2015 Aia Released Questions Aud 1k1s3i

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2015 AIA Newly Released Questions—Auditing 2015 AIA Auditing Newly Released MCQs—Medium (Moderate) Rating 1. A-08625 Reporting standards for financial audits under Government Auditing Standards differ from reporting standards under generally accepted auditing standards in that Government Auditing Standards require the auditor to: a.

Describe the scope of the auditor’s tests of compliance with laws and regulations.

b.

Provide positive assurance that the entity’s audit committee is adequately informed about the effects of any illegal acts.

c.

Present the results of the auditor’s tests of economy and efficiency regarding the use of the entity’s resources.

d.

Provide negative assurance that the auditor discovered no transactions that were indicative of illegal acts.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 4 Page reference (page # and outline point): A6-55 V.D.2. ANSWER: Choice “a” is correct. Reporting standards for financial audits under Government Auditing Standards differ from reporting standards under generally accepted auditing standards (GAAS) in that Government Auditing Standards require the auditor to describe the scope of the auditor’s tests of compliance with laws and regulations. Choice “b” is incorrect. All illegal acts, unless clearly inconsequential, should be reported to those charged with governance (i.e. the entity’s audit committee) under both Government Auditing Standards and GAAS. However, neither Government Auditing Standards nor GAAS require the auditor to provide positive assurance that the entity’s audit committee is adequately informed about the effects of illegal acts. Choice “c” is incorrect. This question is asking about financial audits. Performance, not financial, audits may present the results of the auditor’s tests of economy and efficiency regarding the use of the entity’s resources. Choice “d” is incorrect. Government Auditing Standards do not require the auditor to provide negative assurance that the auditor discovered no transactions that were indicative of illegal acts. However, all illegal acts, unless clearly inconsequential, should be reported to the officials of the audited entity, those charged with governance, or external regulators.

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2015 AIA Newly Released Questions—Auditing 2. A-08626 Which of the following procedures would most likely assist an auditor in identifying related party transactions? a.

Evaluate the reasonableness of management’s ing estimates that are subject to bias.

b.

Retest ineffective internal control activities for evidence of management override.

c.

Review the minutes of the meetings of the board of directors and its committees.

d.

Send second requests for unanswered positive confirmations of s receivable.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A4 Topic to be assigned to: 3 Page reference (page # and outline point): A4-50 I.D.4. ANSWER: Choice “c” is correct. Reviewing the minutes of the meetings of the board of directors and its committees most likely would assist an auditor in identifying related party transactions. Choice “a” is incorrect. Evaluating the reasonableness of management’s ing estimates that are subject to bias may help the auditor in assessing the reasonableness of an balance, but most likely would not assist the auditor in identifying related party transactions. Choice “b” is incorrect. Retesting ineffective internal control activities for evidence of management override may help the auditor identify a control deficiency, but most likely would not assist the auditor in identifying related party transactions. Choice “d” is incorrect. Sending second requests for unanswered positive confirmations of s receivable assists the auditor in obtaining evidence regarding the existence of s receivable, but most likely would not assist the auditor in identifying related party transactions.

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2015 AIA Newly Released Questions—Auditing 3. A-08627 Which of the following factors would most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment? a.

Complexity and size of the entity.

b.

Amount of audit work performed at an interim date.

c.

Amount of audit work performed by the internal auditor.

d.

Results of ing material balances.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 2 Page reference (page # and outline point): A6-37 I.D.1. ANSWER: Choice “a” is correct. The complexity and size of the entity will most likely influence the form and extent of the auditor’s documentation of an entity’s internal control environment. For example, a smaller, less complex entity will typically have fewer controls than a larger, complex entity and, therefore, most likely would result in less audit documentation about the entity’s internal control environment. Choice “b” is incorrect. The amount of audit work performed at an interim date is not likely to influence the form and extent of the auditor’s documentation of the entity’s internal control environment. The auditor must provide documentation proving that sufficient evidence was obtained regarding the internal control environment, regardless of when audit work is performed. Choice “c” is incorrect. The amount of audit work performed by the internal auditor is not likely to significantly influence the form and extent of the auditor’s documentation of the entity’s internal control environment. The external auditor must provide documentation to prove that sufficient evidence was obtained regarding the internal control environment. However, use of the internal auditor’s work may create a more efficient audit. Choice “d” is incorrect. The results of ing material balances is not likely to significantly influence the form and extent of the documentation of the entity’s internal control environment. Typically, the auditor’s understanding of the entity’s internal control environment influences the nature, timing, and extent of substantive testing performed, rather than vice versa.

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2015 AIA Newly Released Questions—Auditing 4. A-08629 According to the AIA Code of Professional Conduct, which of the following actions will impair independence? a.

Preparing client financial statements based on information in a trial balance.

b.

Processing payroll for a client’s signature based on client record keeping.

c.

Participating in the hiring or termination of a client’s employees.

d.

Assisting a client in drafting a stock-offering document or memorandum.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-6 I.C.1.d. ANSWER: Choice “c” is correct. Participating in the hiring or termination of a client’s employees impairs independence because the A is performing a management function. Choice “a” is incorrect. Preparing client financial statements based on information in a trial balance represents a preparation engagement, which would not impair the A’s independence. Management is still responsible for taking responsibility and approving the financial statements. Choice “b” is incorrect. Processing payroll for a client’s signature based on client record keeping would not impair independence and is considered a non-attest service. The A is merely processing information that is the client’s and is not making policy decisions. Choice “d” is incorrect. Merely assisting a client in drafting a stock-offering document or memorandum does not impair independence and is considered a non-attest service. However, acting as the underwriter or promoter of the offering documents would impair independence.

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2015 AIA Newly Released Questions—Auditing 5. A-08630 When an ant compiles the financial statements of a nonissuer in accordance with Statements on Standards for ing and Review Services, the ant’s report should include: a.

A statement that the ant is not aware of material modifications that should be made to the financial statements for them to be in conformity with GAAP.

b.

A statement regarding the ant’s assessment of fraud risk.

c.

A statement that the ant does not express an opinion on the financial statements.

d.

A statement regarding the entity’s compliance with laws and regulations.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-36 VI.E.3. ANSWER: Choice “c” is correct. A compilation report includes a statement that the ant does not express an opinion on the financial statements. Choice “a” is incorrect. A review, not a compilation report, includes a statement that the ant is not aware of material modifications that should be made to the financial statements for them to be in conformity with GAAP. Choice “b” is incorrect. An audit, not a compilation, report includes a statement regarding the auditor’s assessment of risks of material misstatement due to fraud or error. Assessment of fraud risk is not required in a compilation engagement. Choice “d” is incorrect. A standard compilation report is not required to include a statement regarding the entity’s compliance with laws and regulations.

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2015 AIA Newly Released Questions—Auditing 6. A-08631 In which of the following circumstances is an auditor most likely to rely on work done by internal auditors? a.

If financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high.

b.

If the internal auditors have concluded that the risk of material misstatement at the overall financial level is negligible.

c.

For financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence.

d.

For financial statement amounts determined largely or entirely on the basis of estimates made by management.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 2 Page reference (page # and outline point): A3-22 V.A.2. ANSWER: Choice “c” is correct. An auditor is most likely to rely on work done by internal auditors for financial statement amounts judged by the auditor to require little or no subjectively evaluated audit evidence. Choice “a” is incorrect. An auditor is unlikely to rely on the work performed by the internal auditor if financial statement amounts are material and the degree of subjectivity in evaluating the audit evidence is high. Choice “b” is incorrect. An external auditor’s decision to rely on the work performed by internal auditors is unlikely to be based on the internal auditor’s assessment of the risk of material misstatement. Risk of material misstatement is a highly subjective audit decision. In addition, the auditor’s determination to use the work of the internal auditor is based on the external auditor’s evaluation of the competency of the internal audit function, objectivity of the internal auditors, and whether the internal audit function applies a systematic and disciplined approach as well as the external auditor’s determination of the characteristics of the audit work (i.e. low degree of subjectivity, low risk of material misstatement, etc.). Choice “d” is incorrect. An external auditor is unlikely to rely on the work of the internal auditor for financial statement amounts that have a high degree of subjectivity, such as estimates made by management.

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2015 AIA Newly Released Questions—Auditing 7. A-08632 Which of the following statements is correct regarding a management representation letter? a.

A representation letter can be used in place of specific, previously identified audit procedures.

b.

A representation letter encomes a different set of assertions from those inherent in the financial statements.

c.

The date of the representation letter should typically be the same as the audit report.

d.

The representations made apply until the date of a client’s financial statements.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A5 Topic to be assigned to: 4 Page reference (page # and outline point): A5-56 I.B.3. ANSWER: Choice “c” is correct. The date of the representation letter should typically be the same as the audit report. Choice “a” is incorrect. A management representation letter typically does not represent sufficient audit evidence to substitute a specific, previously identified audit procedure. For example, a management representation letter cannot be used to substitute the audit procedure of confirming s receivable. Choice “b” is incorrect. A representation letter encomes the same set of assertions as those inherent in the financial statements (i.e., completeness of information). Choice “d” is incorrect. The management representation letter includes representations up to the date of the auditor’s report, which is after the date of the client’s financial statements. For example, management includes a representation that “all events subsequent to the date of the financial statements have been appropriately ed for and disclosed in accordance with the requirements of GAAP.”

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2015 AIA Newly Released Questions—Auditing 8. A-08634 Which of the following components of internal control would be considered the foundation for the other components? a.

Information and communication.

b.

Risk assessment.

c.

Control environment.

d.

Control activities.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 7 Page reference (page # and outline point): A3-48 I.B.1. ANSWER: Choice “c” is correct. The control environment sets the overall tone of the organization and is considered the foundation for the other components of internal control. The other components of internal control are risk assessment, information and communication, control activities, and monitoring. Choices “a”, “b”, and “d” are incorrect per the above explanation.

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2015 AIA Newly Released Questions—Auditing 9. A-08635 Which of the following activities by small business clients best demonstrates management integrity in the absence of a written code of conduct? a.

Emphasizing ethical behavior through oral communication and management example.

b.

Developing and maintaining formal descriptions of ing procedures.

c.

Documenting internal control procedures using flowcharts rather than narratives.

d.

Reporting regularly to the board of directors about operations and finances.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 7 Page reference (page # and outline point): A3-49 I.B.2.b.(1) ANSWER: Choice “a” is correct. Emphasizing ethical behavior through oral communication and by example best demonstrates management integrity in the absence of a written code of conduct. Choice “b” is incorrect. Management’s development and maintenance of formal descriptions of ing procedures demonstrates good documentation of ing procedures but does not provide evidence about management’s integrity. Choice “c” is incorrect. Documenting internal control procedures using flowcharts rather than narratives demonstrates management’s preference in documenting control procedures, but does not provide evidence about management’s integrity. Choice “d” is incorrect. Reporting regularly to the board of directors about operations and finances provides information about management’s frequency of communication with the board of directors but does not demonstrate management integrity.

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2015 AIA Newly Released Questions—Auditing 10. A-08636 Which of the following procedures would be appropriate to test the existence assertion during an audit of s receivable? a.

Trace transactions from the subsidiary ledger to the general ledger.

b.

Send confirmations to customers.

c.

Trace a sample of invoices to recording in the general ledger.

d.

Determine that all shipments before year-end are recorded as sales.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A4 Topic to be assigned to: 2 Page reference (page # and outline point): A4-23 II.F.1.c. ANSWER: Choice “b” is correct. Sending confirmations to customers is the most appropriate audit procedure to test the existence of s receivable. Choice “a” is incorrect. Tracing transactions from the subsidiary ledger to the general ledger tests the completeness of s receivable. Choice “c” is incorrect. Tracing a sample of invoices to recording in the general ledger tests the completeness of s receivable. Choice “d” is incorrect. Determining that all shipments before year-end are recorded as sales tests the assertions of cutoff and completeness of s receivable.

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2015 AIA Newly Released Questions—Auditing 11. A-8663 A company’s management provided its auditors with information concerning litigation, claims, and assessments. Which of the following is the auditor’s primary means of corroborating management’s information? a.

Inquiring of company’s outside counsel.

b.

Meeting with the company’s audit committee.

c.

Meeting with the company’s chairman of the board.

d.

Inquiring of the company’s in-house counsel.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A4 Topic to be assigned to: 3 Page reference (page # and outline point): A4-57 IV.C. ANSWER: Choice “a” is correct. The auditor’s primary means of corroborating management’s information concerning litigation, claims, and assessments is through a letter of inquiry sent to the company’s outside counsel. Choice “b” is incorrect. Meeting with the company’s audit committee or reviewing minutes of the audit committee may help identify and/or corroborate information provided by management related to litigation, claims, and assessments; however, the auditor’s primary means of corroborating management’s information is through a letter of inquiry sent to the company’s outside counsel. Choice “c” is incorrect. Meeting with the company’s chairman of the board or reviewing board meeting minutes may help identify and/or corroborate information provided by management related to litigation, claims, and assessments; however, the auditor’s primary means of corroborating management’s information is through a letter of inquiry sent to the company’s outside counsel. Choice “d” is incorrect. Inquiring of the company’s in-house legal counsel may help identify and/or corroborate information provided by management related to litigation, claims, and assessments; however, the auditor’s primary means of corroborating management’s information is through a letter of inquiry sent to the company’s outside counsel.

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2015 AIA Newly Released Questions—Auditing 12. A-8664 Which of the following would cause an auditor of an entity’s financial statements to issue either a qualified opinion or a disclaimer of opinion? a.

Scope limitation involving a recorded uncertainty.

b.

Inadequate disclosure of an uncertainty.

c.

The use of inappropriate ing principles.

d.

Unreasonable ing estimates.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A1 Topic to be assigned to: 3 Page reference (page # and outline point): A1-38 VII.A. ANSWER: Choice “a” is correct. An auditor would issue either a qualified opinion or a disclaimer of opinion when there is a scope limitation (GAAS issue). Choice “b” is incorrect. An auditor would issue either a qualified or an adverse opinion when there is inadequate disclosure (GAAP issue). Choice “c” is incorrect. An auditor would issue either a qualified or an adverse opinion when the entity uses inappropriate ing principles (GAAP issue). Choice “d” is incorrect. An auditor would issue either a qualified or an adverse opinion when the entity uses unreasonable ing estimates (GAAP issue).

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2015 AIA Newly Released Questions—Auditing 13. A-8665 At the completion of an audit, which of the following entities has ownership of the audit working papers? a.

The client.

b.

The client’s audit committee.

c.

The A firm that performed the audit.

d.

The client’s stockholders.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 2 Page reference (page # and outline point): A6-35 I.A. ANSWER: Choice “c” is correct. The A firm that performed the audit has ownership of the audit working papers. These workpapers provide for the audit opinion and contain information detailing the audit work performed. Choice “a” is incorrect. The client has ownership of evidence supplied to the auditor by the client (e.g., original invoices, original contracts), but not for audit working papers. Choice “b” is incorrect. The client’s audit committee has ownership of evidence supplied to the auditor by the committee (e.g., original meeting minutes), but not for audit working papers. Choice “d” is incorrect. The client’s stockholders do not have ownership of the audit working papers.

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2015 AIA Newly Released Questions—Auditing 14. A-8666 Which of the following services would constitute a management function under Government Auditing Standards, and result in the impairment of a A’s independence if performed by the A? a.

Developing entity program policies.

b.

Providing methodologies, such as practice guides.

c.

Providing ing opinions to a legislative body.

d.

Recommending internal control procedures.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-4 I.C.1.d. ANSWER: Choice “a” is correct. Developing program policies impairs a A’s independence because the A is acting in a management capacity. Choice “b” is incorrect. Providing information to management, such as practice guides, does not impair independence. This does not constitute the management function as management is making the final decision of what methodology to use. Choice “c” is incorrect. Providing an ing opinion does not impair a A’s independence. Choice “d” is incorrect. Merely recommending internal control procedures does not impair a A’s independence. This does not constitute the management function as management has the final determination of whether to implement the internal control procedures.

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2015 AIA Newly Released Questions—Auditing 15. A-8667 Which of the following best characterizes an auditor’s exercise of professional skepticism? a.

Conducting all fraud-related inquiries in a nonconfrontational manner.

b.

Obtaining adequate conclusive evidence in of the fairness of the financial statements.

c.

Having an attitude that includes a questioning mind.

d.

Taking into past relationships and experiences with management.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 4 Page reference (page # and outline point): A3-30 II.C.1. ANSWER: Choice “c” is correct. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. Choice “a” is incorrect. Professional skepticism does not require performing fraud inquiries in a certain manner (i.e. confrontational, nonconfrontational). Professional skepticism is an attitude that includes asking additional questions and obtaining additional evidence when the reliability of evidence obtained is questionable. Choice “b” is incorrect. Obtaining adequate conclusive evidence in of the fairness of the financial statements does not necessarily demonstrate the exercise of professional skepticism. The auditor is responsible for obtaining sufficient appropriate evidence to determine whether the financial statements are materially misstated, rather than merely looking for evidence that s the fairness of the financial statements. Choice “d” is incorrect. Taking into past relationships and experiences with management does not necessarily demonstrate the exercise of professional skepticism. Sometimes reliance on past relationships and experiences impedes, rather than promotes, the exercise of professional skepticism. The auditor should always information and look at evidence with a questioning attitude even if management has a history of acting honestly.

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2015 AIA Newly Released Questions—Auditing 16. A-8668 Before accepting an engagement to compile or review the financial statements of a nonissuer, which of the following specific inquiries should a successor ant consider making to the predecessor ant? a.

How cooperative was the owner’s lawyer in providing a legal opinion?

b.

How did you assess inherent risk and control risk?

c.

How would you describe the integrity of the owner?

d.

What evaluation did you make of any ing estimates?

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-26 III.A.1. ANSWER: Choice “c” is correct. An ant may ask about the integrity of the owner because an ant should not accept a compilation or review engagement if there are doubts about management integrity. Choice “a” is incorrect. Neither a compilation nor a review of financial statements requires the ant to obtain a legal opinion from the owner’s lawyer and, therefore, this is an unlikely inquiry. Choice “b” is incorrect. Neither a compilation nor a review engagement requires the ant to evaluate inherent risk or control risk and, therefore, this is an unlikely inquiry. Choice “d” is incorrect. A compilation engagement does not include an evaluation of ing estimates and, therefore, is an unlikely inquiry.

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2015 AIA Newly Released Questions—Auditing 17. A-8669 An entity has failed to provide documentation for a newly acquired material asset and informs its auditors that the documentation is lost. According to generally accepted government auditing standards, what would this situation typically indicate to the auditors? a.

Fraudulent activity.

b.

Abusive activity.

c.

Misappropriation of assets.

d.

A heightened risk of fraud.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A5 Topic to be assigned to: 1 Page reference (page # and outline point): A5-18 V.F.7.b. ANSWER: Choice “d” is correct. Although documentation that is lost may be a result of error (e.g., the client misplaced the document), the auditor should approach lost documentation with a heightened risk that fraud may have occurred (e.g., the client intentionally destroyed the documentation). Choice “a” is incorrect. Lost documentation does not necessarily mean that fraud occurred (e.g., documents may be misplaced by error). The auditor will need to evaluate the situation with a heightened sense that fraud could have occurred and will need to obtain other corroborating evidence (e.g., inspect the actual asset, review payment of item) to get comfortable with the balance. Choice “b” is incorrect. Lost documentation does not necessarily indicate that the purchase is abusive. (An example of an abusive purchase would be an employee buying an asset for personal, not business, use.) The auditor will need to evaluate the situation with a heightened sense that fraud could have occurred and will need to obtain other corroborating evidence (e.g., inspect the actual asset, review payment of item) to get comfortable with the balance. Choice “c” is incorrect. Misappropriation of assets involves theft of an entity’s assets. Lost documentation does not necessarily mean the asset was stolen. The auditor should perform additional procedures, such as inspection of the actual asset, to determine whether the asset was stolen.

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2015 AIA Newly Released Questions—Auditing 18. A-8670 An ant performing a compilation for a nonissuer believes that the financial statements might be materially misstated. The client refuses to provide additional or revised information. How should the ant respond? a.

By requesting that the engagement be changed from a compilation to a review or audit.

b.

By issuing a compilation report that is qualified for a scope limitation.

c.

By withdrawing from the compilation engagement.

d.

By issuing an adverse report on the compilation.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-38 VI.E. ANSWER: Choice “c” is correct. If an ant performing a compilation for a nonissuer believes that the financial statements might be materially misstated and the client refuses to provide additional or revised information, then the ant should withdraw from the engagement. Choice “a” is incorrect. Requesting that the engagement be changed from a compilation to a review or audit is not an appropriate response when the ant believes that the financial statements might be materially misstated. Appropriate reasons for changing the engagement include a change in client requirements or a misunderstanding as to the nature of the service to be rendered. Choice “b” is incorrect. An ant would not issue an opinion in a compilation engagement. An opinion is issued in an audit report. Choice “d” is incorrect. An ant would not issue an adverse report in a compilation engagement. The ant should either disclose the effects of the misstatement (if known) in a separate paragraph of the compilation report or withdraw from the engagement. Disclosing the effects of the misstatement is not known as an “adverse” report. The term “adverse” is typically used to describe a type of opinion issued in an audit.

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2015 AIA Newly Released Questions—Auditing 19. A-8671 During an audit of a nonissuer’s financial statements, an auditor should perform tests of controls to obtain sufficient appropriate audit evidence about the operating effectiveness of relevant controls if: a.

The auditor does not presume that client management has committed fraud.

b.

More financial documentation is available through tests of controls.

c.

Substantive procedures alone cannot provide sufficient appropriate audit evidence.

d.

The auditor does not intend to rely on the operating effectiveness of controls.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 8 Page reference (page # and outline point): A3-69 II.A.1. ANSWER: Choice “c” is correct. The auditor should perform tests of controls when substantive procedures alone cannot provide sufficient appropriate audit evidence. Choice “a” is incorrect. Even though the auditor does not presume that client management committed a fraud, this does not necessarily mean that the auditor should perform tests of controls. The auditor’s basis for testing controls is when the auditor’s risk assessment is based on the assumption that controls are operating effectively or when substantive procedures alone are insufficient. Choice “b” is incorrect. The determination to test controls is not based on the quantity of financial information available through tests of controls. An auditor will test controls when the auditor’s risk assessment is based on the assumption that controls are operating effectively or when substantive procedures alone are insufficient. Choice “d” is incorrect. If the auditor does not intend to rely on the operating effectiveness of controls, then the auditor does not need to perform tests of controls.

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2015 AIA Newly Released Questions—Auditing 20. A-8672 In performing interviews and examining documents related to preliminary work in a financial statement audit of a nonissuer, an auditor identifies a business risk associated with plans for a new product line. What should the auditor do as a result? a.

Modify the scope of the engagement to include an analysis of the budget for the new product line and consider the new risk in conjunction with other risks after the budget items have been analyzed.

b.

Analyze the newly identified risk in conjunction with economic circumstances related exclusively to the new product line and consider whether there is an immediate consequence for the risk of material misstatement for affected classes of transactions.

c.

Modify the financial statement disclosures to include the newly identified risk if it is likely that the new product line will have an adverse effect on the company’s profitability.

d.

Analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 8 Page reference (page # and outline point): A3-66 I.A. ANSWER: Choice “d” is correct. An appropriate response to an identified business risk associated with plans for a new product line is for the auditor to analyze the newly identified risk in conjunction with other known business risks and consider whether there is an immediate consequence for the risk of material misstatement at various levels of the audit. Business risks often affect risk of material misstatement at the financial statement level, which may affect risks of material misstatement at the relevant assertion level. For example, an unsuccessful new product may affect the risks of material misstatement related to the valuation of inventory. Choice “a” is incorrect. An appropriate response to identified business risks should include evaluation of the risk of material misstatement at various levels of the audit. Choice “b” is incorrect. The identified risk should be analyzed in conjunction with other known business risks, rather than just the economic risk related to the new product line. In addition, the auditor should analyze the risk of material misstatement at various levels of the audit (i.e. financial statement and relevant assertion level) rather than just for the affected classes of transactions. The relevant assertion level includes classes of transactions, balances, and disclosures. Choice “c” is incorrect. Management, not the auditor, is responsible for the financial statements and determining whether the financial statement disclosures should include the newly identified risk.

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2015 AIA Newly Released Questions—Auditing 21. A-8673 If interim substantive procedures for an identified no exceptions, which of the following would the auditor not perform on that at year-end? a.

Tests of details for the entire year under audit.

b.

Tests of details of activity during the period since the interim testing date.

c.

Reconciliation of year-end balances to interim balances.

d.

Substantive analytical procedures of the period since the interim testing date.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 8 Page reference (page # and outline point): A3-73 III.D.1. ANSWER: Choice “a” is correct. If interim substantive procedures for an identified no exceptions, then the auditor does not need to test details for the entire year under audit at year-end. Choice “b” is incorrect. If substantive procedures are performed at an interim date, the auditor would apply substantive procedures, such as testing the details, to the period since the interim testing date. Note: Substantive procedures include tests of details and substantive analytical procedures. Choice “c” is incorrect. An auditor should reconcile year-end balances to interim dates. This procedure is performed as part of the roll-forward procedures. For example, the client may have a revenue amount at interim (01/01–09/30) of $100,000, and then at year-end (the period of 01/01–12/31) the revenue amount is $150,000. The auditor would that the amount related to 01/01–09/30 is still $100,000, and then would apply substantive procedures to the remainder, $50,000, which occurred from 10/01–12/31. Choice “d” is incorrect. If substantive procedures are performed at an interim date, the auditor would apply substantive procedures, such as performing substantive analytical procedures, during the period since the interim testing date. Note: Substantive procedures include tests of details and substantive analytical procedures.

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2015 AIA Newly Released Questions—Auditing 22. A-8674 In communicating with those charged with governance, the auditor must decide whether to communicate with the audit committee or the client’s entire board of directors. Which of the following considerations will be least relevant to this decision? a.

Whether the audit committee will be able to provide further information and explanations that the auditor may require while performing the audit.

b.

The nature of the matters to be communicated.

c.

Management’s preference.

d.

Regulatory requirements related to audit communications with those charged with governance.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A5 Topic to be assigned to: 3 Page reference (page # and outline point): A5-51 II.A. ANSWER: Choice “c” is correct. The auditor, not management, is responsible for determining which matters need to be communicated to the audit committee or the client’s entire board of directors. Choice “a” is incorrect. The auditor most likely would consider whether the audit committee will be able to provide further information and explanations that the auditor may require while performing the audit when determining whether matters need to be communicated to the audit committee or the client’s entire board of directors. Choice “b” is incorrect. The auditor most likely would consider the nature of the matters to be communicated when determining whether matters need to be communicated to the audit committee or the client’s entire board of directors. Choice “d” is incorrect. The auditor most likely would consider the regulatory requirements related to audit communications with those charged with governance when determining whether matters need to be communicated to the audit committee or the client’s entire board of directors.

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2015 AIA Newly Released Questions—Auditing 23. A-8675 According to the Sarbanes-Oxley Act of 2002, the PCAOB has the legal authority to perform each of the following, except: a.

Prosecute suspected criminal violations by ed public ing firms.

b.

Process, review, and approve the registration of public ing firms that audit issuers.

c.

Inspect and review selected audit engagements of ed public ing firms.

d.

Establish auditing, quality control, and independence standards for audits of issuers.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-16 II.A.2. ANSWER: Choice “a” is correct. The U.S. Department of Justice, not the PCAOB, has the legal authority to prosecute suspected criminal violations by ed public ing firms. (However, the PCAOB has the right to impose civil monetary penalties.) Choice “b” is incorrect. The PCAOB has the legal authority to process, review, and approve the registration of public ing firms that audit issuers. Choice “c” is incorrect. The PCAOB has the legal authority to inspect and review selected audit engagements of ed public ing firms. Choice “d” is incorrect. The PCAOB has the legal authority to establish auditing, quality control, and independence standards for audits of issuers.

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2015 AIA Newly Released Questions—Auditing 24. A-8676 Which of the following best describes the effect of a contingent fee arrangement on the auditor’s independence? a.

The contingent fee arrangement does not impair independence if it is consistent with the ed public ing firm’s quality control policies.

b.

The contingent fee arrangement impairs independence.

c.

The contingent fee arrangement does not impair independence unless more than half of the fee is subject to contingencies.

d.

The contingent fee arrangement impairs independence unless approved by the client’s audit committee.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-9 I.C.7.c. ANSWER: Choice “b” is correct. Contingent fee arrangements impair the auditor’s independence. Choice “a” is incorrect. Contingent fee arrangements impair the auditor’s independence. In addition, a contingent fee arrangement related to audit fees most likely would be prohibited in the ed public ing firm’s quality control policies. Choice “c” is incorrect. Contingent fee arrangements impair the auditor’s independence even if the amount is immaterial. A contingent fee is viewed as a direct financial interest. Choice “d” is incorrect. Contingent fee arrangements are specifically prohibited for audits, regardless of whether or not the contingent fees are approved by the client’s audit committee.

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2015 AIA Newly Released Questions—Auditing 25. A-8677 An ant is engaged to perform compilation services for a new client in an industry with which the ant has no previous experience. How should the ant obtain sufficient knowledge of the industry to perform the compilation service? a.

By obtaining the most recent letter of credit from the entity’s primary financial institution.

b.

By consulting AIA guides, industry publications, or individuals knowledgeable about the industry.

c.

By researching the entity’s Internet site and searching for current press releases.

d.

By reviewing the predecessor ant’s workpapers without the knowledge of the entity.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-34 VI.B.1. ANSWER: Choice “b” is correct. An ant may obtain sufficient knowledge of the industry to perform the compilation service by consulting AIA guides, industry publications, or individuals knowledgeable about the industry. Choice “a” is incorrect. A letter of credit from the entity’s primary financial institution provides a guarantee from the bank that the client’s payment will be received on time and for the correct amount. This document is unlikely to provide the ant with information about the client’s industry. Choice “c” is incorrect. An ant may obtain knowledge about the client’s business by researching the entity’s Internet site and searching for current press releases. However, this most likely would not provide comprehensive information of the industry (e.g., ing rules specific to that industry, economic trends in the industry). Choice “d” is incorrect. An ant’s review of the predecessor ant’s workpapers most likely would not provide comprehensive information about the industry (e.g., ing rules specific to that industry, economic trends in the industry). In addition, an ant is unlikely to review the predecessor ant’s workpapers in a compilation engagement.

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2015 AIA Newly Released Questions—Auditing 2015 AIA Auditing Newly Released MCQs—Difficult (Hard) Rating 26. A-8678 Which of the following statements correctly defines the term reasonable assurance? a.

A substantial level of assurance to allow an auditor to detect a material misstatement.

b.

A significant level of assurance to allow an auditor to detect a material misstatement.

c.

An absolute level of assurance to allow an auditor to detect a material misstatement.

d.

A high, but not absolute, level of assurance to allow an auditor to detect a material misstatement.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A1 Topic to be assigned to: 1 Page reference (page # and outline point): A1-4 I.D.1. ANSWER: Choice “d” is correct. Reasonable assurance is a high, but not absolute, level of assurance to allow an auditor to detect a material misstatement. Choice “a”, “b”, and “c” are incorrect, per the explanation above.

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2015 AIA Newly Released Questions—Auditing 27. A-8679 A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that which of the following is met? a.

Use of the agreed-upon procedures report is not restricted.

b.

The practitioner sets the criteria to be used in the determination of findings.

c.

The client agrees that the practitioner will decide appropriate procedures to be performed.

d.

The prospective financial statements include a summary of significant assumptions.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 6 Page reference (page # and outline point): A2-90 III.D.3. ANSWER: Choice “d” is correct. A practitioner may perform an agreed-upon procedures engagement on prospective financial statements provided that the prospective financial statements include a summary of significant assumptions. Choice “a” is incorrect. Agreed-upon procedure reports must be restricted. Choice “b” is incorrect. The specified parties should create the criteria to be used in the determination of findings. The specified parties and the practitioner will then agree on the criteria. Choice “c” is incorrect. The specified parties should decide the appropriate procedures to be performed. The specified parties and the practitioner will then agree on the procedures to be performed by the practitioner.

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2015 AIA Newly Released Questions—Auditing 28. A-8680 If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, what should the current auditor do? a.

Review the risk assessment of the opening balances of the financial statements.

b.

Withdraw from the engagement.

c.

Disclaim an opinion due to a scope limitation.

d.

Discuss the matter with the client’s legal counsel.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 1 Page reference (page # and outline point): A3-8 VI.B.1. ANSWER: Choice “a” is correct. If the predecessor auditor refuses to give the current auditor of a nonissuer access to the documentation, the current auditor should review the risk assessment of the opening balances of the financial statements. Choice “b” is incorrect. The current auditor may still perform the engagement, even if the predecessor auditor refuses to give the current auditor access to the prior-year documentation. However, if management refuses to permit the current auditor to discuss the prior-year engagement with the predecessor auditor, then the auditor should not accept the engagement. Choice “c” is incorrect. Failure to review the predecessor’s audit documentation does not necessarily result in a disclaimer of opinion. The auditor may be able to perform alternative procedures to obtain reasonable assurance about the financial statements that may result in an opinion other than disclaimer on the financial statements. Choice “d” is incorrect. The predecessor auditor is not required by law to provide the current auditor with access to the predecessor’s documentation, and therefore, discussion with the client’s legal counsel is not required.

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2015 AIA Newly Released Questions—Auditing 29. A-8681 Analytical procedures used in planning an audit should focus on: a.

Identifying material weaknesses in internal control.

b.

Enhancing the auditor’s understanding of the client’s business.

c.

Testing individual balances that depend on ing estimates.

d.

Evaluating the adequacy of the evidence gathered concerning unusual balances.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A4 Topic to be assigned to: 1 Page reference (page # and outline point): A4-7 IV.B. ANSWER: Choice “b” is correct. Analytical procedures used in planning an audit should focus on enhancing the auditor’s understanding of the client’s business. Choice “a” is incorrect. The focus of analytical procedures is rarely to identify material weaknesses in internal control. Tests of operating effectiveness of internal control include inquiries, observation, inspection, and reperformance. Choice “c” is incorrect. An auditor may use analytical procedures as a substantive procedure when testing individual balances that depend on ing estimates. Substantive analytical procedures are performed after the planning phase. Choice “d” is incorrect. Analytical procedures performed during the overall review stage of the audit help aid the auditor in evaluating the adequacy of the evidence gathered concerning unusual balances. The overall review phase occurs after the planning phase.

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2015 AIA Newly Released Questions—Auditing 30. A-8682 If an auditor is obtaining an understanding of an issuer’s information and communication component of internal control, which of the following factors should the auditor assess? a.

The integrity and ethical values of top management.

b.

The philosophy and operating style of management to promote effective internal control over financial reporting.

c.

The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements.

d.

The oversight responsibility over financial reporting and internal control by the board or audit committee.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 7 Page reference (page # and outline point): A3-52 I.B.4.b.(1) ANSWER: Choice “c” is correct. The classes of transactions in the issuer’s operations that are significant to the issuer’s financial statements are typically assessed when the auditor is obtaining an understanding of the information and communication component of internal control. Choice “a” is incorrect. The integrity and ethical values of top management are typically assessed when the auditor is obtaining an understanding of the control environment component of internal control. Choice “b” is incorrect. The philosophy and operating style of management to promote effective internal control over financial reporting are typically assessed when the auditor is obtaining an understanding of the control environment component of internal control. Choice “d” is incorrect. The oversight responsibility over financial reporting and internal control by the board or audit committee is typically assessed when the auditor is obtaining an understanding of the control environment component of internal control.

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2015 AIA Newly Released Questions—Auditing 31. A-8683 Which of the following is not a role of the risk assessment in an integrated audit of a nonissuer? a.

Concluding on the effectiveness of a given control.

b.

Selecting controls to test.

c.

Determining significant s and relevant assertions.

d.

Determining evidence necessary to conclude on the effectiveness of a given control.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A5 Topic to be assigned to: 2 Page reference (page # and outline point): A5-33 III.D.2. ANSWER: Choice “a” is correct. The auditor’s conclusion on the operating effectiveness of a given control is not a role of the risk assessment process. The auditor’s conclusion on the operating effectiveness of internal control occurs after the risk assessment process. Choice “b” is incorrect. Selecting controls to test is part of the risk assessment process in an integrated audit of a nonissuer. Choice “c” is incorrect. Determining significant s and relevant assertions is part of the risk assessment process in an integrated audit of a nonissuer. Choice “d” is incorrect. Determining evidence necessary to conclude on the effectiveness of a given control is part of the risk assessment process in an integrated audit of a nonissuer.

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2015 AIA Newly Released Questions—Auditing 32. A-8684 Which of the following situations represents a limitation, rather than a failure, of internal control? a.

A jewelry store employee steals a small necklace from a display cabinet.

b.

A bank teller embezzles several hundred dollars from the cash drawer.

c.

A purchasing employee and an outside vendor participate in a kickback scheme.

d.

A movie theater cashier sells reduced-price tickets to full-paying customers and pockets the difference.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 7 Page reference (page # and outline point): A3-63 II.H.3. ANSWER: Choice “c” is correct. Even a well-designed internal control system has its limitations. One example of a limitation of internal control includes deliberate circumvention of controls by collusion of two or more people, such as when a purchasing employee and an outside vendor participate in a kickback scheme. Other limitations of internal controls include human error and management override of control. Choice “a” is incorrect. A failure in internal control occurs when a control does not exist, is not designed appropriately, or is not operating effectively. An example of a failure of internal control would be a jewelry store employee stealing a small necklace from a display cabinet. A control could have prevented the employee from stealing the necklace (e.g.,, require two employees to open a display cabinet by having different keys assigned to each employee). Choice “b” is incorrect. A failure in internal control occurs when a control does not exist, is not designed appropriately, or is not operating effectively. An example of a failure of internal control is a bank teller embezzling several hundred dollars from the cash drawer. A control could have prevented the bank teller from being able to embezzle cash (e.g.,, random cash counts). Choice “d” is incorrect. An example of a failure of internal control is a movie theater cashier selling reduced-price tickets to full-paying customers and pocketing the difference. A control could have prevented the employee from pocketing the difference (e.g., reconciliation by another employee of sales to deposits).

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2015 AIA Newly Released Questions—Auditing 33. A-8685 An audit client has substantial assets held in a trust that is managed by the trust department of a bank. Which of the following actions by the auditor is the most efficient way to obtain information about the trust department’s internal controls? a.

Perform a review or compilation of the trust department.

b.

Perform tests of controls on a sample of the client’s transactions with the trust department.

c.

Rely on the trust department’s audit report on internal controls placed in operation and their operating effectiveness.

d.

Ask management of the trust department to complete a questionnaire about internal controls and provide flowcharts for related processes.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 7 Page reference (page # and outline point): A3-64 II.I.2.b. ANSWER: Choice “c” is correct. The most efficient way to obtain information about the trust department’s internal controls is to rely on the trust department’s audit report on internal controls placed in operation and their operating effectiveness. Choice “a” is incorrect. A review or compilation of the trust department would not provide information on the trust department’s internal controls. In addition, attestation standards allow only an examination or agreed-upon procedures to be performed on internal controls. Choice “b” is incorrect. An auditor may perform tests of controls on a sample of the client’s transactions with the trust department, which would provide information about the trust department’s internal control. However, this would not be as efficient as relying on the trust department’s audit report. Choice “d” is incorrect. Asking management of the trust department to complete a questionnaire about internal controls and to provide flowcharts for related processes would provide information about the trust department’s internal control. However, this would not be as efficient as relying on the trust department’s audit report.

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2015 AIA Newly Released Questions—Auditing 34. A-8686 Which of the following levels would most likely address the risk of material misstatement by the auditor’s consideration of an entity’s control environment? a.

Financial statements.

b.

Disclosures.

c.

Classes of transactions.

d.

Specific balances.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 8 Page reference (page # and outline point): A3-66 I.B.2. ANSWER: Choice “a” is correct. The control environment is pervasive and reflects the overall tone of the organization. Therefore, the auditor is most likely to focus on the highest level of risk of material misstatement, which is risk assessed at the financial statement level. Choice “b”, “c”, and “d” are incorrect. Specific balances, classes of transactions, and disclosures relate to responding to risks at the relevant assertion level, which is lower than the financial statement level.

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2015 AIA Newly Released Questions—Auditing 35. A-8687 In addition to descriptions of the nature, timing, and extent of planned risk assessment procedures and planned further audit procedures, which of the following additional pieces of information should be documented in the audit plan? a.

Procedures performed to assess independence and the ability to perform the engagement.

b.

The understanding of the of the engagement, including scope, fees, and resource allocation.

c.

Other audit procedures to be performed to comply with generally accepted auditing standards.

d.

Issues with management integrity that could affect the decision to continue the audit engagement.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 2 Page reference (page # and outline point): A3-18 IV.A.3. ANSWER: Choice “c” is correct. The audit plan should include documentation of specific audit procedures (including other audit procedures) to be performed to comply with generally accepted auditing standards. Choice “a” is incorrect. The auditor’s assessment of independence is required to be documented, but is not required to be documented in the audit plan. The audit plan outlines the nature, extent, and timing of the procedures to be performed during the audit. Choice “b” is incorrect. The understanding of the of the engagement, including scope, fees, and resource allocation, should be documented (typically in the form of an engagement letter), but is not required to be documented in the audit plan. The audit plan outlines the nature, extent, and timing of the procedures to be performed during the audit. Choice “d” is incorrect. Issues with management integrity that could affect the decision to continue the audit engagement should be documented. However, the specific issues with management integrity generally are not documented in the audit plan.

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2015 AIA Newly Released Questions—Auditing 36. A-8688 An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk? a.

Review the client’s control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year.

b.

Review the client’s control procedures over the safeguarding of inventory, incorporate the use of substantive analytical procedures, and develop an expectation.

c.

Review the client’s control procedures over the safeguarding of inventory, but do not modify substantive procedures over inventory.

d.

Review the client’s control procedures over the safeguarding of inventory, and perform physical inventory counts throughout the current year.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A3 Topic to be assigned to: 3 Page reference (page # and outline point): A3-27 I.C.5.b. ANSWER: Choice “a” is correct. An appropriate response to an increase in risk of material misstatement is to perform testing at year-end. Choice “b” is incorrect. Test of details, such as observation of inventory, is generally more persuasive than substantive analytical procedures when obtaining evidence regarding existence of the inventory. Choice “c” is incorrect. An auditor should respond to an increased level of risk of material misstatement by modifying substantive procedures, such as obtaining more persuasive evidence, increasing sample size, or shifting testing from interim to year-end. Choice “d” is incorrect. An appropriate response to an increase in level of risk of material misstatement is to perform the testing at year-end rather than throughout the year.

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2015 AIA Newly Released Questions—Auditing 37. A-8689 When planning an engagement to examine the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would be least likely to consider which of the following factors? a.

Preliminary judgments about the effectiveness of internal control.

b.

The extent of recent changes in the entity and its operations.

c.

The type of available evidential matter pertaining to the effectiveness of the entity’s internal control.

d.

The evaluation of the operating effectiveness of the controls.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A5 Topic to be assigned to: 2 Page reference (page # and outline point): A5-31 III.C. ANSWER: Choice “d” is correct. When planning an engagement to examine the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would be least likely to consider the evaluation of the operating effectiveness of the controls. The evaluation of the operating effectiveness of controls occurs after the planning stage. Choice “a” is incorrect. When planning an engagement to examine the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider preliminary judgments about the effectiveness of internal control. Choice “b” is incorrect. When planning an engagement to examine the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider the extent of recent changes in the entity and its operations. Choice “c” is incorrect. When planning an engagement to examine the effectiveness of the entity’s internal control in an integrated audit of a nonissuer, a practitioner would likely consider the type of available evidential matter pertaining to the effectiveness of the entity’s internal control.

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2015 AIA Newly Released Questions—Auditing 38. A-8690 In the audit of a nonissuer, which of the following statements is correct regarding the use of external confirmations to obtain audit evidence? a.

Management’s refusal to allow an auditor to perform external confirmation procedures is considered a departure from GAAP sufficient to qualify the opinion.

b.

Negative confirmations provide more persuasive audit evidence than positive confirmations.

c.

Negative confirmations should be used only if a very high exception rate is expected.

d.

A factor for an auditor to consider when deg confirmation requests is the assertion being tested.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A4 Topic to be assigned to: 2 Page reference (page # and outline point): A4-25 II.G.1. ANSWER: Choice “d” is correct. A factor for an auditor to consider when deg confirmation requests is the assertion being tested. Choice “a” is incorrect. Management’s refusal to allow an auditor to perform external confirmation procedures is considered a departure from GAAS, not GAAP, sufficient to qualify the opinion. Choice “b” is incorrect. Negative confirmations provide less, not more, persuasive evidence than positive confirmations. Choice “c” is incorrect. Negative confirmations should be used if there is a low, not high, exception rate expected.

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2015 AIA Newly Released Questions—Auditing 39. A-8691 After performing a compliance audit of an entity that received federal funds, what conclusion would the auditor draw if the entity does not have adequate documentation to $5 million in operating expenses paid from federal program funds? a.

The entity spent $5 million in operating expenses that were not approved.

b.

Questioned costs of $5 million for operating expenses have been identified.

c.

The entity spent $5 million of government funds for services that were not required.

d.

The entity submitted unauthorized invoices for expenses.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 4 Page reference (page # and outline point): A6-67 VII.G.3. ANSWER: Choice “b” is correct. If the entity does not have adequate documentation to $5 million in operating expenses paid from federal program funds, then the auditor would conclude that questioned costs of $5 million for operating expenses have been identified. This will appear on the schedule of findings and questioned costs for federal awards. Choice “a” is incorrect. The question states that the entity does not have adequate documentation to money paid from federal program funds. There is no indication that the controls related to approval were not operating effectively. Choice “c” is incorrect. The entity does not have the appropriate documentation; however, this does not necessarily mean that the funds were for services that were not required. Choice “d” is incorrect. The question states that the entity does not have adequate documentation to expenses paid from federal program funds. There is no indication that invoices were unauthorized.

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2015 AIA Newly Released Questions—Auditing 40. A-8692 An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it: a.

Changes the company’s operating results from a net loss to a net income.

b.

Arises from a transaction cycle with controls that were determined to be operating effectively.

c.

Is the first time a misstatement has arisen from the relevant transaction cycle.

d.

Decreases management’s incentive compensation for the period.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A4 Topic to be assigned to: 4 Page reference (page # and outline point): A4-60 II.B.5.b.(1) ANSWER: Choice “a” is correct. An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it changes the company’s operating results from a net loss to a net income. Choice “b” is incorrect. A misstatement associated with a transaction cycle with controls that were determined to be operating effectively would most likely not result in the auditor determining that the misstatement is qualitatively material. However, depending on the circumstances, the auditor may reassess control risk and modify substantive testing, if necessary. Choice “c” is incorrect. A first-time misstatement most likely would not result in the auditor determining that the misstatement is qualitatively material. Choice “d” is incorrect. An auditor of a nonissuer is most likely to conclude that a misstatement identified during an audit that is below the quantitative materiality limit is qualitatively material if it increases, not decreases, management’s incentive compensation for the period.

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2015 AIA Newly Released Questions—Auditing 41. A-8693 What is the maximum number of days in which a nonissuer’s auditor should complete the assembly of the final audit file following the report release date? a.

30 days

b.

45 days

c.

60 days

d.

75 days

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 2 Page reference (page # and outline point): A6-36 I.C.3.a. ANSWER: Choice “c” is correct. A nonissuer auditor should complete the assembly of the audit file within 60 days following the report release date. Choice “a” and “d” are incorrect, per the above explanation. Choice “b” is incorrect. An auditor should complete the assembly of the audit file within 45 days for an issuer, not a nonissuer.

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2015 AIA Newly Released Questions—Auditing 42. A-8694 In an integrated audit of a nonissuer, if an auditor concludes that a material weakness exists as of the date specified in management’s assertion, the auditor should take which of the following actions? a.

Obtain written representations from management relating to such matters.

b.

Communicate, in writing, to the entity3’s outside legal counsel that the material weakness exists.

c.

Issue an adverse opinion.

d.

Disclaim an opinion.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A5 Topic to be assigned to: 2 Page reference (page # and outline point): A5-43 III.J.5.a. ANSWER: Choice “c” is correct. The presence of a material weakness in internal control results in an adverse opinion. Choice “a” is incorrect. Management is not required to include a written representation confirming the auditor’s conclusion that a material weakness exists. However, management will include a written representation that management disclosed all significant deficiencies and material weaknesses to the auditor. Choice “b” is incorrect. An auditor should communicate, in writing, to management and to those charged with governance that the material weakness exists. There is no requirement that the auditor communicate a material weakness in writing to the entity’s outside legal counsel. Choice “d” is incorrect. A material weakness results in an adverse opinion. A scope limitation results in a disclaimer of opinion or withdrawal from the engagement.

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2015 AIA Newly Released Questions—Auditing 43. A-8695 A nonissuer requests that a A change an audit engagement to a review engagement. If the ant agrees to the change, how, if at all, should the ant’s review report be modified? a.

The ant should issue the review report without mentioning the change in engagement.

b.

The ant should include in the review report a disclaimer of an audit opinion.

c.

The ant should include in the review report the circumstances that resulted in the change in engagement.

d.

The ant should include in the review report a reference to the original engagement but not the reason for the change.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-56 XII.A. ANSWER: Choice “a” is correct. If the ant agrees with the change, the ant should issue the review report without mentioning the change in engagement. Choice “b” is incorrect. The review report should not include a disclaimer of an audit opinion. Choice “c” is incorrect. The review report should not report the circumstances that resulted in the change in engagement. Choice “d” is incorrect. The review report should not include a reference to the original engagement.

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2015 AIA Newly Released Questions—Auditing 44. A-8696 Which of the following procedures regarding notes payable would an ant most likely perform during a nonissuer’s review engagement? a.

Confirming the year-end outstanding note payable balance with the lender.

b.

Examining records indicating proper authorization of the notes payable.

c.

Making inquiries of management regarding maturities, interest rate, and collateral.

d.

Documenting control procedures for payment calculations of the notes’ principal and interest.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-43 VII.B.4. ANSWER: Choice “c” is correct. Review procedures include inquiries within the organization. Therefore, the ant is most likely to make inquiries of management regarding the maturities, interest rate, and collateral. Choice “a” is incorrect. Substantive testing, such as confirming balances, is performed in an audit, not a review. Choice “b” is incorrect. Control testing, such as examining records for proper authorization, is performed in an audit, not a review. Choice “d” is incorrect. An ant is not required to document control procedures in a review.

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2015 AIA Newly Released Questions—Auditing 45. A-8697 When financial statements that an ant has compiled in accordance with Statements on Standards for ing and Review Services omit substantially all disclosures required by generally accepted ing principles, the ant’s report should include: a.

Management’s justification for its decision to elect to omit substantially all the disclosures.

b.

No modification of the standard compilation report because compilations do not require disclosures that are required for audited financial statements.

c.

Information alerting readers about omission of the disclosures and notification that the omission may influence the ’s conclusions about the financial statements.

d.

A separate paragraph in the compilation report stating that the financial statements are misleading due to the lack of disclosures by management.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-36 VI.E.5.a.(1) ANSWER: Choice “c” is correct. An ant may compile financial statements that omit substantially all disclosures required by GAAP as long as the compilation report includes a separate paragraph which alerts readers about omission of the disclosures and includes notification that the omission may influence the ’s conclusions about the financial statements. In addition, the ant should be satisfied that the omission is not intended to mislead s of the financial statements. Choice “a” is incorrect. The compilation report for financial statements that omit substantially all disclosures required by GAAP is not required to include management’s justification for its decision to omit substantially all of the disclosures. However, a separate paragraph should be added that states that if disclosures were included, they might influence the ’s conclusions, and should indicate that financial statements are not designed for those who are uninformed about the omitted disclosures. Choice “b” is incorrect. When an entity elects to omit substantially all disclosures required by GAAP, the standard compilation report is required to be modified by adding a separate paragraph disclosing such omissions. Choice “d” is incorrect. An ant may not compile financial statements that omit substantially all disclosures required by GAAP if the ant believes the omission is intended to mislead the s of the financial statements.

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2015 AIA Newly Released Questions—Auditing 46. A-8698 The standard ant’s report issued after reviewing the financial statements of a nonissuer in accordance with SSARS should state that the: a.

ant is not aware of any material modifications that should be made to the financial statements for them to be in accordance with GAAP.

b.

ant does not express an opinion or any other form of assurance on the entity’s internal control system.

c.

ant has no responsibility to update the report for circumstances occurring after the date of the report.

d.

Financial statements present fairly the entity’s financial position and the results of its operations and cash flows in conformity with GAAP.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A2 Topic to be assigned to: 2 Page reference (page # and outline point): A2-51 VII.B.10.f. ANSWER: Choice “a” is correct. An ant’s standard review report should include a statement that the ant is not aware of any material modifications that should be made to the financial statements to be in accordance with GAAP. Choice “b” is incorrect. Although it is true that the standard review report in accordance with SSARS does not include an opinion or any other form of assurance on the entity’s internal control system, this is not explicitly stated in the report. Choice “c” is incorrect. A standard review report in accordance with SSARS does not include the statement that the ant has no responsibility to update the report for circumstances occurring after the date of the report. Choice “d” is incorrect. A review report provides only limited assurance. The “present fairly” are used in an audit report, not a review report.

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2015 AIA Newly Released Questions—Auditing 47. A-8699 According to the AIA Code of Professional Conduct, which of the following activities results in an act discreditable to the profession? a.

A A solicits recent Uniform A Examination questions without written authorization from the AIA.

b.

A A signs a document containing immaterial false and misleading information, or permits or directs another A to do so.

c.

A A who is engaged to perform a government audit neglects to follow certain government auditing requirements and discloses in the audit report the fact that such requirements were not followed and the reasons for it.

d.

A A fails to give a client copies of the A’s workpapers related to a completed and issued work product upon the client’s request because the client has not paid fees payable to the A for the work product.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-10 I.C.8.b.(6) ANSWER: Choice “a” is correct. An act that is considered discreditable to the professions is when a A solicits recent Uniform A Examination questions without written authorization from the AIA. Choice “b” is incorrect. A A that signs a document containing immaterial false and misleading information, or permits or directs another A to do so, has failed to follow the Integrity and Objectivity Rule. Choice “c” is incorrect. The Compliance with Standards Rule, not Acts Discreditable Rule, describes that a A should comply with the appropriate standards. Note: The A may not necessarily have failed to follow the Compliance with Standards Rule because in extremely rare circumstances, a A may depart from certain government auditing requirements. Choice “d” is incorrect. A A is not required to give a client copies of the A’s workpapers. However, a A is required to return the client’s records even if the client has not paid the fees to the A. Failure to return client records would result in an act discreditable to the profession.

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2015 AIA Newly Released Questions—Auditing 48. A-8700 An issuer’s auditor is prohibited from providing tax services to which of the following individuals? a.

The chair of the board of directors.

b.

The chair of the audit committee.

c.

The CEO.

d.

The CFO of an of the issuer audited by another firm.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-24 IV.B.5. ANSWER: Choice “c” is correct. An issuer’s auditor is prohibited from providing tax services to corporate officers, the audit client, or to immediate family of corporate officers. Corporate officers manage the day-today operations of the corporation and include positions such as the CEO, CFO, and COO. Choice “a” is incorrect. An issuer’s auditor is allowed to provide tax services to individuals on the board of directors, which includes the chair of the board of directors. Choice “b” is incorrect. An issuer’s auditor is allowed to provide tax services to individuals on the board of directors, which includes the chair of the audit committee. Choice “d” is incorrect. An issuer’s auditor is allowed to provide tax services to the CFO of an of the issuer audited by another firm.

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2015 AIA Newly Released Questions—Auditing 49. A-8701 Each of the following is an ethical principle that should guide the work of auditors in the conduct of audits under government auditing standards, except: a.

Materiality.

b.

Integrity.

c.

The public interest.

d.

Proper use of government information.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 4 Page reference (page # and outline point): A6-53 V.A. ANSWER: Choice “a” is correct. The ethical principles that guide the work of auditors in the conduct of audits under government auditing standards do not include materiality. The ethical principles that guide the work of auditors in the conduct of audits under government auditing standards include serving the public interest, integrity, objectivity, proper use of governmental information, resources and positions, and professional behavior. Choice “b” is incorrect. The ethical principles that guide the work of auditors in the conduct of audits under government auditing standards include integrity. Choice “c” is incorrect. The ethical principles that guide the work of auditors in the conduct of audits under government auditing standards include the public interest. Choice “d” is incorrect. The ethical principles that guide the work of auditors in the conduct of audits under government auditing standards include proper use of government information.

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2015 AIA Newly Released Questions—Auditing 50. A-8702 According to the IFAC Code of Ethics for Professional ants, audit teams are required to be independent of the audit client during the engagement period and during which other period? a.

The fiscal year following the period covered by the financial statements.

b.

The period covered by the financial statements.

c.

The calendar years that include any part of the period covered by the financial statements.

d.

The two years prior to the period covered by the financial statements.

EDITOR ANSWER SECTION BELOW: Class to be assigned to: A6 Topic to be assigned to: 1 Page reference (page # and outline point): A6-24 IV.B.2. ANSWER: Choice “b” is correct. According to the IFAC Code of Ethics for Professional ant (and AIA/PCAOB), audit teams are required to be independent of the audit client during the engagement period and during the period covered by the financial statements. Choice “a” is incorrect. IFAC does not include a requirement that the audit teams should be independent during the entire fiscal year following the period covered by the financial statements. The requirement is that the audit team is independent during the engagement team period (which may include part of the following fiscal year) and the period covered by the financial statements. Choice “c” is incorrect. The requirement for independence includes the period covered by the financial statements, not the calendar year covered by the financial statements. Some entities’ financial statements have a fiscal year-end (i.e., June 30) rather than a calendar year-end (i.e., December 31). Choice “d” is incorrect. IFAC does not include a requirement that the audit teams should be independent two years prior to the period covered by the financial statements.

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AUDITING 2015 AIA Newly Released Sims

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Sampling and Communications A5, Sim 2, Task 6 Title: Internal Control Report (AIA Adapted)

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Selection List – Column B Question 1

Question 2

ant's Report on Internal Controls

analyzed

Auditor's Report on Agreed-Upon Procedures Auditor's Report on Internal Controls Independent ant's Report

audited examined reviewed

Independent Auditor's Report ed Public ing Firm Report

tested

Selection List – Column B Question 3 American Institute of Certified Public ants

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Question 4 assessment

Auditing Standards Board Committee of Sponsoring Organizations of the Treadway Commission International Auditing and Assurance Board

attestation

Public Company ing Oversight Board Securities and Exchange Commission

examination inspection review

audit evaluation

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Selection List – Column B Question 5

Question 6

American Institute of Certified Public ants

Legitimate

Auditing Standards Board Committee of Sponsoring Organizations of the Treadway Commission International Auditing and Assurance Board

Logical Reasonable Reliable

Public Company ing Oversight Board Securities and Exchange Commission

Sufficient Valid

Selection List – Column B Question 7

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Question 8 Cost considerations

American Institute of Certified Public ants

Design limitations Distinct limitations Inherent limitations

Auditing Standards Board Committee of Sponsoring Organizations of the Treadway Commission International Auditing and Assurance Board

Operational considerations Unique conditions

Public Company ing Oversight Board Securities and Exchange Commission

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Title: Internal Control Report (AIA Adapted) Solution This question is testing the student's knowledge of the nonissuer report expressing an opinion directly on the company's internal controls over financial reporting. An example of this report may be found in A-5 Topic 2, "Internal Control Communications." #1: Independent Auditor's Report #2: examined #3: Committee of Sponsoring Organizations of the Treadway Commission #4: examination #5: American Institute of Certified Public ants #6: reasonable #7: inherent limitations #8: Committee of Sponsoring Organizations of the Treadway Commission

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Draft Report

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Other Professional Engagements A2, Sim 1, Task 7 Title: Review Engagement Procedures (AIA Adapted)

Selection List – Column B

Selection List – Column B

Questions 1&2

Questions 3&4

Are any investments encumbered? Are there compensating balances or other restrictions on the availability of funds? Has there been a proper cutoff of sales transactions? Please prepare and sign confirmations as of year-end for mailing. Please provide an outstanding list as of April 30, Year 1, in order to trace the subsequent bank statements. Please provide the following sample of reconciliations for reperformance. Please provide the interest income report for recalculation.

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Please prepare and sign confirmations as of yearend for mailing. Please provide copies of the following sample of purchase invoices to voucher current year additions. Please provide the following sample of reconciliations for reperformance. Were consignments in or out considered in taking a physical count? What are the company's capitalization policies, and have those policies been consistently and appropriately applied? When will the physical inventory count and fixed asset reviews occur so that I may coordinate our observation.

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Selection List – Column B Question 5&6 Are there assets that have been pledged as collateral? Have all liabilities been appropriately accrued? Please prepare and sign confirmations as of year-end for mailing. Please provide an explanation for why the load amortization schedule does not recalculate. Please provide the following sample of reconciliations for reperformance. Please provide the following sample of invoices to perform the search for unrecorded liabilities.

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Title: Review Engagement Procedures (AIA Adapted) Solution Cash s receivable Inventory Fixed assets s payable Debt

Question or request Are there compensating balances or other restrictions on the availability of funds? Has there been a proper cutoff of sales transactions? Were consignments in or out considered in taking a physical inventory count? What are the company's capitalization policies, and have those policies been consistently and appropriately applied? Have all liabilities been appropriately accrued? Are there assets that have been pledged as collateral?

This question may be answered by process of elimination. Many answer choices relate to control or substantive procedures, which are performed in an audit but not in a review. (Examples of control procedures and substantive procedures are provided in A4.)

Question #1 (Cash—Are there compensating balances or other restrictions on the availability of funds?) and Question #2 (s receivable—Has there been a proper cutoff of sales transactions?) The following answer choices are unlikely inquiries to be made in a review and may be eliminated as answer choices. These answer choices are asking for management to provide additional corroborating evidence. Generally, in a review, the ant merely inquires of management and does not need additional detailed evidence to substantiate management's responses. • •

•

•

Please prepare and sign confirmations as of year-end for mailing. o Sending out confirmations is a substantive procedure performed in an audit, not a review. Please provide an outstanding check list as of April 30, Year 1 in order to trace to subsequent bank statements. o Substantive procedures, such as tracing checks to subsequent bank statements, are performed in an audit, not a review. Please provide the following sample of reconciliations for reperformance. o Reperformance, which is a procedure to test controls, is not typically performed in a review. Please provide the interest income report for recalculation. o Evidence of the interest income report is a substantive procedure more likely to be performed in an audit rather than in a review.

The remaining answer choices are: •

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Are investments encumbered? o This question may be asked in a review, but it does not directly relate to the cash or s receivable . Determining whether investments are encumbered typically relates to disclosures for investments.

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•

Are there compensating balances or other restrictions on the availability of funds? o This relates to cash. If cash is used as a compensating balance or has restrictions on the availability of funds, then appropriate disclosure and presentation of the cash balance (e.g., current or non-current) can be verified.

•

Has there been a proper cutoff of sales transactions? o This relates to s receivable. The ant is ing that sales made on credit are recorded in the correct period. o Note: This is also a question that could be related to cash. However, this is not the "best" response for cash. The cash balance is related to more items than just sales transactions. For example, cash may decrease as a result of payment of s payable or increase as a result of sale of stock. One concern related specifically to cash is whether it is used as a compensating balance or has other restrictions on the availability of the funds, which is why that response is the "best" choice for the cash inquiry.

Question #3 (Inventory—Were consignments in or out considered in taking a physical inventory count?) and Question #4 (Fixed assets—What are the company's capitalization policies, and have those policies been consistently and appropriately applied?) The following answer choices may be eliminated: • •

•

•

Please prepare and sign confirmations as of year-end for mailing. o Sending out confirmations is a substantive procedure performed in an audit, not a review. Please provide copies of the following sample of purchase invoices to vouch current year additions. o Substantive procedures, such as vouching purchase invoices to current year additions, are performed in an audit, not a review. Please provide the following sample of reconciliations for reperformance. o Reperformance, which is a procedure to test controls, is not typically performed in a review. When will the physical inventory count and fixed asset reviews occur so that I may coordinate our observation. o Observation of inventory is performed in an audit, not a review.

The remaining answer choices are: •

•

Were consignments in or out considered in taking a physical count? o This answer choice relates to inventory. The ant is ing that the appropriate amount of inventory is recorded. Specifically, if the client is the consignor, that inventory should be included in the count, even if off-site. If the client is the consignee, that inventory should be excluded from the count, even if on-site. What are the company's capitalization policies, and have those policies been consistently and appropriately applied? o This answer choice relates to fixed assets. The ant is ing the ing polices used and the method used in applying them.

Question #5 (s payable—Have all liabilities been appropriately accrued?) and Question #6 (Debt—Are there assets that have been pledged as collateral?) (null)

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The following answer choices may be eliminated: • •

•

•

Please prepare and sign confirmations as of year-end for mailing. o Sending out confirmations is a substantive procedure performed in an audit, not a review. Please provide an explanation for why the loan amortization schedule does not recalculate. o Typically, in a review, the ant does not perform detailed substantive testing, such as recalculation procedures, on individual balances. Please provide the following sample of reconciliations for reperformance. o Reperformance, which is a procedure to test controls, is not typically performed in a review. Please provide the following sample of invoices to perform the search for unrecorded liabilities. o The search for unrecorded liabilities is a substantive procedure that is typically performed in an audit, but not a review.

The remainder answer choices are: •

•

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Are there assets that have been pledged as collateral? o This question relates to debt. Sometimes when a company obtains debt, the company has to provide collateral for the debt. This provides more security for the creditor loaning the money. Assets that have been pledged as collateral should be disclosed in the financial statements. Have all liabilities been accrued? o This question relates to s payable. The ant is ing that all the liabilities (e.g., s payable) have been recorded. o Note: This is also a question that could be related to debt, because debt is a liability. However, this is not the "best" response for debt. Debt represents money that must be paid back. Liability is a broader term that refers to an economic obligation (which includes wages payable, unearned revenue, etc.) Therefore, the question "Are there assets that have been pledged as collateral?" is the best response for debt because it relates directly to debt rather than "have all liabilities been accrued," which is a question that could relate to several liability s.

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Other Professional Engagements A2, Sim 1, Task 11 Title: Research (AIA Adapted)

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Title: Research (AIA Adapted) Solution Source of answer for this question: AT 601.52 Keyword search: subsequent events Step 1: The question is asking about an attest engagement. Search just the attestation standards by clicking on the Attestation Standards [AT] folder (located on the left hand side of the screen). Step 2: Enter "compliance with law" and click "search within." You will find the majority of your results in AT 601, "Compliance Attestation." Step 3: Search just AT 601 "Compliance Attestation" by clicking on the AT 601 folder on the left-hand side of the screen. Step 4: Search for "Subsequent event" AT 601.52 is the "best" response because it addresses this question directly: •

•

The subsequent event of noncompliance occurs subsequent to Year 1 (noncompliance occurred during the first week of February Year 2), which is prior to the date of the examination report of February 10. It describes the effect on the examination report—an explanatory paragraph should be added.

Note: AT 601.23 is an incorrect response because it relates to subsequent noncompliance in an agreedupon procedures engagement.

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