D251 Advanced Auditing

What is the materiality level that an auditor uses for determining significant accounts, significant locations, and audit procedures for those accounts and locations?

Performance Materiality

An auditor has determined performance materiality has been set too high at the beginning of the audit.

Which procedure should the auditor consider to detect misstatements?

The auditor should perform additional substantive audit procedures.

Which risk exists at the overall financial statement level and at the assertion level, and can be categorized as involving inherent risk and control risk?

Risk of Material Misstatement (RMM)

What represents an identified and assessed risk of material misstatement that requires special audit consideration?

Significant Risk

What is the impact on the amount of acceptable audit risk if an auditor believes the chance of financial failure (going concern) of a client is high?

The acceptable audit risk is reduced

Which factor should lead an auditor to assess inherent risk as high?

The account balance consists of a large number of complex transactions

Which factor would lead an auditor to assess client business risk at a higher level?

The client’s use of information technology (IT) is incompatible across systems and processes.

An auditor determines overall materiality of $500,000 would be material to the income statement and $1,000,000 would be material to the balance sheet.

Which amount would an auditor typically assess performance materiality to be for this client?

75% of $500,000

Which percentage do auditors commonly set posting materiality?

5% of planning materiality

What is quantitative evaluation?

Determining whether the upper limit of the possible deviation rate exceeds the tolerable deviation rate.

In which circumstances would an auditor change an audit objective to estimating the correct value?

When the total estimated misstatement exceeds the tolerable misstatement

What describes tainting percentage?

The percentage of misstatement present in a logical unit

Which statement reflects a 5% risk of overreliance?

95% confidence level that the actual rate of deviation will not exceed the tolerable deviation

What is the objective of sampling when testing controls?

To determine whether controls are operating effectively

What is the primary objective of monetary unit sampling?

To identify overstatement errors

How can an auditor increase the chances that systematically selected samples are representative of the population?

By using multiple random starts

Which sampling method allows an auditor to measure the risk of making an incorrect inference about the population from which the sample is taken?

Statistical

Which action must an auditor take after discovering an illegal act during an audit of a publicly traded company?

Alert management and the audit committee, even if the act is immaterial

Which type of misstatement results from an auditor’s best estimate of the total misstatements in a given population based on the misstatements detected in an audit sample of that population?

Projected misstatements

When does GAAP require a client to only disclose a contingent loss that might occur, and either an accrual has not been made, or an exposure exists that is greater than the amount accrued?

When the loss contingency is reasonably possible

A client made a decision to discontinue a major line of business after the balance sheet date.

How should an auditor treat this type of subsequent event?

Disclose the information in the notes to the financial statements

Who is responsible for designing and maintaining policies and procedures to identify, evaluate, and account for loss contingencies in accordance with GAAP?

Management

Which procedures help an auditor form an overall conclusion about whether financial statements are consistent with the auditor’s understanding of an entity?

Review analytical procedures

What is a risk-based review in which a reviewer evaluates the significant judgements and conclusions made by an audit team?

Engagement quality review (EQR)

Which circumstances involves acts of omission or commission by an entity, either intentionally or unintentionally, which are contrary to the prevailing laws or regulations?

Noncompliance

How should an auditor respond to a client’s claim that a financial statement estimate is at least good as the auditor’s estimate?

The auditor should gather sufficient evidence related to the estimate

What is the major difference between a Type I subsequent event and a Type II subsequent event?

The financial statements should be adjusted to reflect Type I subsequent events

What is a support letter when an auditor is gathering audit evidence in a going concern evaluation?

Written evidence that management has the required financial support

An auditor concludes that an illegal act has been committed, the act has a material effect on the financial statements, and the act has not been properly disclosed.

What should the auditor do?

Issue an adverse opinion

When should an auditor issue an adverse opinion when reporting on internal controls over financial reporting of a U.S. public company?

When there is one material weakness

Which scenario could cause a scope limitation?

A company’s accounting records were destroyed during a flood at the company’s headquarters

Which condition must be present for an auditor to issue an unqualified/unmodified report?

The financial statement disclosures are adequate

Which opinion should an auditor use for a situation where there is a scope limitation that is material but not pervasive?

Qualified

What is the basic principle of audit reporting according to the AICPA?

The purpose of an audit is to enhance the degree of confidence that users can place in the financial statements

In which audit report paragraph should an auditor disclose all of the substantive reasons for issuing a qualified report?

Opinion paragraph

Which opinion should an auditor use for a situation where the auditor concludes that there is a going concern issue?

Unqualified with emphasis-of-matter paragraph

During an engagement, an auditor may be unable to gather sufficient supporting evidence in order to issue an unqualified opinion.

Which agency or organization, with limited exceptions, will only accept an unqualified opinion?

Securities and Exchange Commission (SEC)

Which opinion should an auditor use for a situation where there is a departure from financial reporting framework that is material and pervasive?

Adverse

What is the difference between an auditor’s report on nonpublic companies and public companies?

The auditor’s report for public companies includes a paragraph referencing the audit of internal controls

An auditor is reviewing the shipping policy of a large supply company. The title to goods shipped is not changed until the retailer sells the goods to their customers.

Which primary concern should the auditor have about this practice?

The amount of the client’s inventory stored at the retailer’s location

During an annual audit of a client with fiscal year-end of December 31, an auditor reviews disbursement records for January 1 of the following fiscal year. The auditor examines the disbursement records to determine if the client recorded a related liability in the fiscal year ending December 31.

Which management assertion should be a primary concern while the auditor is performing this procedure?

Completeness

Which account is insignificant to the acquisition and payment cycle but would be of interest to an auditor because of the nature of the account?

Income tax expense

Which trend could indicate fraud relating to the overstatement of inventory?

Ending inventory increasing faster than sales trends

Which objective is addressed if a client uses prenumbered receiving reports to provide evidence that goods are received?

Completed purchases are recorded

Which procedure should an auditor perform if the fraud risk for AP is assessed as high?

Send blank confirmations to vendors

Which internal control weakness could allow employees to manipulate the receipt of goods

Receiving documents are manually numbered by employees

Which internal control would mitigate the risk of purchasing agents entering into kickback arrangements with vendors?

Require purchasing agents to conduct sealed competitive bids for large purchases

Which document should auditors review to determine if a purchase of goods or services is authorized?

Requisition

Which activity occurs with the acquisition and payment cycle?

Create requisition of goods

Which management assertion is addressed when determining if inventory balances include all inventory transactions for the period?

Completeness

Which action should an auditor consider taking if engagement risk is determined to be high on a particular audit?

Set audit risk at a lower level

When should fraud brainstorming occur during an audit?

Throughout the audit engagement

What s control risk in the audit risk model?

The susceptibility of a misstatement occurring that could be material to the financial statements before considering any internal controls

What should an auditor do to keep the original level of audit risk after deciding to increase the assessed level of control risk?

Decrease detection risk

Which terms describes the magnitude of an omission or misstatement of accounting information that makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement?

Materiality

What is a tolerable rate of deviation according to the AICPA?

A rate of deviation set by the auditor to obtain an appropriate level of assurance that the rate set by the auditor is not exceeded by the actual rate of deviation

What is the difference between statistical attribute sampling and monetary unit sampling?

Statistical attribute sampling is used to estimate the rate of control procedure failure, while monetary unit sampling is used to estimate dollar misstatements of account balances

Which calculation is used to determine the sampling interval for monetary unit sampling?

Population size divided by sample size

Which audit sampling method is most appropriate for performing year-end cutoff tests?

Block

What is the risk that an auditor will not complete the appropriate audit procedure?

Nonsampling risk

An auditor has concluded there is a low risk of material misstatement for the existence assertion of a certain significant general ledger account balance.

What should the auditor do next in this situation?

The auditor should be willing to accept a greater risk that substantive audit procedures will not detect a material misstatement.

What is the next step after an auditor detects a misstatement?

The auditor and management jointly decide how to proceed if the misstatement is material.

Which risk is controllable by the client?

Inherent risk

In which order should an auditor assess the risk of material misstatement using the factors in the audit risk model?

Inherent risk, control risk, and detection risk

What represents the calculation for tainting percentage?

The amount of misstatement in an item divided by the item’s recorded amount

Which procedure would be appropriate to test 100% of the population

Data analytics analysis

Which factor is used in planning samples and represents the precision required to keep sampling risk at the desired level?

Allowance for sampling error

Which management assertion would cause an auditor to use a nonstatistical sampling method?

Existence

Which audit procedure should an auditor perform to provide reasonable assurance that a client complied with laws and regulations?

Obtain an understanding of internal controls the client has implemented to achieve proper compliance

How should auditors consider misstatements?

The auditor should evaluate each misstatement individually and in the aggregate

Who is responsible for identifying, evaluating, and accounting for loss contingencies?

Management

Which material subsequent event occurring after a balance sheet date requires an adjustment to the financial statements being audited?

The client settles a lawsuit for an amount that differs from the present accrual on the books

What is an auditor required to evaluate as part of the going concern assumption?

The likelihood that the audit client will continue operating as a going concern for a reasonable amount of time after the date of the auditor's report

What is a main provision of the Foreign Corrupt Practices Act (FCPA) of 1977 that was reemphasized and expanded as part of the Sarbanes-Oxley Act of 2002?

Companies that have securities listed on U.S. markets must design and maintain an adequate system of internal accounting controls.

Which action is an auditor required to take after discovering an illegal act for publicly listed companies?

Notify management and the audit committee

Which combination of risks is the risk of material misstatement referring to?

Inherent and control risk

What should an auditor communicate to management and the audit committee, for integrated audit clients, prior to issuing the auditor's report on the ICFR?

A report summarizing the quality of internal controls

What is the objective of the management letter from the auditor to the client?

To make significant operational or control recommendations to the client

In which situation could management and an auditor decide not to correct the misstatements found during an audit?

The misstatements, in the aggregate, are immaterial.

Which group has the responsibility for identifying and deciding the appropriate accounting treatment for recording or disclosing contingent liabilities in the financial statements?

Management

When should an auditor assess a client's ability to continue as a going concern?

Throughout the entire audit process

An auditor discovered facts after an audit report release date that may have affected the financial statements and the auditor’s report had the auditor known the facts at the report release date.

Which steps should the auditor take to prevent further reliance on the financial statements and audit report?

Advise the client to make appropriate and timely disclosure of the newly discovered facts

Which date should be used for a management representation letter?

The audit report date

Which contingent losses should be accrued and disclosed in financial statements?

Contingent losses that are reasonably estimated and probable

Which material event being audited indicates conditions that did not exist at the balance sheet date but may require disclosure in the footnotes to the financial statements?

The client loses a major manufacturing facility due to a hurricane.

An auditor discovered facts after an audit report release date that may have affected the financial statements and the auditor’s report if the auditor had known the facts at the audit report release date. The auditor notified the client to make appropriate and timely disclosure of these new facts, but the client did not cooperate.

Which steps should the auditor take to prevent further reliance on the financial statements and audit report?

Notify the client and any regulatory agency with jurisdiction over the client that the audit report should no longer be associated with the client’s financial statements

Which approach does the U.S. Securities and Exchange Commission (SEC) mandate for handling current-year and prior-year financial statement misstatements?

A dual approach

Which statement would be included in a management representation letter?

"The effects of uncorrected misstatements are immaterial, both individually and in the aggregate."

What should an auditor disclose in a separate paragraph, if anything, when issuing an adverse opinion?

The principal effects on the subject matter of the adverse opinion on the financial position, results of operations, and cash flows

Which situation would require an auditor to report on financial statements when the auditor lacks independence?

When required by regulation

What are critical audit matters (CAM), according to the Public Company Accounting Oversight Board (PCAOB)?

A matter involving especially challenging, subjective, or complex auditor judgment

Matters came to an auditor’s attention that convinced the auditor that modifications to the disclosures about changes in internal control over financial reporting (ICFR) were necessary.

Which change should the auditor make to the audit report?

Modify the report on ICFR to include an explanatory paragraph describing the reasons the auditor believes that the management disclosures should be modified

What should an auditor disclose in a separate paragraph when issuing a qualified opinion?

All the substantive reasons for the qualified opinion

A new client is audited for the first time, and there is insufficient evidence to support the inventory beginning balance.

Scope limitation

Under which circumstance would U.S. auditing standards require an additional paragraph of an auditor’s report?

Correction of a material misstatement in previously issued financial statements

What is positive assurance in an auditor's report?

An explicit statement as to whether the financial statements are presented fairly

Which element is required in an auditor’s report on audits of U.S. public companies?

An affirmative statement that the audit firm is registered with the PCAOB

Which language should an auditor include in the opinion paragraph when expressing a qualified opinion?

"Except for"

When should critical audit matters be included in an auditor's report on internal controls over financial reporting?

When a material audit matter was communicated to the audit committee

Which type of opinion should an auditor issue when the auditor has substantial doubt about the client being a going concern?

Disclaimer