Auditing and Attestation Answer Key

1. Correct: b

Explanation: An analytical procedure is a comparison of reported financial information with expected results using real data. In this case, using past sales figures and trends to determine an estimate for the current year's sales is an example of an analytical procedure.

2. Correct: b

Explanation: As a control to protect investment securities, the custody, authorization, and record-keeping of assets, including securities, should always be kept separate. Answer (c) is incorrect because more than one person should have custody of securities, and answer (d) is incorrect because securities should be registered in the owner's name.

3. Correct: a

Explanation: Flowcharts provide a visual explanation of client's activities and help make it easy to quickly grasp the design of the internal controls system. However, they do not identify weaknesses in the internal controls, and there are times when it's useful to use internal control questionnaires.

4. Correct: c

Explanation: The record count is simply the number of records in a file or batch, which in this case is 6.

5. Correct: a

Explanation: Reasonable assurance states that the internal controls of an entity should not be greater than the benefits those controls can be expected to deliver.

6. Correct: c

Explanation: Operational auditing is the process of evaluating the effectiveness and efficiency of an entity's operations. The goal is generally to identify any areas that could be improved. Answer (a) is incorrect because this type of auditing focuses on financial statements, not operations, and answer (d) is incorrect because analytical procedures are a way of evaluating information by estimations based on existing data.

7. Correct: b

Explanation: According to AU 530, the date on which fieldwork ends should be used as the date of the report under these circumstances.

8. Correct: c

Explanation: An auditor should perform tests of controls if the auditor is relying on those controls, or if substantive tests alone are not sufficient to the audit needs.

9. Correct: a

Explanation: The scope paragraph includes the generally accepted auditing standards (GAAS) followed during the audit. Answers (b) and (d) are incorrect because the opinion paragraph indicates that the financial statements follow GAAP.

10. Correct: a

Explanation: Because similar transactions are routed through the system in groups during batch processing, it creates an audit trail that is generally easier to follow.

11. Correct: c

Explanation: This situation generally calls for an unqualified opinion. There is no lack of consistency (see AU 420 for more on this issue), no deviation from GAAP, and no need for an adverse opinion.

12. Correct: c

Explanation: During a financial statement audit, an auditor is required to explicitly assess the risk of material misstatements that arise as a result of fraud. This is mandated by AU 316 and SAS 109. Answers (a) and (b) are incorrect because although SAS 109 calls for an assessment of the risk of material misstatements, it does not call for the assessment of material misstatements specifically due to errors.

13. Correct: c

Explanation: According to AU 508, only the opinion paragraph should be modified in this circumstance, and a separate explanatory paragraph should be added to include an explanation of the omission.

14. Correct: b

Explanation: WebTrust is the seal awarded to websites to help assure users of the privacy, security, business practices/transaction integrity, availability, and confidentiality of the website. It was established by the American Institute of Chartered Public Accountants (AICPA) and the Canadian Institute of Chartered Accountants (CICA). The others listed do not exist.

15. Correct: d

Explanation: The control risk is below or equal to the planned assessed level. To support the planned level, the population's tolerable rate must be greater than the deviation rate, and the auditor must estimate that the tolerable rate is greater than the deviation rate.

16. Correct: c

Explanation: According to AU 711, the predecessor auditor must read the pertinent sections of the registration statement and obtain a letter of representation from the successor auditor in this situation.

17. Correct: a

Explanation: The auditor should design auditing procedures to detect misstatements that aggregate the smallest amount that would have a material effect on the entity's income statement. According to AU 312, the auditor should design the audit to secure reasonable assurance that the financial statements have no material misstatement. Because it's hard to know during the planning stage how misstatements might affect a financial statement, the auditor generally must use the lowest amount that would have a material effect on the income statement during the planning phase.

18. Correct: c

Explanation: The expected rate of errors in an accounting record is usually lower than the tolerable rate of deviations for a test of a related control. It is not necessary to rely on internal control unless the expected error rate is lower that the tolerable rate of deviations, which is the maximum rate of deviations from a prescribed control procedure that an auditor would accept.

19. Correct: d

Explanation: An auditor is not prohibited from identifying risk factors during any of the points listed above. According to AU 316, an auditor can identify fraud risk factors during planning, obtaining an understanding, or while conducting fieldwork, and in addition, risk factors can be identified while considering acceptance or continuance of engagements and clients.

20. Correct: b

Explanation: Deviations from control procedures do increase the risk of material misstatements, but it is possible for a deviation to exist without creating an error.