Financial Planning Problems

| August 14, 2017

1. In the first audit of a client, because of the client’s record retention policies, an auditor was not able to gather sufficient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. If the amounts in question could materially affect current operating results, the auditor wouldAnswer Be unable to express an opinion on the current year’s results of operations and cash flowsExpress a qualified opinion on the financial statements because of a client-imposed scope limitationWithdraw from the engagement and refuse to be associated with the financial statementsSpecifically state that the financial statements are not comparable to the prior year because of an uncertainty2. After issuance of the auditor’s report, the auditor has no obligation to make any further inquiries with respect to audited financial statements covered by an auditor’s report unless aAnswer Contingency is resolvedDevelopment occurs which may affect the client’s ability to continue as a going concernMaterial defalcation ensuesHistory of significant non-arms-length related party transactions is discovered3. Which of the following would the accountant most likely investigate during the review of financial statements of a nonpublic entity if accounts receivable did not conform to a predictable pattern during the year?Answer Sales returns and allowancesCredit salesSales of consigned goodsCash sales4. The auditor is least likely to use generalized audit software toAnswer Perform analytical procedures on the client’s dataAccess information stored on the client’s IT filesIdentify weaknesses in the client’s IT controlsTest the accuracy of the client’s computations5. During a review of the financial statements of a nonpublic entity, the CPA finds that the financial statements contain a material departure from generally accepted accounting principles. If management refuses to correct the financial statement presentations, the CPA shouldAnswer Disclose the departure in a separate paragraph of the reportIssue an adverse opinionAttach a footnote explaining the effects of the departureIssue a compilation report6. For an attributes sampling plan, the tolerable deviation rate is 4%, the computed upper deviation rate is 7%, the sample deviation rate is 3%, and the risk of assessing control risk too low is 5%. Which of the following is true?Answer The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rateThe auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rateThe auditor must increase control risk because the computed upper deviation rate is greater than the tolerable deviation rateThe auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate7. The formula for nonstatistical sampling for tests of account balances provided by the AICPA Answer Must be used for nonstatistical sampling.Includes a provision for the risk of incorrect acceptance. Is affected by the nature of other substantive tests used to test the account balance.Is largely based on the variation of items in the account. 8. An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude thatAnswer There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatementThere is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatementsThe asset account is fairly stated because the total projected misstatement is less than the tolerable misstatementThe asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements9. When assessing the tolerable deviation rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in misstatements. This explains why A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recordedDeviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactionsDeviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatements at a higher rateA recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement10. Before issuing a report on the compilation of financial statements of a nonpublic entity, the accountant shouldAnswer Apply analytical procedures to selected financial data to discover any material misstatementsCorroborate at least a sample of the assertions management has embodied in the financial statementsInquire of the client’s personnel whether the financial statements omit substantially all disclosuresRead the financial statements to consider whether the financial statements are free from obvious material errors11. An examination of a financial forecast is a professional service that involvesAnswer Compiling or assembling a financial forecast that is based on management’s assumptionsLimiting the distribution of the accountant’s report to management and the board of directorsAssuming responsibility to update management on key events for one year after the report’s dateEvaluating the preparation of a financial forecast and the support underlying management’s assumptions12. An auditor has taken a large sample from an audit population that is skewed in the sense that it contains a large number of small dollar balances. The auditor can conclude Answer The sampling distribution is not normal; therefore PPS sampling will more accurately define the nature of the populationThe sampling distribution is normal; therefore the confidence coefficient value can be used to evaluate the sample resultsThe sampling distribution is not normal; thus attribute sampling is the only alternative statistical tool that can be appropriately usedNone of the above answers is correct. 13. When expressing an opinion on a specified account or item in the financial statements, the auditor need only consider that account or item. However, the auditor must have audited the entire set of financial statements if this engagement requires a report on the entity’sAnswer Net incomeRetained earningsAssetsWorking capital14. When a CPA is associated with the preparation of forecasts, all of the following should be disclosed except the Answer Sources of informationCharacter of the work performed by the CPAMajor assumptions in the preparation of the forecastsProbability of achieving estimates15. An auditor will use the IT test data method in order to gain certain assurances with respect to theAnswer Input dataMachine capacityProcedures contained within the programDegree of keypunching accuracy16. In statistical sampling, setting the appropriate confidence level and desired sample precision are decisions made by the auditor that will affect sample size for a substantive test. Which of the following should not be a factor in the choice of desired precision? Answer The sampling risk. The size of an account balance misstatement considered materialThe audit resources available for execution of the sampling plan. The objectives of the audit test being conducted17. For an engagement in which the auditor performs a set of agreed-upon procedures, the auditor should do any of the following exceptAnswer Compare the procedures to be applied to the specified users’ written requirementsDiscuss the procedures with a representative of the usersPerform procedures similar to those applied in a review engagementReview contracts or correspondence from the specified users18. The auditor’s best course of action with respect to “other financial information” included in an annual report containing the auditor’s report is toAnswer Indicate in the auditor’s report that the “other financial information” is unauditedConsider whether the “other financial information” is accurate by performing a limited reviewObtain written representations from management as to the material accuracy of the “other financial information.” Read and consider the manner of presentation of the “other financial information19. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?Answer Significant related party transactions are pervasiveUnusual trade credit from suppliers is deniedArrearages in preferred stock dividends are paidRestrictions on the disposal of principal assets are present20. When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report shouldAnswer Disclose that the statements are not intended to conform with generally accepted accounting principlesDisclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standardsNot express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting usedInclude an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting21. While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. The situation illustrates the risk ofAnswer Incorrect rejectionIncorrect acceptance. Assessing control risk too high. Unable to determine22. Which of the following is true of generalized audit software packages?Answer They can be used only in auditing on-line computer systemsThey can be used on any computer without modificationThey each have their own characteristics which the auditor must carefully consider before using in a given audit situationThey enable the auditor to perform all manual test procedures less expensively.23. ACL is an example ofAnswer An EDI software packageAn IT software packageSoftware that allows auditors to retrieve data from client systemsA type of networking24. An auditor’s study and evaluation of the internal accounting control system made in connection with an annual audit is usually not sufficient to express an opinion on an entity’s system becauseAnswer The evaluation of weaknesses is subjective enough that an auditor should not express an opinion on the internal accounting controls aloneThe audit cost-benefit relationship permits an auditor to express only reasonable assurance that the system operates as designedManagement may change the internal accounting controls to correct weaknessesOnly those controls on which an auditor intends to rely are reviewed, tested, and evaluated25. Which of the following statements is correct concerning statistical sampling in tests of controls?Answer As the population size increases, the sample size should increase proportionatelyDeviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rateThere is an inverse relationship between the expected population deviation rate and the sample sizeIn determining tolerable deviation rate, an auditor considers detection risk and the sample size

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