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Unformatted text preview: Becker Professional Education Registered to: Question CPA-02332 Which of the following factors should an auditor consider in making a judgment about whether a control deficiency is a significant deficiency? I. The likelihood that a control will fail to prevent or detect a misstatement. II. The magnitude of the misstatement that could result from the deficiency. a. b. c. d. I only. II only. Both I and II. Neither I nor II. Explanation Choice "c" is correct. When evaluating whether a control deficiency is a significant deficiency or a material weakness, the auditor should consider both the likelihood and magnitude of any potential misstatement. Choices "a", "b", and "d" are incorrect, based on the explanation above. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02470 Which of the following statements is correct concerning significant deficiencies in internal control with respect to an audit of a nonissuer? a. b. c. d. An auditor is required to search for significant deficiencies during an audit. All significant deficiencies are also considered to be material weaknesses. An auditor may communicate significant deficiencies during an audit or after the audit's completion. An auditor may report that no significant deficiencies were noted during an audit. Explanation Choice "c" is correct. Because timely communication may be important, the auditor may choose to communicate significant deficiencies during the course of the audit rather than after the audit is concluded. Choice "a" is incorrect. The auditor is not obligated to search for significant deficiencies. Choice "b" is incorrect. All material weaknesses are significant deficiencies, but not all significant deficiencies are material weaknesses. Choice "d" is incorrect. Because of the potential for misinterpretation, the auditor should not issue a written report representing that no significant deficiencies were noted during the audit. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02496 Significant deficiencies are control deficiencies that come to an auditor's attention that are: a. b. c. d. Disclosures of information that significantly contradict the auditor's going concern assumption. Material fraud or illegal acts perpetrated by high-level management. Important enough to merit attention by those charged with governance. Manipulation or falsification of accounting records or documents from which financial statements are prepared. Explanation Choice "c" is correct. Significant deficiencies in the design or operation of internal control are control weaknesses that are important enough to merit attention by those charged with governance. Choice "a" is incorrect. Information that significantly contradicts the auditor's going concern assumption is not considered a significant deficiency. Choice "b" is incorrect. Fraud perpetrated by high-level managers should be reported to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control. Choice "d" is incorrect. Fraud should be reported to an appropriate level of management, and sometimes to the audit committee / those charged with governance, but it does not necessarily represent a significant deficiency in internal control. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02508 Which of the following matters would an auditor most likely communicate to those charged with governance? a. A list of negative trends that may lead to working capital deficiencies and adverse financial ratios. b. The level of responsibility assumed by management for the preparation of the financial statements. c. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables. d. The effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance. Explanation Choice "d" is correct. The auditor should communicate the initial selection of, and changes in, significant accounting policies to those charged with governance. Choice "a" is incorrect. Negative trends and adverse financial ratios are evaluated by an auditor when considering an entity's ability to continue as a going concern. These trends and ratios are not required to be communicated to those charged with governance. Choice "b" is incorrect. The auditor's communications to those charged with governance include the level of responsibility that the auditor is assuming regarding matters of interest to those charged with governance, not the level of responsibility assumed by management. Choice "c" is incorrect. The auditor is required to inform the audit committee about difficulties encountered with management during the audit. Difficulties encountered in achieving a satisfactory response rate from the entity's customers in confirming accounts receivables generally would not be communicated to those charged with governance, since such difficulties are not related to management. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02513 Which of the following should be included as a written representation from management? a. The belief that misstatements identified by the auditor and not corrected are immaterial. b. The belief that misstatements identified by the auditor and corrected are material. c. The belief that the auditor is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles. d. The belief that the financial statements are completely accurate in all respects. Explanation Choice "a" is correct. The representation letter should include management's belief that the effects of any uncorrected financial statement misstatements aggregated by the auditor during the current engagement and pertaining to the latest period presented are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Choice "b" is incorrect. If the misstatements have been corrected, there is no need for management to make representations regarding their materiality. Choice "c" is incorrect. Management (and not the auditor) is responsible for the fair presentation of the financial statements in conformity with generally accepted accounting principles. Choice "d" is incorrect. Management states its belief that the financial statements are fairly presented in conformity with GAAP. Fair presentation does not mean that the financial statements are completely accurate in all respects, but that they are accurate in all material respects. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02524 "There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements." The foregoing passage is most likely from a: a. b. c. d. Report on internal control. Special report. Management representation letter. Letter for underwriters. Explanation Choice "c" is correct. The statement concerning communications with regulatory agencies is made by management to the auditor as written confirmation of a matter for which corroborating evidence can only be obtained from inquiry of management. The statement would appear in the management representation letter. Choice "a" is incorrect. As a representation of management, the statement concerning communications with regulatory agencies would not appear in the auditor's report on internal control. Choice "b" is incorrect. As a representation of management, the statement concerning communications with regulatory agencies would not appear in the auditor's special report. Choice "d" is incorrect. A statement concerning communications with regulatory agencies generally would not appear in an auditor's letter for underwriters. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02527 In identifying matters for communication with those charged with governance, an auditor most likely would ask management whether: a. b. c. d. The turnover in the accounting department was unusually high. It consulted with another CPA firm about accounting matters. There were any subsequent events of which the auditor was unaware. It agreed with the auditor's assessed level of control risk. Explanation Choice "b" is correct. The auditor is required to communicate to those charged with governance regarding certain matters, including management consultation with other auditors. Consequently, the auditor must ask management about this matter. Choice "a" is incorrect. Unusually high turnover in the accounting department is a negative factor in assessing control risk, but it is not a matter that needs to be communicated to those charged with governance. Choice "c" is incorrect. Inquiry of management concerning any subsequent events of which the auditor is unaware is a required audit procedure, which would also be confirmed as part of the management representation letter, but it is not a matter that needs to be communicated to those charged with governance. (They should already know!) Choice "d" is incorrect. The auditor alone has responsibility for judgments regarding the assessed level of control risk, and the auditor would not generally discuss this assessment with management. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02530 Which of the following matters would an auditor most likely consider to be a significant deficiency in internal control to be communicated to management and those charged with governance? a. b. c. d. Management's failure to renegotiate unfavorable long-term purchase commitments. Recurring operating losses that may indicate going concern problems. Evidence of a lack of objectivity by those responsible for accounting decisions. Management's current plans to reduce its ownership equity in the entity. Explanation Choice "c" is correct. A lack of objectivity by those responsible for accounting decisions represents a significant internal control deficiency because it may result in financial statements that are biased rather than being presented fairly. This is a matter that would merit attention by those charged with governance. Choice "a" is incorrect. Management's failure to renegotiate unfavorable long-term purchase commitments does not represent a significant deficiency in internal control. Choice "b" is incorrect. Going concern problems do not represent a significant deficiency in internal control. Choice "d" is incorrect. Management's plan to reduce its ownership equity in the entity does not represent a significant deficiency in internal control. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02533 Which of the following matters would an auditor most likely include in a management representation letter? a. b. c. d. Communications with those charged with governance concerning weaknesses in internal control. The completeness and availability of minutes of stockholders' and directors' meetings. Plans to acquire or merge with other entities in the subsequent year. Management's acknowledgment of its responsibility for the detection of employee fraud. Explanation Choice "b" is correct. The purpose of the management representation letter is to confirm management's oral evidence supplied during the engagement. Specific written representations obtained by the auditor should include acknowledgment as to the completeness and availability of minutes of stockholders' and directors' meetings. Choice "a" is incorrect. Communications with those charged with governance are generally not included in the management representation letter, whereas communications from regulatory agencies regarding noncompliance with, or deficiencies in, financial reporting practices would be included. Choice "c" is incorrect. Management's subsequent plans need not be included in the management representation letter, unless they will affect the carrying value or classification of assets and liabilities. Choice "d" is incorrect. Management acknowledges its responsibility for the fair presentation of the financial statements and states that they are unaware of any employee fraud, but does not acknowledge responsibility for the detection of employee fraud. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02540 Which of the following statements is correct about an auditor's required communication with those charged with governance? Assume those charged with governance are not involved in managing the entity. a. Any matters communicated to those charged with governance also are required to be communicated to the entity's management. b. The auditor is required to inform those charged with governance about significant errors discovered by the auditor and subsequently corrected by management. c. Disagreements with management about the application of accounting principles are not required to be communicated to those charged with governance if they have been appropriately resolved. d. Significant deficiencies in internal control previously reported to those charged with governance that have not been corrected need not be communicated again. Explanation Choice "b" is correct. If those charged with governance are not involved with managing the entity, the auditor should communicate material, corrected misstatements brought to management's attention as a result of the audit. Choice "a" is incorrect. Certain matters communicated to those charged with governance, such as those related to the competence and integrity of management, might not be appropriate for discussion with management. Choice "c" is incorrect. The auditor should communicate disagreements with management, whether or not resolved. Choice "d" is incorrect. Previously communicated significant deficiencies that have not been corrected should be communicated again, in writing, during the current audit. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02542 An auditor's letter issued on significant deficiencies relating to a nonissuer's internal control observed during a financial statement audit should: a. Include a brief description of the tests of controls performed in searching for significant deficiencies and material weaknesses. b. Indicate that the significant deficiencies should be disclosed in the annual report to the entity's shareholders. c. Include a paragraph describing management's assertion concerning the effectiveness of internal control. d. Indicate that the audit's purpose was to report on the financial statements and not to provide assurance on internal control. Explanation Choice "d" is correct. Conditions noted by the auditor that are significant deficiencies or material weaknesses should be reported in writing. Any report issued on such conditions should (1) indicate that the purpose of the audit was to report on the financial statements and not to provide assurance on internal control; (2) include the definition of materials weakness and, if applicable, significant deficiency; (3) include a restriction on use (i.e., the report is intended solely for the information and use of management, those charged with governance, etc.). Choice "a" is incorrect. During an audit, the auditor is not required to design tests specifically to detect significant deficiencies in internal control. Choice "b" is incorrect. Significant deficiencies in internal control are not generally disclosed in the annual report, and the auditor's letter on such conditions observed during a financial statement audit is intended solely for the information and use of management, those charged with governance, and others within the organization. Choice "c" is incorrect. Management does not provide an assertion concerning the effectiveness of internal control as part of a financial statement audit of a nonissuer (but would provide such an assertion in a separate engagement related to internal control). 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02543 An auditor would least likely initiate a discussion with those charged with governance concerning: a. The methods used to account for significant unusual transactions. b. The maximum dollar amount of misstatements that could exist without causing the financial statements to be materially misstated. c. Indications of fraud and illegal acts committed by a corporate officer that were discovered by the auditor. d. Disagreements with management as to accounting principles that were resolved during the current year's audit. Explanation Choice "b" is correct. The auditor's consideration of materiality is a matter of professional judgment and is influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. Materiality assessments are not typically discussed with those charged with governance. Choice "a" is incorrect. The auditor should communicate with those charged with governance about the appropriateness of significant accounting policies, such as the methods used to account for significant unusual transactions. Choice "c" is incorrect. The auditor should inform those charged with governance of illegal acts that come to the auditor's attention during the course of the audit. Fraud involving senior management should also be reported directly to those charged with governance. Choice "d" is incorrect. The auditor should discuss with those charged with governance any disagreements with management, whether or not they were satisfactorily resolved, about matters that individually or in the aggregate could be significant to the entity's financial statements or the auditor's report. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-02551 In reporting on a nonissuer's internal control over financial reporting in an attest engagement, a practitioner should include a paragraph that describes the: a. b. c. d. Documentary evidence regarding the control environment factors. Changes in internal control since the prior report. Potential benefits from the practitioner's suggested improvements. Inherent limitations of any internal control. Explanation Choice "d" is correct. In reporting on a no...
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