorrect. Materiality does recognize that some matters are important for fair presentation in conformity with GAAP. B. Answer B is correct because the auditor considers materiality for planning purposes in terms of the smallest, not the largest, aggregate amount of misstatement that could be material to any one of the financial statements.

C. Answer C is incorrect as materiality is a judgment assessed in quantitative and qualitative terms. D. Answer D is incorrect because materiality is a function of the auditor's perception of user needs. Hint What is the definition of materiality?

C.

Question: ENPL2-0019 In considering materiality for planning purposes, an auditor believes that misstatements aggregating $10,000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate

Hint No tricks here.

Answers A: $10,000 B: $15,000 C: $20,000 D: $30,000 Answer Explanations A. Answer A is correct because it will ordinarily be difficult to anticipate during the planning stage of an audit whether all misstatements will affect only one financial statement. The auditor therefore generally is required to use the lower financial statement figure for most portions of planning. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint In the planning stage, the auditor typically makes a conservative assessment of materiality. Question: ENPL2-0020 Following the Professional Standards which of the following is not one of the assertions made by management for account balances? Answers A: Completeness. B: Existence. C: Valuation and allocation. D: Relevance and reliability. Answer Explanations A. Answer A is incorrect. Completeness is an account balance assertion. B. Answer B is incorrect. Existence is an account balance assertion.

D.

Answer C is incorrect. Presentation and disclosure is an account balance assertion. Answer D is correct. Relevance and reliability is not included in the professional standards as an account balance assertion. AU 326 presents as assertions: (1) Existence, (2) Rights and obligations, (3) Completeness, and (4) Valuation and allocation.

Question: ENPL2-0021 Which of the following, if material, would be fraud as defined in Statements on Auditing Standards? Answers A: Errors in the application of accounting principles. B: Errors in the accounting data underlying the financial statements. C: Misinterpretation of facts that existed when the financial statements were prepared. D: Misappropriation of assets. Answer Explanations A. Answer A is incorrect because an error in the application of accounting principles is an example of "errors" as defined by Statements on Auditing Standards. An error refers to an unintentional mistake. B. Answer B is incorrect because an error in accounting data is an example of "errors" as defined by Statements on Auditing Standards. An error refers to an unintentional mistake. C. Answer C is incorrect because a misinterpretation of facts is an example of "errors" as defined by Statements on Auditing Standards. An error refers to an unintentional mistake. D. Answer D is correct because the term "fraud" refers to intentional distortions of financial statements such as deliberate misrepresentations. Hint Fraud is an intentional distortion of the financial statements. Question: ENPL2-0022 Which of the following factors is most important concerning an auditor's responsibility to detect errors and fraud?

Answers A: The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles. B: The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements.

C: The possibility that management fraud, defalcations, and the misappropriation of assets may indicate the existence of illegal acts. D: The risk that mistakes, falsifications, and omissions may cause the financial statements to contain material misstatements. Answer Explanations A. Answer A is incorrect. The susceptibility of the accounting records to intentional manipulations, alterations, and the misapplication of accounting principles are examples of factors that may influence the auditor's consideration of risk of material misstatement. This answer is incorrect because it is incomplete. B. Answer B is incorrect. The probability that unreasonable accounting estimates result from unintentional bias or intentional attempts to misstate the financial statements is an example of a factor that may influence the auditor's consideration of risk of material misstatements in the financial statements. This answer is incorrect because it is incomplete. C. Answer C is incorrect. The possibility that management fraud, defalcations, and the misappropriation of assets indicating the existence of illegal acts is one factor the auditor can use to assess the risk of management misrepresentation in the financial statements. Answer C is incorrect because it is incomplete. D. Answer D is correct. The auditor should assess the risk that errors and fraud (which include mistakes, falsifications and omissions) may cause the financial statements to contain material misstatements. Hint Three of these answers are incorrect because they are incomplete. The correct answer is the broadest in scope. Question: ENPL2-0023 What assurance does the auditor provide that errors, fraud, and direct effect illegal acts that are material to the financial statements will be detected?

A. B. C. D.

Answers A: A. B: B. C: C. D: D.

Errors Limited Limited Reasonable Reasonable

Fraud Negative Limited Limited Reasonable

Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. D. Answer D is correct. AU 316 requires the auditor to design the audit to provide reasonable assurance of detecting material errors, fraud and direct effect illegal acts. Hint Direct effect illegal acts require the same assurance as errors and fraud. Question: ENPL2-0024 The independent auditor's plan for an examination in accordance with generally accepted auditing standards is influenced by the possibility of material misstatements. The auditor will therefore conduct the examination with an attitude of Answers A: Professional skepticism. B: Subjective mistrust. C: Objective indifference. D: Professional responsiveness. Answer Explanations A. Answer A is correct because the auditor should plan and perform the audit with an attitude of professional skepticism, recognizing that the application of auditing procedures may produce evidential matter indicating the possibility of errors or fraud. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint Controlled doubt increases the likelihood of detecting material misstatements due to errors and fraud. Question: ENPL2-0025 Direct Which effect of the following statements best describes the auditor's illegal responsibility acts regarding the detection of material errors and Limited fraud? Reasonable Limited Answers Reasonable A: The auditor is responsible for the failure to detect material errors and fraud only when such failure results from the nonapplication of generally accepted accounting principles. B: Auditing procedures may or may not need to be extended if the auditor’s analysis indicates the existence of fraud risk factors.

C: The auditor is responsible for the failure to detect material errors and fraud only when the auditor fails to confirm receivables or observe inventories. D: Extended auditing procedures are required to detect unrecorded transactions even if there is no evidence that material errors and fraud may exist. Answer Explanations A. Answer A is incorrect. The auditor should design the audit to provide reasonable assurance of detecting errors and fraud that is material to the financial statements. This responsibility for detection is not limited to circumstances arising from the nonapplication of generally accepted accounting principles. B. Answer B is correct. When fraud risk factors exist, the auditor should consider whether already designed procedures adequately consider the existence of fraud. When they do not, audit procedures must be extended. C. Answer C is incorrect. The auditor may be held responsible for failures to detect misstatements due to errors and fraud because of inadequate planning, performance or judgment. Not confirming receivables or not observing inventories are only two of the many possible situations in which the auditor may be held responsible for a failure to detect associated errors and fraud. D. Answer D is incorrect. The extended auditing procedures are necessary when normal procedures indicate evidence that misstatements due to errors and fraud may exist, not when there is no such evidence. Hint An existing material misstatement due to error or fraud suggests that other such misstatements may exist. Question: ENPL2-0026 Which of the following is an example of fraudulent financial reporting?

Answers A: Company management improperly records as revenue the proceeds of a loan. B: The treasurer diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. C: An employee steals inventory and the "shrinkage" is recorded in cost of goods sold. D: An employee bills his company for products not received, using the name of a fictitious supplier. Answer Explanations A. Answer A is correct because fraudulent financial reporting involves intentional misstatements or omissions of

amounts or disclosures in financial statements to deceive financial statement users and improperly recording the revenue results in such misstatements. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint Differentiate between fraudulent financial reporting and misappropriation of assets. Question: ENPL2-0027 Which of the following is correct concerning a "fraud risk factor?" Answers A: Its presence indicates that the risk of fraud is high. B: It has been observed in circumstances where frauds have occurred. C: It requires modification of planned audit procedures. D: It is also a material weakness in internal control. Answer Explanations A. Answer A is incorrect because the risk of fraud may or may not be high when a risk factor is present. B. Answer B is correct because AU 316 suggests that while fraud risk factors do not necessarily indicate the existence of fraud, they often have been observed in circumstances where frauds have occurred. C. Answer C is incorrect because the current audit program may in many circumstances appropriately address a fraud risk factor. D. Answer D is incorrect because a fraud risk factor may or may not represent a material weakness in internal control; see AU 325 for information on reportable conditions and material weaknesses in internal control. Hint Fraud risk factors are present in most audits. Question: ENPL2-0028 Which of the following is correct concerning requirements about auditor communications about fraud? Answers A: All fraud that causes a material misstatement of the financial statements should be reported directly to the audit committee. B: Fraud that causes an immaterial misstatement of the financial statements need not be reported to the audit committee. C: Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.

D: The auditor has no responsibility to disclose fraud outside the entity under any circumstances. Answer Explanations A. Answer A is correct because all fraud involving senior management and all other material fraud should be reported directly to the audit committee. B. Answer B is incorrect because fraud resulting in an immaterial misstatement of the financial statements with which management is involved must be communicated to the audit committee. C. Answer C is incorrect because auditors are only required to report fraud to the Securities and Exchange Commission under particular circumstances. D. Answer D is incorrect because under certain circumstances auditors must disclose fraud outside the entity. AU 316 provides information on the CPA's responsibility relating to fraud. Hint What party do CPAs frequently report significant matters to? Question: ENPL2-0029 Which of the following is not required when considering fraud in a financial statement audit? Answers A: Conduct a continuing assessment of the risks of material misstatment due to fraud throughout the audit. B: Conduct an audit team discussion of the risk of material misstatment due to fraud. C: Conduct the audit with professional skepticism, which includes an attitude that assumes balances are incorrect until documented by the auditor. D: Inquire of the audit committee as to their views about the risks of fraud and their knowledge of any fraud or suspected fraud. Answer Explanations A. Answer A is incorrect because an assessment of the risks of material misstatement of fraud is required by AU 316. B. Answer B is incorrect because such a staff discussion is required by AU 316. C. Answer C is correct because professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence—it does not assume that balances are incorrect until documented by the auditor. AU 316 provides guidance on considering fraud during a financial statement audit. D. Answer D is incorrect because such inquiries of an audit committee are required by AU 316. Hint What are the major requirements of SAS 99? Question: ENPL2-0030

Which of the following need not be documented in relation to the auditor's consideration of fraud? Answers A: Nature of communications about fraud made to management. B: Procedures performed to obtain information to identify and assess risks of material misstatement due to fraud. C: Specific risks of material misstatment due to fraud that were identified. D: The assessed level of the risk of management override of controls. Answer Explanations A. Answer A is incorrect because AU 316 requires such communications. B. Answer B is incorrect because AU 316 requires such communications. C. Answer C is incorrect because AU 316 requires such communications. D. Answer D is correct because while auditors must consider the risk of management override of controls, no such assessment need be made as part of an audit. Hint Think about an auditor's overall approach to considering fraud. Question: ENPL2-0031 Which of the following is most likely to be an overall response to fraud risks identified in an audit? Answers A: Supervise members of the audit team less closely and rely more upon judgment. B: Increase consideration of management's selection and application of accounting principles. C: Use only accountants with multiple years of experience on the engagement. D: Increase emphasis on the audit of transactions in all areas of the audit. Answer Explanations A. Answer A is incorrect because closer supervision, not less close supervision, is more likely to be appropriate. B. Answer B is correct because AU 316 indicates that overall responses to the risk of material misstatement due to fraud include (1) assigning personnel with particular skills relating to the area and considering the necessary extent of supervision to the audit, (2) increasing the consideration of management’s selection and application of accounting principles, and (3) making audit procedures less predictable. C. Answer C is incorrect because no such requirement for experience of all staff members exists. D. Answer D is incorrect because it is unlikely that increased emphasis on transactions in all areas of the audit will be necessary.

Hint Think about an approach that will make identifying misstatements more likely.

Answer Explanations A. Answer A is correct because, when obtaining information needed to identify risks of material misstatement due to fraud, AU 316 requires inquiries of management, consideration of results of analytical procedures, consideration Question: ENPL2-0032 Individuals who commit fraud are ordinarily able to rationalize of fraud risk factors, and consideration of certain other the act and have information. In addition, a discussion among engagement personnel regarding the risks of material misstatement due to Incentive Professional skepticism fraud is required. A. Yes Yes B. Answer B is incorrect because it states that a B. Yes No consideration of fraud risk factors is unnecessary. C. No Yes C. Answer C is incorrect because it states that inquiry of D. No No management is unnecessary. D. Answer D is incorrect because it states that neither inquiry of management nor a consideration of fraud risk factors Answers A: A. is necessary. B: B. Hint C: C. Think about various approaches to detecting fraud, none of D: D. which are perfect. Answer Explanations A. Answer A is incorrect because professional Question: ENPL2-0034 skepticism is not ordinarily necessary. Professional skepticism, when exercised during the B. Answer B is correct because AU 316 suggests that the consideration of the risk of misstatement due to fraud three conditions generally present when fraud occurs are that individuals have an (1) incentive or pressure, (2) opportunity, Answers and (3) ability to rationalize. A: Should only be exercised during the planning stage of the C. Answer C is incorrect because an incentive is audit. ordinarily necessary and professional skepticism is not. B: Is based on the notion that the client is dishonest. D. Answer D is incorrect because an incentive is C: Is an attitude that includes a questioning mind. ordinarily necessary. D: Ordinarily includes the use of an outside expert in most audits. Hint Consider whether the options seem to relate to committing as Answer Explanations opposed to detecting fraud. A. Answer A is incorrect because professional skepticism is exercised during all stages of the audit. B. Answer B is incorrect because the auditor does not Question: ENPL2-0033 An auditor gathers information necessary to identify risks of assume that the client is either honest or dishonest. material misstatement due to fraud by C. Answer C is correct because AU 230 defines professional skepticism as an attitude that includes a Inquiry of Consideringquestioning mind and a critical assessment of audit evidence. management fraud risk factors D. Answer D is incorrect because no outside expert is A. Yes Yes ordinarily consulted relating to the professional skepticism B. Yes No requirement. C. No Yes Hint D. No No Define professional skepticism. Answers A: A. B: B. C: C. D: D.

Question: ENPL2-0035 Which of the following is not a likely response when an auditor has determined that a misstatement is, or may be, the result of fraud, and has determined that the effect on the financial statements may be material?

Answers A: Consider the implications for other aspects of the audit. B: Discuss the matter and approach to further investigation with an appropriate level of management. C: Attempt to obtain additional evidential matter to determine whether material fraud has occurred or is likely to have occurred. D: Suggest that the client contact a local law enforcement authority to report the possible fraud. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. D. Answer D is correct because in most circumstances of fraud it is unlikely that a CPA would suggest to a client that a local law enforcement authority be contacted. Hint When considering material implications of fraud, whom is the auditor least likely to suggest the client contact? Question: ENPL2-0036 In which of the following circumstances is it least likely that the auditor will have a responsibility to disclose a fraudulent act to parties other than the client's senior management and its audit committee? Answers A: In response to a successor auditor. B: To comply with legal and regulatory requirements. C: In response to question raised by an analyst who follows the stock of the company. D: To a funding agency in accordance with requirement for audit of entities that receive governmental financial assistance. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. C. Answer C is correct because an auditor will not ordinarily disclose a fraudulent act in response to a question raised by an analyst. This answer is incorrect. Refer to the correct answer explanation. Hint An auditor is responsible to disclose information to successor auditors, legal and regulatory agencies, and funding agencies. Question: ENPL2-0037 Which of the following is a risk factor relating to the misappropriation of assets? Answers

A: Large amounts of cash on hand. B: High turnover of legal counsel. C: Inability to generate positive cash flows from operations. D: Overly complex organizational structure involving numerous legal entities. Answer Explanations A. Answer A is correct because the existence of large amounts of cash on hand may lead to the misappropriation of assets. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint Think in terms of assets on the balance sheet. Question: ENPL2-0038 Which of the following is not typically a characteristic of fraud? Answers A: Collusion. B: Concealment. C: Falsified documentation. D: Unintentional. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. D. Answer D is correct because fraud is intentional, not unintentional. Hint No tricks here. Question: ENPL2-0039 Which of the following statements is correct concerning fraud risk factors that an auditor considers when performing a financial statement audit? Answers A: They can easily be ranked in order of importance. B: They must be considered individually, and not in combination, when conducting an audit. C: They must be combined into models before they are effective in identifying the existence of fraud. D: Their existence in an audit does not necessarily indicate the existence of fraud. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

D. Answer D is correct because AU 316 makes clear that while fraud risk factors do not necessarily indicate the existence of fraud, they often have been observed in circumstances where frauds have occurred. Hint Does a sample necessarily represent the population as a whole? Question: ENPL2-0040 Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting? Answers A: Inability to generate cash flows from operations while reporting substantial earnings growth. B: Management's lack of interest in increasing the entity's stock trend. C: Large amounts of liquid assets that are easily convertible into cash. D: Inability to borrow necessary capital without granting debt covenants. Answer Explanations A. Answer A is correct because the inability to generate cash flows from operations while reporting earnings and growth is explicitly included as a risk factor in AU 316; such a situation causes one to question whether the earnings being reported are proper. B. Answer B is incorrect because while many managements share an interest in increasing the entity’s stock trend (e.g., increase price), the lack of such an interest does not indicate particularly high risk of fraudulent financial reporting. C. Answer C is incorrect because large amounts of liquid assets are often relatively easily to audit, and not indicative of fraudulent financial reporting. D. Answer D is incorrect because the granting of debt covenants is often necessary and appropriate when obtaining debt financing. Hint Which seems the most risky? Question: ENPL2-0041 When an auditor becomes aware of a possible client illegal act, the auditor should obtain an understanding of the nature of the act to Answers A: Increase the assessed level of control risk. B: Recommend remedial actions to the audit committee. C: Evaluate the effect on the financial statements. D: Determine the reliability of management’s representations. Answer Explanations

A. Answer A is incorrect. Discovery of an illegal act will not necessarily increase the assessed level of control risk. B. Answer B is incorrect. While the occurrence of illegal acts will be communicated to the audit committee, the auditor will not necessarily recommend remedial actions. C. Answer C is correct. When an auditor becomes aware of information concerning a possible illegal act, he or she should obtain an understanding of the nature of the act, the circumstances in which it occurred, and sufficient other information to evaluate its effect on the financial statements. D. Answer D is incorrect. Obtaining an understanding of the nature of the act will not necessarily affect the reliability of management's representations. Hint Illegal acts are communicated to the audit committee after their effects are evaluated. Question: ENPL2-0042 Which of the following is not a procedure performed primarily for the purpose of expressing an opinion on the financial statements, but may bring possible illegal acts to the auditor's attention? Answers A: Obtain an understanding of internal control. B: Review of policies concerning effectiveness of management decision making policies. C: Tests of transactions. D: Tests of balances. Answer Explanations A. Answer A is incorrect because obtaining an understanding of internal control is performed to lead to the expression of an opinion on the financial statements. B. Answer B is correct because the review of effectiveness of decision making policies is not a procedure when expressing an opinion on the financial statements. External auditors are primarily concerned with internal controls that affect recording, processing, summarizing, and reporting financial data. C. Answer C is incorrect because tests of transactions (substantive tests) are performed for the purpose of expressing an opinion on the financial statements. D. Answer D is incorrect because tests of balances (substantive tests) are performed for the purpose of expressing an opinion on the financial statements. Hint An auditor must obtain an understanding of the internal control and perform substantive procedures. Question: ENPL2-0043

An auditor of a manufacturer would most likely question whether that client has committed illegal acts if the client has Answers A: Been forced to discontinue operations in a foreign country. B: Been an annual donor to a local political candidate. C: Failed to correct material weaknesses in internal control that were reported after the prior year’s audit. D: Disclosed several subsequent events involving foreign operations in the notes to the financial statements. Answer Explanations A. Answer A is correct because being forced to discontinue operations in a foreign country is consistent with the existence of an illegal act, although other conditions may have forced such discontinuance. B. Answer B is incorrect because such political contributions made by companies are generally not illegal. C. Answer C is incorrect because failure to correct a material weakness is not necessarily indicative of violation of a law (e.g., the Foreign Corrupt Practices Act). D. Answer D is incorrect because disclosure of subsequent events, whether involving foreign operations or other information, is a normal acceptable disclosure which need not directly relate to illegal acts. Hint A forced dismissal from a country is often due to the company's conduct. Question: ENPL2-0044 An auditor who finds that the client has committed an illegal act would be most likely to withdraw from the engagement when the Answers A: Illegal act affects the auditor’s ability to rely on management representations. B: Illegal act has material financial statement implication. C: Illegal act has received widespread publicity. D: Auditor can not reasonably estimate the effect of the illegal act on the financial statements. Answer Explanations A. Answer A is correct. The requirement is to determine the circumstances under which an auditor's discovery of an illegal act would be most likely to result in withdrawal from the engagement. The auditor must consider the effects of illegal acts on his/her ability to rely on management's representations and the possible effects of continuing his/her association with the client. B. Answer B is incorrect because a material illegal act need not always result in resignation.

C. Answer C is incorrect because according to the professional standards (AU 328), publicity is not directly related to a decision to withdraw. D. Answer D is incorrect because while an inability to estimate the effect of an illegal act may lead to report modification, it need not lead to withdrawal. Hint The FS are the representations of management. The auditor does not want to be associated with a client that lacks integrity. Question: ENPL2-0045 Hawkins requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor's working papers. The prospective client's refusal to permit this will bear directly on Hawkins' decision concerning the Answers A: Adequacy of the preplanned audit program. B: Ability to establish consistency in application of accounting principles between years. C: Apparent scope limitation. D: Integrity of management. Answer Explanations A. Answer A is incorrect since such a program will not exist before the prospective client is accepted. B. Answer B is incorrect because the availability of prior year financial statements and accounting records normally provides sufficient evidence concerning consistency. C. Answer C is incorrect since the potential successor has not yet accepted the prospective client. D. Answer D is correct since obtaining evidence relative to the integrity of management is one of the objectives to be accomplished during such a review. Hint Why might management refuse the communication? Question: ENPL2-0046 When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining Answers A: Whether the predecessor’s work should be utilized. B: Whether the company follows the policy of rotating its auditors. C: Whether in the predecessor’s opinion internal control of the company has been satisfactory.

D: Whether the engagement should be accepted. Answer Explanations A. Answer A is incorrect because the auditor may review the predecessor auditor's work papers only to help isolate matters of continuing accounting significance. B. Answer B is incorrect because the requirement that the successor auditor communicate with the predecessor auditor discourages the process of rotating auditors, especially due to client-auditor disagreements about accounting principles and audit procedures. C. Answer C is incorrect because the predecessor's opinion of the client's internal control is not relevant to the successor auditor. D. Answer D is correct because the successor auditor is required to communicate with the predecessor auditor to obtain information concerning the client to help determine whether the engagement should be accepted. Hint Think about the questions asked by a successor auditor. Question: ENPL2-0047 What is the responsibility of a successor auditor with respect to communicating with the predecessor auditor in connection with a prospective new audit client? Answers A: The successor auditor has no responsibility to contact the predecessor auditor. B: The successor auditor should obtain permission from the prospective client to contact the predecessor auditor. C: The successor auditor should contact the predecessor regardless of whether the prospective client authorizes contact. D: The successor auditor need not contact the predecessor if the successor is aware of all available relevant facts. Answer Explanations A. Answer A is incorrect because the successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is obtained. B. Answer B is correct because permission must be obtained from the prospective client before contact with the predecessor is attempted. The successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is received. C. Answer C is incorrect because the successor auditor must receive permission from the prospective client before contact with the predecessor auditor is permitted. D. Answer D is incorrect because the successor auditor must attempt to communicate with the predecessor auditor after permission from the prospective client is obtained. Hint

The successor auditor should attempt to communicate with the predecessor auditor. Question: ENPL2-0048 Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected? Answers A: The details of most recorded transactions are not available after a specified period of time. B: Internal control activities requiring the segregation of duties are subject to management override. C: It is unlikely that sufficient competent evidence is available to support an opinion on the financial statements. D: Management has a reputation for consulting with several accounting firms about significant accounting issues. Answer Explanations A. Answer A is incorrect because an auditor may be able to modify the timing of performance of audit procedures to when such details of recorded transactions are available. B. Answer B is incorrect because in many circumstances controls are subject to management override and an auditor may still be able to form an opinion on the financial statements. C. Answer C is correct because the objective of an audit of financial statements is the expression of an opinion on the financial statements; accordingly, when sufficient competent evidence is not available it is unlikely that an audit will be performed. D. Answer D is incorrect because such “shopping for principles” will not necessarily lead to rejection of a potential audit engagement; see AU 625 for information on requirements for reporting on the application of accounting principles. Hint What is the objective of an audit? Question: ENPL2-0049 An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should Answers A: Engage financial experts familiar with the nature of the business entity. B: Obtain a knowledge of matters that relate to the nature of the entity’s business. C: Refer a substantial portion of the audit to another CPA who will act as the principal auditor. D: First inform management that an unqualified opinion cannot be issued. Answer Explanations A. Answer A is incorrect because audit expertise rather than financial expertise is required. Presumably, the auditor will

be able to obtain competence with respect to the industry of the business entity. B. Answer B is correct because an auditor who accepts an engagement and does not possess sufficient industry expertise should attempt to obtain knowledge of the matters that relate to the nature of the entity's business organization and its operating characteristics. C. Answer C is incorrect because there is no requirement to refer a substantial portion of the audit to another auditor. D. Answer D is incorrect because audit opinions are not qualified or disclaimed due to lack of capability of the auditor. If the auditor does not have the competence to undertake the engagement, the auditor should decline the engagement. Hint Important to an effective audit is an understanding of the information being audited. Question: ENPL2-0050 Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit? Answers A: Obtaining a written representation letter from the client’s management. B: Examining documents to detect illegal acts having a material effect on the financial statements. C: Considering whether the client’s accounting estimates are reasonable in the circumstances. D: Determining the extent of involvement of the client’s internal auditors. Answer Explanations A. Answer A is incorrect because auditors obtain a written representation letter near the conclusion of an audit. B. Answer B is incorrect because examination of documents related to illegal acts, if available at all, will occur subsequent to the planning of the audit. C. Answer C is incorrect because considering the reasonableness of accounting estimates will also occur subsequent to the planning of the audit. D. Answer D is correct because SAS 108, which lists various planning procedures, includes determining the extent of involvement of the client's internal auditors. Hint The auditor would use such information in designing the nature, extent, and timing of later testing. Question: ENPL2-0051 The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the

Answers A: Timing of inventory observation procedures to be performed. B: Evidence to be gathered to provide a sufficient basis for the auditor’s opinion. C: Procedures to be undertaken to discover litigation, claims, and assessments. D: Pending legal matters to be included in the inquiry of the client’s attorney. Answer Explanations A. Answer A is correct because the auditor will normally wish to observe the counting of inventory and there is therefore a need for coordination of timing between the auditor and the client. B. Answer B is incorrect because the client will not determine the evidence to be gathered to provide a sufficient basis for the auditor's opinion. C. Answer C is incorrect because procedures relating to discovery of litigation, claims, and assessments will be determined subsequent to implementation of the audit strategy. D. Answer D is incorrect because procedures relating to the discovery of pending legal matters will be determined subsequent to implementation of the audit strategy. Hint An auditor must coordinate client assistance prior to the audit. Question: ENPL2-0052 Which of the following procedures is least likely to be performed as a part of obtaining an understanding during an audit engagement of a new audit client previously audited by another CPA? Answers A: Communication with the predecessor auditor. B: Performing analytical procedures. C: Obtaining confirmation of cash balances. D: Considering internal control. Answer Explanations A. Answer A is incorrect. A successor auditor should attempt communication with the predecessor auditor while obtaining an understanding of the client. B. Answer B is incorrect. Analytical procedures must be performed while obtaining an understanding of the client. C. Answer C is correct. Confirmation of cash balances is a substantive audit procedure which will be performed during the audit. D. Answer D is incorrect because a tentative audit program will be designed while obtaining an understanding of the client. Hint

Identify the least likely procedure to be performed very early during the audit. Question: ENPL2-0053 If, during an audit, the successor auditor becomes aware of information that may indicate that financial statements reported on by the predecessor auditor may require revision, the successor auditor should Answers A: Ask the client to arrange a meeting among the three parties to discuss the information and attempt to resolve the matter. B: Notify the client and the predecessor auditor of the matter and ask them to attempt to resolve it. C: Notify the predecessor auditor who may be required to revise the previously issued financial statements and auditor’s report. D: Ask the predecessor auditor to arrange a meeting with the client to discuss and resolve the matter. Answer Explanations A. Answer A is correct because the auditor should not contact the predecessor auditor directly due to the confidential relationship with the client. B. Answer B is incorrect because the auditor should not contact the predecessor auditor without the client's permission. C. Answer C is incorrect because this communication should not occur without the client's permission. D. Answer D is incorrect because the auditor should not communicate with the predecessor auditor without the client's permission. Hint A confidential relationship exists between a client and auditor. Question: ENPL2-0054 A predecessor auditor Answers A: Must attempt communication with a successor auditor prior to accepting the engagement. B: Must attempt communication with a successor auditor after the engagement has been accepted. C: Must attempt communication with a successor auditor prior to acceptance of the engagement and may choose to attempt communication after the engagement has been accepted. D: Is not required to attempt communication with a successor since this is the successor’s responsibility. Answer Explanations A. Answer A is incorrect because the successor auditor must attempt communication with a predecessor prior to accepting the engagement.

B. Answer B is incorrect because no communication is required after the engagement has been accepted. C. Answer C is incorrect because no communication is required after the engagement has been accepted. D. Answer D is correct because the successor auditor must attempt communication with the predecessor auditor either prior to accepting the engagement, or after the engagement has been accepted, or both. It is the successor's responsibility, not the predecessor auditor's responsibility. Hint Determine who must attempt communication between the predecessor and successor auditors. Question: ENPL2-0055 The audit work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the Answers A: Audit has been performed by persons having adequate technical training and proficiency as auditors. B: Auditor’s system of quality control has been maintained at a high level. C: Results are consistent with the conclusions to be presented in the auditor’s report. D: Audit procedures performed are approved in the professional standards. Answer Explanations A. Answer A is incorrect because while determining that the audit has been performed by persons having adequate technical training and proficiency as auditors is important, this is accomplished by numerous procedures in addition to reviewing audit work. B. Answer B is incorrect because CPA firms, not individual auditors within the firms, have systems of quality control. C. Answer C is correct because AU 311 suggests that the work performed by each assistant should be reviewed to determine whether it was adequately performed and to evaluate whether the results are consistent with the conclusions to be presented in the auditor's report. D. Answer D is incorrect because the professional standards do not in general approve certain audit procedures. Hint Differences of opinion among audit personnel must be resolved prior to the issuance of an opinion. Question: ENPL2-0056 With respect to planning of a year-end audit, which of the following statements is always true?

Answers A: An engagement should not be accepted after the fiscal yearend. B: An inventory count must be observed at the balance sheet date. C: The client’s audit committee should not be told of the specific audit procedures which will be performed. D: It is an acceptable practice to carry out substantial parts of the examination at interim dates. Answer Explanations A. Answer A is incorrect because an audit may be accepted after the fiscal year-end. However, the auditor should ascertain whether circumstances are likely to permit an adequate audit and expression of an unqualified opinion. B. Answer B is incorrect because the inventory count need not be observed if it is impracticable; however, the auditor must bear in mind that s/he has the burden of justifying the use of alternate procedures. It is also incorrect because the auditor's observation procedures may be performed either during or after the end of the period under audit in cases of well-kept perpetual inventory records. C. Answer C is incorrect because in certain circumstances the audit committee may be told of specific audit procedures. D. Answer D is correct because it is an acceptable practice for the auditor to carry out substantial parts of the examination at interim dates. Hint To lessen an auditor's seasonal workload, procedures may be performed before the balance sheet date. Question: ENPL2-0057 Which of the following is least likely to be included in the auditor’s risk assessment process to identify and assess the risks of material misstatement? Answers A: Identify risks. B: Relate risks to what can go wrong at the relevant assertion level. C: Consider whether risks are of a magnitude that could result in a misstatement that could be material. D: Consider the likelihood that risks could result in misstatements of an amount which is less than material. Answer Explanations A. Answer A is incorrect. The risk assessment includes identification of risks. B. Answer B is incorrect. An auditor should relate risks to what can go wrong at the relevant assertion level.

C.

D.

Answer C is incorrect. An auditor should consider whether risks are of a magnitude that could cause a material misstatement. Answer D is correct. An auditor must consider the likelihood of risks of material misstatements, not misstatements less than material.

Hint Find an inconsistency in the replies. Question: ENPL2-0058 Which of the following is most likely to be considered a “further audit procedure?” Answers A: Communication with the predecessor auditor. B: Preparation of an engagement letter. C: Preparation of a flowchart of the sales function. D: Performance of tests of controls. Answer Explanations A. Answer A is incorrect. The communication with the predecessor auditor occurs while establishing an understanding with the client, which is prior to the performance of further audit procedures. B. Answer B is incorrect. The preparation of an engagement letter occurs during audit planning, which is prior to the performance of further audit procedures. C. Answer C is incorrect. The preparation of a flowchart of the sales function relates most directly to obtaining an understanding of the client, which is prior to the performance of further audit procedures. D. Answer D is correct. Tests of controls and substantive procedures are further audit procedures. Hint Further audit procedures are performed after risk assessment. Question: ENPL2-0059 In which circumstance is the confirmation of receivables on October 31 most likely for a client with a December 31 yearend? Answers A: Tests of controls have revealed that the disbursements cycle is operating effectively. B: The receivables balance is material. C: Accounts were confirmed as of December 31 for the preceding year’s audit. D: Appropriate audit tests indicate that control risk for receivables is low. Answer Explanations A. Answer A is incorrect because auditors will ordinarily only confirm receivables prior to year-end in circumstances

where internal control over receivables, not disbursements, is operating effectively. B. Answer B is incorrect because confirmation prior to year-end may be performed when balances are material or immaterial. C. Answer C is incorrect because having confirmed receivables at year-end the preceding year need not affect this year's decision. D. Answer D is correct because when control risk for receivables is low the auditor may be more likely to confirm receivables at an interim date. Hint Identify the circumstance in which the confirmation is most likely prior to year-end.

Answers A: Assisting in adjusting the books of account for a partnership. B: Reviewing interim financial data required to be filed 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 Explanations A. Answer A is incorrect. The SSARS do not apply when the CPA is assisting in adjusting the books of account for a partnership or other organization. B. Answer B is incorrect. The SSARS only apply to nonpublic entities. C. Answer C is incorrect. The SSARS do not apply when processing the financial data for clients of other accounting Question: ENPL2-0060 A CPA is required to comply with the provisions of Statements firms. on Standards for Accounting and Review Services when D. Answer D is correct. The SSARS apply when a CPA either compiles or reviews the financial statements of a Processing financial Consultingnonpublic on entity. data for clients of accounting Hint other CPA firms mattersSSARS apply to nonpublic entities. A. Yes Yes B. Yes No Question: ENPL2-0062 C. No Yes Blue Co., a privately held entity, asked its tax accountant, Cook, D. No No a CPA in public practice, to reproduce Blue's internally prepared interim financial statements on Cook's microcomputer when Cook prepared Blue's quarterly tax return. Cook should not submit these financial statements to Blue unless, as a Answers A: A. minimum, Cook complies with the provisions of B: B. C: C. Answers D: D. A: Statements on Responsibilities in Tax Practice. B: Statements on Standards for Accounting and Review Answer Explanations This answer is incorrect. Refer to the correct answer explanation. Services. This answer is incorrect. Refer to the correct answer explanation. C: Statements on Responsibilities in Unaudited Financial This answer is incorrect. Refer to the correct answer explanation. Services. D. Answer D is correct because the SSARS requirements D: Statements on Standards for Attestation Engagements. do not apply to either the processing of financial data for clients Answer Explanations of other CPA firms or to consulting on accounting matters. See A. Answer A is incorrect because Statements on AR 100 for these and additional services to which the SSARS Responsibilities in Tax Practice do not represent enforceable do not apply. standards in this situation and also because they do not directly address such interim financial statements (TX 102). Hint No tricks here. B. Answer B is correct because Statements on Standards for Accounting and Review Services apply (AR 100) and require that the CPA who wishes to submit such financial Question: ENPL2-0061 Statements on Standards for Accounting and Review Services statements to a client must, at a minimum, meet the compilation establish standards and procedures for which of the following requirements. engagements?

C. Answer C is incorrect because there are no statements referred to as "Statements on Responsibilities in Unaudited Financial Services." D. Answer D is incorrect because no attest engagement is involved in this situation. Hint What is the minimum CPA service for financial statements? Question: ENPL2-0063 A CPA should not submit unaudited financial statements of a nonpublic company to a client or others unless, as a minimum, the CPA complies with the provisions applicable to

B. Answer B is incorrect. Compilations are considered accounting services, not attestation services and therefore do not preclude an accountant who is not independent from issuing this type of report. C. Answer C is correct because providing special reports is an attestation service and therefore requires the accountant to be independent. D. Answer D is incorrect because while objectivity is required when performing consulting services, independence is not required. Hint An attestation service includes special reports.

Answers A: Compilation engagements. B: Review engagements. C: Statements on auditing standards. D: Attestation standards. Answer Explanations A. Answer A is correct. An accountant should not submit such information unless he has, at a minimum, complied with the provisions applicable to a compilation engagement. B. Answer B is incorrect. Reviews represent attestation services with procedures and responsibilities in excess of the minimum provisions necessary. C. Answer C is incorrect. Statements on Auditing Standards relate primarily to audits and represent procedures and responsibilities in excess of the minimum provisions necessary. D. Answer D is incorrect. Attestation standards represent procedures and responsibilities in excess of the minimum provisions necessary. Hint Which of the answers results in no assurance?

Question: ENPL2-0065 Which of the following replies does not include a portion of the "Special Committee on Assurance Services" definition of assurance services?

Question: ENPL2-0064 An accountant who is not independent of a client is precluded from issuing a

Question: ENPL2-0066 In connection with the element of inspection, a CPA firm's system of quality control should ordinarily provide for the maintenance of

Answers A: Compilation report on historical financial statements. B: Compilation report on prospective financial statements. C: Special report on compliance with contractual agreements. D: Report on consulting services. Answer Explanations A. Answer A is incorrect. Compilations are considered accounting services, not attestation services and therefore do not preclude an accountant who is not independent from issuing this type of report.

Answers A: A consulting service. B: Improve the quality of information. C: Improve the context of information. D: For decision makers. Answer Explanations A. Answer A is correct because the Special Committee on Assurance Services, also referred to as the Elliott Committee, defined assurance services as independent professional services—not "a consulting service"—that improve the quality of information, or its context, for decision makers. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation. Hint Recall the broadness of the Committee's definition.

Answers A: A file of minutes of staff meetings. B: Updated personnel files. C: Documentation to demonstrate compliance with its policies and procedures. D: Documentation to demonstrate compliance with peer review directives. Answer Explanations This answer is incorrect. Refer to the correct answer explanation. This answer is incorrect. Refer to the correct answer explanation.

C. Answer C is correct. The requirement is to determine what inspection, an element of quality control, should include. Answer C is the most accurate because it provides for maintenance of documentation of the various quality control policies and procedures. Thus, it is all encompassing. Answers A, B, and D, while desirable, relate to more specific areas and are thus less complete than C. This answer is incorrect. Refer to the correct answer explanation. Hint One answer is more complete than the others. Question: ENPL2-0067 Which of the following is not an element of quality control for a CPA firm? Answers A: Independence, integrity and objectivity. B: Acceptance and continuance of clients and engagements. C: Engagement supervision. D: Monitoring. Answer Explanations A. Answer A is incorrect. Independence, integrity, and objectivity are elements of quality control. B. Answer B is incorrect. Acceptance and continuance of clients and engagements is an element of quality control. C. Answer C is correct. Engagement supervision is not an element of quality control. The five elements of quality control are (1) independence, integrity, and objectivity, (2) personnel management, (3) acceptance and continuance of clients and engagements, (4) engagement performance, and (5) monitoring. D. Answer D is incorrect because Statements on Quality Control Standards provide guidance for CPA firms in meeting their responsibility to provide professional services that conform with professional standards. Hint Recall the quality control standards. Question: ENPL2-0068 As guidance for measuring the quality of the performance of an auditor, the auditor should refer to Answers A: Statements of the Financial Accounting Standards Board. B: Generally accepted auditing standards. C: Interpretations of the Statements on Auditing Standards. D: Statements on Quality Control Standards. Answer Explanations A. Answer A is incorrect because Statements of the Financial Accounting Standards Board deal with GAAP which

are used to prepare financial statements, but do not address the auditor's examination of the statements. B. Answer B is correct because auditors are responsible for compliance with generally accepted auditing standards and comparison of their performance against these standards is appropriate. C. Answer C is incorrect because while Interpretations of the Statements on Auditing Standards provide timely guidance on the application of certain pronouncements of the Auditing Standards Board, their coverage is less complete than the standards. D. Answer D is incorrect because Statements on Quality Control Standards provide guidance for CPA firms in meeting their responsibility to provide professional services that conform with professional standards. Hint Which standards govern the work of an auditor? Question: ENPL2-0069 A basic objective of a CPA firm is to provide professional services to conform with professional standards. Reasonable assurance of achieving this basic objective is provided through Answers A: Continuing professional education. B: A system of quality control. C: Compliance with generally accepted reporting standards. D: A system of peer review. Answer Explanations A. Answer A is incorrect because a system of quality control is necessary to provide the CPA firm with reasonable assurance that it is conforming to professional standards. Continuing professional education is only a part of a firm's system of quality control. B. Answer B is correct because a system of quality control is necessary to provide a CPA firm with reasonable assurance that it is conforming to generally accepted auditing standards. C. Answer C is incorrect because it relates only to reporting standards. D. Answer D is incorrect because a system of quality control is necessary to provide the CPA firm with reasonable assurance that it is conforming to professional standards. A system of peer review is only a part of a firm's system of quality control. Hint Which of the answer choices has the broadest focus? Question: ENPL2-0070

Which of the following types of services is most directly designed to improve the quality of information, or its context, for decision makers? Answers A: Assurance services B: Attestation services C: Audit services D: Consulting services Answer Explanations A. Answer A is correct because the Special Committee on Assurance Services (the Elliott Committee), defined assurance services as independent professional services that improve quality of information, or its context, for decision makers. B. Answer B is incorrect because attestation services are defined as written conclusions about the reliability of the written assertions of another party. C. Answer C is incorrect because audit services are defined as examinations of financial statements that result in an opinion of those financial statements. D. Answer D is incorrect because consulting services are defined as recommendations based on the objectives of the engagement. Hint Recall the Elliott Committee. Question: ENPL2-0071 In performing an attestation engagement, a CPA typically Answers A: Supplies litigation support services. B: Assesses control risk at a low level. C: Expresses a conclusion about the assertion on the subject matter. D: Provides management consulting advice. Answer Explanations A. Answer A is incorrect because most litigation support services are not attest engagements. B. Answer B is incorrect because control risk need not generally be assessed at a low level on attestation engagements; also, control may not be of major importance on some attest engagements. C. Answer C is correct because, when performing an attest engagement, a CPA expresses a conclusion about the assertion on the subject matter. D. Answer D is incorrect because most management consulting engagements are not attestation engagements. Hint Recall the definition of an attestation engagement.

Question: ENPL2-0072 Which of the following professional services would be considered an attest engagement? Answers A: A management consulting engagement to provide computerized 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 Explanations A. Answer A is incorrect because management consulting engagements are not considered attest engagements. B. Answer B is correct because a report on compliance with statutory requirements might be structured as an attest engagement in which the required "written assertion" relates to such compliance. C. Answer C is incorrect because tax returns preparations are not considered attest engagements. D. Answer D is incorrect because compilations are considered nonattest engagements. Hint An attest engagement requires a written assertion. Question: ENPL2-0073 The technical standards that apply to consulting services engagements require the practitioner to do all of the following except Answers A: Maintain independence from the client. B: Give support for and clearly identify as estimates any quantifiable results that are based on estimates. C: Obtain an understanding concerning the nature, scope, and limitations of the consulting advisory services engagement to be performed. D: Take no position which might impair the practitioner’s objectivity. Answer Explanations A. Answer A is correct because independence is not required. B. Answer B is incorrect because estimates are to be supported and clearly identified. C. Answer C is incorrect because an understanding of the nature of the engagement must be obtained.

D. Answer D is incorrect because an accountant is to maintain objectivity. Hint This differs from audit engagements. Question: ENPL2-0074 A CPA firm's personnel partner periodically studies the CPA firm's personnel advancement experience to ascertain whether individuals increased degrees of responsibility. This is evidence of the CPA firm's adherence to prescribed standards of Answers A: Quality control. B: Due professional care. C: Supervision and review. D: Fieldwork. Answer Explanations A. Answer A is correct because the seventh quality control standard requires that a firm establish policies and procedures pertaining to personnel advancement. B. Answer B is incorrect because due professional care, the third general standard, pertains to the performance of the examination and the preparation of the report. C. Answer C is incorrect because proper supervision and review pertains to the first standard of fieldwork which also focuses on the performance of audits. D. Answer D is incorrect because the three fieldwork standards pertain to planning and supervision (AU 310), the auditor's study and evaluation of internal control (AU 319), and the collection of evidential matter (AU 326). Hint There is a standard which requires established policies and procedures pertaining to personnel advancement. Question: ENPL2-0075 The objective of quality control mandates that a public accounting firm should establish policies and procedures for professional development which provide reasonable assurance that all entry-level personnel Answers A: Prepare working papers which are standardized in form and content. B: Have the knowledge required to enable them to fulfill responsibilities assigned. C: Will advance within the organization. D: Develop specialties in specific areas of public accounting. Answer Explanations A. Answer A is incorrect because preparing working papers which are standardized in form and content is an

objective which is more specific than those that are contemplated in the elements of quality control. B. Answer B is correct because one of the quality control considerations for a firm of independent auditors is that the policies and procedures for professional development should be established to provide reasonable assurance that personnel have the knowledge required to enable them to fulfill responsibilities assigned. C. Answer C is incorrect because it is an objective which is more specific than those that are contemplated in the elements of quality control. D. Answer D is incorrect because it is an objective which is more specific than those that are contemplated in the elements of quality control. Hint Which of the answer choices would most directly affect the quality of the auditor's work? Question: ENPL2-0076 A CPA establishes quality control policies and procedures for deciding whether to accept a new client or continue to perform services for a current client. The primary purpose for establishing such policies and procedures is Answers A: To enable the auditor to attest to the integrity or reliability of a client. B: To comply with the quality control standards established by regulatory bodies. C: To minimize the likelihood of association with clients whose management lacks integrity. D: To lessen the exposure to litigation resulting from failure to detect irregularities in client financial statements. Answer Explanations A. Answer A is incorrect because auditors attest to the fairness of financial statements, not the integrity or reliability of a client. B. Answer B is incorrect because while quality control policies for acceptance of new clients are required by quality control standards, the primary purpose is to avoid clients whose management lacks integrity. C. Answer C is correct because policies and procedures should be established for deciding whether to accept or continue a client in order to minimize the likelihood of association with clients whose management lacks integrity. D. Answer D is incorrect because the primary and immediate purpose of quality control policies over accepting new clients is to avoid clients who lack integrity, which may indirectly lessen exposure to litigation. Hint

Auditors must rely on the representations of client management. Question: ENPL2-0077 Within the context of quality control, a primary purpose of personnel management activities is to enable a CPA firm to provide personnel within the firm with Answers A: Technical training that assures proficiency as an auditor. B: Professional education that is required in order to perform with due professional care. C: Knowledge required to fulfill assigned responsibilities for consulting engagements. D: Knowledge required in order to perform a peer review. Answer Explanations A. Answer A is incorrect because quality control standards apply to all auditing, accounting, and review services, not only auditing. B. Answer B is incorrect because while performing responsibilities with due professional care is essential, personnel management policies relate more directly to personnel hiring, assignment, professional development, and advancement activities. C. Answer C is correct the quality control standards relate to a firm's accounting and auditing practice. D. Answer D is incorrect because the emphasis of such education is not primarily on obtaining peer review skills. Hint Continuing professional education benefits both the individual and the CPA firm. Question: ENPL2-0078 A CPA in public practice must be independent in fact and appearance when providing which of the following services?

A. B. C. D.

Answers A: A. B: B. C: C. D: D.

Preparation of a tax return Yes No No No

Compilation of a financial forecast No Yes No No

Com of pe fina state

Y Y

Answer Explanations A. Answer A is incorrect. Preparing tax returns is not considered an attestation service, therefore the CPA need not be independent B. Answer B is incorrect. Compiling forecasts is not considered an attestation service, therefore the CPA need not be independent. C. Answer C is incorrect. Compiling financial statements is not considered an attestation service, therefore the CPA need not be independent. D. Answer D is correct. An auditor need only be independent when providing attestation services. Preparing tax returns and compiling forecasts or financial statements are not considered attestation services, therefore the CPA need not be independent. Hint Independence is required for audits and reviews. Question: ENPL2-0079 The first general standard requires that the examination of financial statements is to be performed by a person or persons having adequate technical training and Answers A: Independence with respect to the financial statements and supplementary disclosures. B: Exercising professional care as judged by peer reviewers. C: Proficiency as an auditor which likely has been acquired from previous experience. D: Objectivity as an auditor as verified by proper supervision. Answer Explanations A. Answer A is incorrect because independence pertains to the second general standard. B. Answer B is incorrect because peer reviewers are not the primary judges of whether professional care is being exercised. C. Answer C is correct because the first general standard requires that the examination be performed by a person or persons having adequate technical training and proficiency as an auditor which has been achieved by formal education and by previous experience. D. Answer D is incorrect because objectivity relates more directly to the independence standard. Hint No tricks here. Question: ENPL2-0080 Rogers & Co., CPAs, policies require that all members of the audit staff submit weekly time reports to the audit manager, who then prepares a weekly summary work report regarding

variance from budget for Rogers' review. This provides written evidence of Rogers & Co.'s professional concern regarding compliance with which of the following generally accepted auditing standards? Answers A: Quality control. B: Due professional care. C: Adequate review. D: Adequate planning. Answer Explanations A. Answer A is incorrect because quality control is not an explicit part of generally accepted auditing standards. B. Answer B is incorrect because due professional care, while certainly relevant to the situation described is less complete than adequate planning. C. Answer C is incorrect because adequate review is not an explicit part of the generally accepted auditing standards. D. Answer D is correct because the weekly time reports are being used to meet the first standard of fieldwork. The work is to be adequately planned, and assistants, if any, are to be properly supervised. Thus, the budget is prepared during the planning stage of the audit and the analysis of variances from budget is used as a part of the supervision process. Hint The budget is prepared during the planning stage of the audit. Question: ENPL2-0081 The third general standard states that due care is to be exercised in the performance of the examination. This standard means that a CPA who undertakes an engagement assumes a duty to perform each audit Answers A: As a professional possessing the degree of skill commonly possessed by others in the field. B: In conformity with generally accepted accounting principles. C: With reasonable diligence and without fault or error. D: To the satisfaction of governmental agencies and investors who rely upon the audit. Answer Explanations A. Answer A is correct because the level of skill necessary is that commonly possessed by other professionals in the same employment. B. Answer B is incorrect because an audit is performed in conformity with generally accepted auditing standards, not generally accepted accounting principles. C. Answer C is incorrect because no professional can guarantee performance without fault or error.

D. Answer D is incorrect because while various governmental and user groups should be satisfied with the nature of audits, the CPA is to possess the requisite skills. Hint There is a required level of skill under the third general standard. Question: ENPL2-0082 The exercise of due professional care requires that an auditor Answers A: Examine all available corroborating evidence. B: Critically review the judgment exercised at every level of supervision. C: Reduce control risk below the maximum. D: Attain the proper balance of professional experience and formal education. Answer Explanations A. Answer A is incorrect because auditors generally sample from the available corroborating evidence and do not examine all available corroborating evidence. B. Answer B is correct because the exercise of due professional care (the third general standard) requires critical review at every level of supervision of the work done and the judgment exercised by those assisting in the audit. C. Answer C is incorrect because control risk may be assessed at the maximum level. D. Answer D is incorrect because a proper balance of professional experience and formal education relates more directly to the first general standard concerning technical training and proficiency as an auditor. Hint A critical review is required in the exercise of due professional care. Question: ENPL2-0083 When an accountant is not independent, the accountant is precluded from issuing a Answers A: Compilation report. B: Review report. C: Management advisory report. D: Tax planning report. Answer Explanations A. Answer A is incorrect because AR 100 states that an accountant who is not independent may issue a compilation report. B. Answer B is correct because AR 100 requires the accountant who performs a review to be independent (because it is an attestation service).

C. Answer C is incorrect because Article IV of the Code of Professional Conduct states that the appearance of independence is not required in the case of management advisory services. D. Answer D is incorrect because Article IV of the Code of Professional Conduct states that the appearance of independence is not required in the case of tax practice. Hint An accountant must be independent for attestation services. Question: ENPL2-0084 If requested to perform a review engagement for a nonpublic entity in which an accountant has an immaterial direct financial interest, the accountant is Answers A: Independent because the financial interest is immaterial and, therefore, may issue a review report. B: Not independent and, therefore, may not be associated with the financial statements. C: Not independent and, therefore, may not issue a review report. D: Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion. Answer Explanations A. Answer A is incorrect because such a financial interest does impair independence. B. Answer B is incorrect because independence is not required for compilation services, and therefore, an accountant may be so associated with the financial statements. C. Answer C is correct. Reviews are a form of attestation service, and an accountant may not maintain independence when an immaterial direct financial interest is held in a client when performing attestation services. D. Answer D is incorrect because neither a review report nor an auditor's opinion may be issued. Hint Recall independence requirements of Code of Professional Conduct. Question: ENPL2-0085 The concept of materiality would be least important to an auditor when considering the Answers A: Effects of a direct financial interest in the client upon the CPA’s independence. B: Decision whether to use positive or negative confirmations of accounts receivable. C: Adequacy of disclosure of a client’s illegal act.

D: Discovery of weaknesses in a client’s internal control structure. Answer Explanations A. Answer A is correct because the auditor may not have any direct financial interest in a client, regardless of materiality. B. Answer B is incorrect because auditors generally consider the size (materiality) of account balances when choosing between the use of positive or negative confirmation. C. Answer C is incorrect because materiality is considered when evaluating the adequacy of disclosures of illegal acts. D. Answer D is incorrect because the materiality of internal control weaknesses should be considered by the auditor. Hint Which of these is an area with an absolute requirement?

Question: ENPL2-0086 Which of the following is correct concerning PCAOB guidance that uses the term “must”? Answers A: The auditor must fulfill the responsibilities. B: The auditor must comply with requirements unless s/he demonstrates that alternative actions were sufficient to achieve the objectives of the standards. C: The auditor should consider the guidance; whether the auditor follows depends on exercise of professional judgment in the circumstances. D: The auditor has complete discretion as to whether to perform the procedure. Answer Explanations A. Answer A is correct because terms such as “must,” “shall,” and “is required to” are used to indicate that the auditor must fulfill the responsibilities. B. Answer B is incorrect because the term “should” means that the auditor must comply with the requirements unless he or she can demonstrate that alternative actions were sufficient to achieve the objectives of the standards. C. Answer C is incorrect because terms such as “may,” “might” and “could” are used when the auditor should consider performing the audit procedure. D. Answer D is incorrect because no particular terms are used for the situation in which the auditor has complete discretion whether to perform the procedure. Hint No trick here. Question: ENPL2-0087 An integrated audit under the Sarbanes-Oxley Act of 2002 and PCAOB standards includes

Answers A: An audit of the financial statements and a review of internal control over financial reporting. B: An audit of the financial statements and an audit of compliance with the Sarbanes-Oxley Act and PCAOB standards. C: An audit of the financial statements and an audit of controls over compliance with the Sarbanes-Oxley Act. D: An audit of the financial statements and an audit of internal control over financial reporting. Answer Explanations A. Answer A is incorrect because the law calls for an audit of the financial statements and an audit of internal control over financial reporting. B. Answer B is incorrect because the law calls for an audit of the financial statements and an audit of internal control over financial reporting. C. Answer C is incorrect because the law calls for an audit of the financial statements and an audit of internal control over financial reporting. D. Answer D is correct because the law calls for an audit of the financial statements and an audit of internal control over financial reporting. Hint Sarbanes-Oxley deals with the reliability of financial reporting. Question: ENPL2-0088 Which of the following statements is correct concerning an auditor’s responsibility to report fraud? Answers A: The auditor is required to communicate to the client's audit committee all minor fraudulent acts perpetrated by low-level employees, even if the amounts involved are inconsequential. B: The disclosure of material management fraud to principal stockholders is required when both senior management and the board of directors fail to acknowledge the fraudulent activities. C: Fraudulent activities involving senior management of which the auditor becomes aware should be reported directly to the SEC. D: The disclosure of fraudulent activities to parties other than the client's senior management and its audit committee is not ordinarily part of the auditor's responsibility. Answer Explanations A. Answer A is incorrect. Only minor fraudulent acts involving management need be disclosed to the audit committee. See AU 316 for information on an auditor’s responsibility relating to fraud. B. Answer B is incorrect. Auditors do not in general communicate directly with stockholders. See AU 316 for information on an auditor’s responsibility relating to fraud.

C.

Answer C is incorrect. Fraudulent activities involving senior management are reported to the audit committee, not ordinarily the SEC. See AU 316 for information on an auditor’s responsibility relating to fraud. D. Answer D is correct. In most circumstances the auditor is not required to communicate the matter beyond management and the audit committee. See AU 316 for information on an auditor’s responsibility relating to fraud. Hint Auditors generally cannot report matters to outsiders. Question: ENPL2-0089 Which of the following procedures would least likely result in the discovery of possible illegal acts? Answers A: Reading the minutes of the board of directors' meetings. B: Making inquiries of the client's management. C: Performing tests of details of transactions. D: Reviewing an internal control questionnaire. Answer Explanations A. Answer A is incorrect. It may lead to discovery of illegal acts. See AU 317 for information on illegal acts. B. Answer B is incorrect. It might lead to the discovery of illegal acts in that a question to management about the existence of the acts may be answered with an acknowledgement that such acts have occurred. See AU 317 for information on illegal acts. C. Answer C is incorrect. It may lead to discovery of possible illegal acts when the auditor analyzes the details of the transactions and finds evidence of illegal acts. See AU 317 for information on illegal acts. D. Answer D is correct. While the internal control questionnaire may reveal weaknesses in the design of internal control, it will have little or no information on whether an illegal act has occurred. See AU 317 for information on illegal acts. Hint No trick here. Question: ENPL2-0090 Which of the following circumstances most likely would cause an auditor to suspect that there are material misstatements in an entity’s financial statements? Answers A: Senior financial management participates in the selection of accounting principles and the determination of significant estimates. B: Supporting accounting records and files that should be readily available are not produced promptly when requested.

C: Related-party transactions take place in the ordinary course of business with an entity that is audited by another CPA firm. D: Senior management has an excessive interest in upgrading the entity's information technology capabilities. Answer Explanations A. Answer A is incorrect. Senior financial management might be expected to select accounting principles and determine significant estimates. B. Answer B is correct. Unavailability of records when requested might indicate fraudulent entries lacking proper support. C. Answer C is incorrect. Related-party transactions often do take place in the ordinary course of business; significant related-party transactions not in the ordinary course of business may be an indicator of material misstatements. D. Answer D is incorrect. An excessive interest in upgrading the entity’s information technology capabilities has not in the past been found to be indicative of fraud. Hint No trick here. Question: ENPL2-0091 The primary purpose of establishing quality control policies and procedures for deciding whether to accept new clients is to Answers A: Minimize the likelihood of association with clients whose management lacks integrity. B: Monitor significant deficiencies in the design and operation of the client's internal control. C: Identify noncompliance with aspects of contractual agreements that affect the financial statements. D: Provide reasonable assurance that personnel will be adequately trained to fulfill their assigned responsibilities. Answer Explanations A. Answer A is correct. The quality control standards (see QC 20) indicate that the primary purpose is to minimize the likelihood of association with clients whose management lacks integrity. Null Null Null Hint No trick here. Question: ENPL2-0092 An auditor’s engagement letter most likely would include a statement regarding Answers A: Management's responsibility to provide certain written representations to the auditor.

B: Conditions under which the auditor may modify the preliminary judgment abut materiality. C: Internal control activities that would reduce the auditor's assessment of control risk. D: Materiality matters that could modify the auditor's preliminary assessment of fraud risk. Answer Explanations A. Answer A is correct. SAS 108 states that information on management’s responsibility to provide certain written representations is ordinarily included in the understanding an auditor obtains with management through inclusion in an engagement letter. B. Answer B is incorrect. It includes information not ordinarily included in an engagement letter, presenting detailed information beyond what is ordinarily included. C. Answer C is incorrect. It includes information not ordinarily included in an engagement letter, presenting detailed information beyond what is ordinarily included. D. Answer D is incorrect. It includes information not ordinarily included in an engagement letter, presenting detailed information beyond what is ordinarily included. Hint No trick here. Question: ENPL2-0093 A successor auditor should make specific and reasonable inquiries of the predecessor auditor regarding the predecessor’s Answers A: Understanding of the reasons for the change in auditors. B: Methodology used in applying sampling techniques. C: Opinion on subsequent events that have occurred since the balance sheet date. D: Perception of the competency and reliance on the client's internal audit function. Answer Explanations A. Answer A is correct. Inquiries ordinarily include questions on integrity of management, disagreements with management, and communications with the audit committee regarding fraud, illegal act, and internal control related matters. See AU 315 for information on the communications between predecessor and successor auditors. B. Answer B is incorrect. It represents information much less frequently obtained. See AU 315 for information on the communications between predecessor and successor auditors. C. Answer C is incorrect. It represents information much less frequently obtained. See AU 315 for information on the communications between predecessor and successor auditors.

D.

Answer D is incorrect. It represents information much less frequently obtained. See AU 315 for information on the communications between predecessor and successor auditors.

Hint Which inquiry relates to client acceptance? Question: ENPL2-0094 Which of the following activities would most likely be considered an attestation engagement? Answers A: Consulting with management representatives of a firm to provide advice. B: Issuing a report about a firm's compliance with laws and regulations. C: Advocating a client's position on tax matters that are being reviewed by the IRS. D: Preparing a client's tax returns Answer Explanations A. Answer A is incorrect. It represents a consulting engagement. B. Answer B is correct. The attest standards provide for issuance of a report about a firm’s compliance with laws and regulations—see AT 601. C. Answer C is incorrect. It represents a tax engagement. D. Answer D is incorrect. It represents a tax engagement. Hint Attestation involves providing assurance about some matter. Question: ENPL2-0095 An auditor reviews a client’s accounting policies and procedures when considering which of the following planning matters? Answers A: Method of sampling to be used. B: Preliminary judgments about materiality levels. C: Nature of reports to be rendered. D: Understanding of the client's operations and business. Answer Explanations A. Answer A is incorrect. The general nature of the policies and procedures is unlikely to provide adequate information for sampling or materiality levels. B. Answer B is incorrect. The general nature of the policies and procedures is unlikely to provide adequate information for sampling or materiality levels. C. Answer C is incorrect. The accounting policies and procedures will not provide adequate information to determine the nature of reports to be rendered.

D.

Answer D is correct. Such information provides overall guidance to help an auditor understand the client’s operations and business.

Hint No trick here. Question: ENPL2-0096 An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end? Answers A: Send confirmations for all new customer balances incurred from the interim date to year-end. B: Resend confirmations for any significant customer balances remaining at year-end. C: Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end. D: Review cash collections subsequent to the interim date and the year-end. Answer Explanations A. Answer A is incorrect. It is unlikely that confirmations will be sent again, particularly given the positive results obtained. Also, one ordinarily confirms accounts receivable at an interim date so as to avoid confirming accounts at year-end. See AU 330 for information on the confirmation process. B. Answer B is incorrect. It is unlikely that confirmations will be sent again, particularly given the positive results obtained. Also, one ordinarily confirms accounts receivable at an interim date so as to avoid confirming accounts at year-end. See AU 330 for information on the confirmation process. C. Answer C is correct. An auditor will review significant changes in balances. See AU 330 for information on the confirmation process. D. Answer D is incorrect. It is less complete than reply C. See AU 330 for information on the confirmation process. Hint The auditor must perform tests on intervening transactions. Question: ENPL2-0097 A successor auditor is required to attempt communication with the predecessor auditor prior to Answers A: Performing test of controls. B: Testing beginning balances for the current year. C: Making a proposal for the audit engagement. D: Accepting the engagement. Answer Explanations

A. Answer A is incorrect because no such communication is required prior to performing tests of controls. B. Answer B is incorrect because, while the successor may communicate with the predecessor to obtain information on beginning balances, this is not required. C. Answer C is incorrect because a proposal may be made prior to communicating with the predecessor auditor— however, final acceptance of the client is not appropriate prior to attempting such communication. See AU 315 for information on a successor’s responsibilities. D. Answer D is correct. The requirement is to determine when a successor auditor is required to attempt communication with a predecessor auditor. Answer D is correct because prior to accepting an engagement the successor should attempt such communication. Hint The communication is performed in part to help the successor to learn about the integrity of management. Question: ENPL2-0098 Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should not be accepted? Answers A: There are significant related-party transactions that management claims occurred in the ordinary course of business. B: Internal control activities requiring the segregation of duties are subject to management override. C: Management continues to employ an inefficient system of information technology to record financial transactions. D: It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements. Answer Explanations A. Answer A is incorrect because the simple existence of related-party transactions, while often indicating a high-risk situation, is less likely to result in nonacceptance of an engagement. B. Answer B is incorrect because virtually all controls are subject to management override. C. Answer C is incorrect because inefficient information technology may still be technology that lends itself to auditing and the forming of an opinion on the company’s financial statements. D. Answer D is correct. The requirement is to identify the factor that is most likely to lead a CPA to conclude that a potential audit engagement should not be accepted. Answer D is correct because the lack of sufficient appropriate evidence ordinarily negates the purpose of an audit, which is to have the CPA form an opinion on the financial statements. Hint

The objective of an audit is the expression of an opinion. Question: ENPL2-0099 Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following details do management and the auditor usually agree upon at this time? Answers A: The specific matters to be included in the communication with the audit committee. B: The minimum amount of misstatements that may be considered to be significant deficiencies. C: The schedules and analyses that the client's staff should prepare. D: The effects that inadequate controls may have over the safeguarding of assets. Answer Explanations A. Answer A is incorrect because the information on specific matters to be included in the communication with the audit committee is beyond the scope of the general audit strategy; related, the auditor will not at this early point be aware of some of the information that will be communicated (e.g., specific deficiencies in internal control). B. Answer B is incorrect since the discussion will ordinarily not include comments on a minimum amount of misstatements that represent a significant deficiency. C. Answer C is correct. The requirement is to identify the matter on which management and the auditor would ordinarily agree while discussing the general audit strategy prior to the auditor commencing fieldwork. Answer C is correct because at this early point in the audit process the auditor will discuss client assistance in the audit, including schedules and analyses to be prepared by the client’s staff. D. Answer D is incorrect because any discussion on inadequate controls ordinarily will occur later in the audit. Hint One of these is a responsibility the client may assume relating to the audit. Question: ENPL2-0100 An auditor is required to establish an understanding with a client regarding the services to be performed for each engagement. This understanding generally includes Answers A: The auditor's responsibility for determining the preliminary judgments about materiality and audit risk factors. B: Management's responsibility for identifying mitigating factors when the auditor has doubt about the entity's ability to continue as a going concern.

C: The auditor's responsibility for ensuring that the audit committee is aware of any significant deficiencies that come to the auditor's attention. D: Management's responsibility for providing the auditor with an assessment of the risk of material misstatement due to fraud. Answer Explanations A. Answer A is incorrect because the understanding does not ordinarily involve preliminary judgments about materiality and audit risk factors. B. Answer B is incorrect because, while management may identify mitigating factors when a question concerning going concern status exists, this is not ordinarily discussed while obtaining an understanding with a client. C. Answer C is correct. The requirement is to identify the information ordinarily included in an auditor’s understanding with a client regarding the services to be performed. Answer C is correct because the auditor must report to the audit committee significant deficiencies, and accordingly, the auditor will include such information while establishing an understanding with a client. D. Answer D is incorrect because, while management must provide auditors with certain information related to fraud, it is the auditor’s, not management’s, responsibility to assess the risk of material misstatement due to fraud—see AU 316. Hint An auditor must disclose certain information. Question: ENPL2-0101 Which of the following circumstances would an auditor most likely consider a risk factor relating to misstatements arising from fraudulent financial reporting? Answers A: Several members of management have recently purchased additional shares of the entity's stock. B: Several members of the board of directors have recently sold shares of the entity's stock. C: The entity distributes financial forecasts to financial analysts that predict conservative operating results. D: Management is interested in maintaining the entity's earnings trend by using aggressive accounting practices. Answer Explanations A. Answer A is incorrect because management’s purchase of additional shares in the entity is not ordinarily a risk factor. B. Answer B is incorrect since board of director members selling shares of stock may well be an ordinary occurrence. C. Answer C is incorrect because predicting conservative operating results is very different from fraudulent financial reporting. See AU 316 for information on the auditor’s

consideration of fraud in a financial statement audit. See the appendix to AU 316 for examples of fraud risk factors. D. Answer D is correct. The requirement is to identify the circumstance an auditor most likely would consider a risk factor relating to misstatements arising from fraudulent financial reporting. Answer D is correct because aggressive accounting practices used to maintain an earnings trend represent such a risk factor. Hint One of these seems much more risky in terms of fraudulent financial reporting than the others. Question: ENPL2-0102 Management’s emphasis on meeting projected profit goals most likely would significantly influence an entity’s control environment when Answers A: Internal auditors have direct access to the entity's board of directors. B: A significant portion of management compensation is represented by stock options. C: External policies established by parties outside the entity affect accounting policies. D: The audit committee is active in overseeing the entity's financial reporting policies. Answer Explanations A. Answer A is incorrect because when internal auditors have direct access to the entity’s board of directors, this may decrease the likelihood of overly aggressive accounting to meet projected profit goals and is less likely to affect the control environment. B. Answer B is correct. The requirement is to identify the situation in which management’s emphasis on meeting projected profit goals would be most likely to significantly influence an entity’s control environment. Answer B is correct because when a significant portion of management’s compensation is represented by stock options, risk may be involved in that management is under great pressure to report earnings that meet projected profit goals; this will ordinarily increase management compensation significantly and, under some circumstances, create a pressure to report overstated earnings to meet those projections. C. Answer C is incorrect because such external policies are ordinarily beyond management’s control and would have a limited effect on the control environment. D. Answer D is incorrect because an active audit committee is likely to control management’s aggressive reporting, and thereby is less likely to affect the entity’s control environment.

Hint Implicit here is that one of the replies involves an increase in the risk of material misstatement.