Which of the following auditor concerns most likely could be so serious that the auditor concludes that a financial statement audit cannot be performed?
Answer(s): D
Choice "d" is correct. Intentional misapplication of accounting principles would indicate that management lacks integrity and as a result, the auditor might conclude that a financial statement audit cannot be performed.Choice "a" is incorrect. Management's failure to modify prescribed internal controls for changes in information technology would preclude the auditor from relying on those controls but would not prevent the auditor from performing a financial statement audit. Choice "b" is incorrect. If management rarely monitors segregation of duties, the auditor would not rely on that particular control, but this would not prevent the auditor from performing a financial statement audit.Choice "c" is incorrect. If management is dominated by one person who is also the majority stockholder, the risk of fraudulent financial reporting is increased, but this would not preclude the auditor from performing a financial statement audit.
Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?I). Financial statement accounts likely to contain a misstatement.II). Conditions that require extension of audit tests.
Answer(s): C
Choice "c" is correct. During the planning stage, the auditor assesses the risk of material misstatement in financial statement accounts. Based on this assessment, the auditor plans the audit procedures to provide reasonable assurance that material misstatements in the financial statements will be detected.Additionally, during the planning stage, conditions may come to the auditor's attention that indicate a necessary extension of audit tests. The auditor would need to consider this factor in determining the time budget and staffing needs for the engagement.Choices "a", "b", and "d" are incorrect. The auditor would need to consider both factors (financial statement accounts likely to contain a misstatement and conditions that require an extension of audit tests) in planning the audit.
In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements most likely would consider the:
Answer(s): A
Choice "a" is correct. Objectivity is reflected by the organizational level to which the internal auditor reports as well as by policies prohibiting audits of areas where the internal auditor lacks independence.In assessing the objectivity of internal auditors, the independent CPA who is auditing the entity's financial statements considers information obtained from previous experience, from discussions with management, from external quality reviews (if performed), and from professional internal auditing standards (such as those developed by The Institute of Internal Auditors). Choice "b" is incorrect. Tests of internal control activities that could detect errors and fraud would not help the CPA assess the objectivity of the internal auditor. Choice "c" is incorrect. The materiality of the accounts recently inspected by the internal auditors would not help the CPA assess the objectivity of the internal auditor. Choice "d" is incorrect. Results of the tests of transactions recently performed by the internal auditor would aid the auditor in evaluating the internal auditor's competence rather than his or her objectivity.
Which of the following factors most likely would cause a CPA to not accept a new audit engagement?
Choice "d" is correct. An auditor must consider the availability and adequacy of the client's accounting records and the integrity of management in deciding whether or not to accept a new audit engagement. A prospective client that is unwilling to provide all financial records would give the auditor cause for concern about both of these issues. Choice "a" is incorrect. The auditor may apply acceptable alternative procedures to audit inventory. Choice "b" is incorrect. The auditor can accept the engagement and obtain an understanding of the client's operations and industry after acceptance.Choice "c" is incorrect. Inability to review the predecessor's audit documentation means the auditor will expend greater effort auditing beginning balances. It does not mean the engagement should be declined.
A CPA wishes to determine how various publicly-held companies have complied with the disclosure requirements of a new financial accounting standarD. Which of the following information sources would the CPA most likely consult for this information?
Answer(s): B
Choice "b" is correct. The AICPA's Accounting Trends & Techniques is an annual survey of accounting practices followed in 600 stockholders' annual reports. Choices "a", "c", and "d" are incorrect. These sources do not provide comparative information about accounting practices.
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