Financial Planning Problems

Question # 00004998 Posted By: vikas Updated on: 12/09/2013 01:14 AM Due on: 12/30/2013
Subject Finance Topic Finance Tutorials:
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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 would

Be unable to express an opinion on the current year’s results of operations and cash flows

Express a qualified opinion on the financial statements because of a client-imposed scope limitation

Withdraw from the engagement and refuse to be associated with the financial statements

Specifically state that the financial statements are not comparable to the prior year because of an uncertainty

2. 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 a

Contingency is resolved

Development occurs which may affect the client’s ability to continue as a going concern

Material defalcation ensues

History of significant non-arms-length related party transactions is discovered

3. 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?

Sales returns and allowances

Credit sales

Sales of consigned goods

Cash sales

4. The auditor is least likely to use generalized audit software to

Perform analytical procedures on the client’s data

Access information stored on the client’s IT files

Identify weaknesses in the client’s IT controls

Test the accuracy of the client’s computations

5. 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 should

Disclose the departure in a separate paragraph of the report

Issue an adverse opinion

Attach a footnote explaining the effects of the departure

Issue a compilation report
6. 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?

The auditor must increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate

The auditor is likely to increase control risk because the risk of assessing control risk too low is greater than the tolerable deviation rate

The auditor must increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate

The auditor is likely to increase control risk because the computed upper deviation rate is greater than the tolerable deviation rate
7. The formula for nonstatistical sampling for tests of account balances provided by the AICPA

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 that

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 misstatement

There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements

The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement

The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements

9. 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 recorded

Deviations would result in errors in the accounting records only if the deviations and the misstatements occurred on different transactions

Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in misstatements at a higher rate

A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material misstatement
10. Before issuing a report on the compilation of financial statements of a nonpublic entity, the accountant should

Apply analytical procedures to selected financial data to discover any material misstatements

Corroborate at least a sample of the assertions management has embodied in the financial statements

Inquire of the client’s personnel whether the financial statements omit substantially all disclosures

Read the financial statements to consider whether the financial statements are free from obvious material errors
11. An examination of a financial forecast is a professional service that involves

Compiling or assembling a financial forecast that is based on management’s assumptions

Limiting the distribution of the accountant’s report to management and the board of directors

Assuming responsibility to update management on key events for one year after the report’s date

Evaluating the preparation of a financial forecast and the support underlying management’s assumptions
12. 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

The sampling distribution is not normal; therefore PPS sampling will more accurately define the nature of the population

The sampling distribution is normal; therefore the confidence coefficient value can be used to evaluate the sample results

The sampling distribution is not normal; thus attribute sampling is the only alternative statistical tool that can be appropriately used

None 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’s

Net income

Retained earnings


Working capital
14. When a CPA is associated with the preparation of forecasts, all of the following should be disclosed except the

Sources of information

Character of the work performed by the CPA

Major assumptions in the preparation of the forecasts

Probability of achieving estimates
15. An auditor will use the IT test data method in order to gain certain assurances with respect to the

Input data

Machine capacity

Procedures contained within the program

Degree of keypunching accuracy
16. 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?

The sampling risk.

The size of an account balance misstatement considered material

The audit resources available for execution of the sampling plan.

The objectives of the audit test being conducted
17. For an engagement in which the auditor performs a set of agreed-upon procedures, the auditor should do any of the following except

Compare the procedures to be applied to the specified users’ written requirements

Discuss the procedures with a representative of the users

Perform procedures similar to those applied in a review engagement

Review contracts or correspondence from the specified users
18. The auditor’s best course of action with respect to “other financial information” included in an annual report containing the auditor’s report is to

Indicate in the auditor’s report that the “other financial information” is unaudited

Consider whether the “other financial information” is accurate by performing a limited review

Obtain 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 information
19. 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?

Significant related party transactions are pervasive

Unusual trade credit from suppliers is denied

Arrearages in preferred stock dividends are paid

Restrictions on the disposal of principal assets are present

20. When an auditor reports on financial statements prepared on an entity’s income tax basis, the auditor’s report should

Disclose that the statements are not intended to conform with generally accepted accounting principles

Disclaim an opinion on whether the statements were examined in accordance with generally accepted auditing standards

Not express an opinion on whether the statements are presented in conformity with the comprehensive basis of accounting used

Include an explanation of how the results of operations differ from the cash receipts and disbursements basis of accounting

21. 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 of

Incorrect rejection

Incorrect acceptance.

Assessing control risk too high.

Unable to determine
22. Which of the following is true of generalized audit software packages?

They can be used only in auditing on-line computer systems

They can be used on any computer without modification

They each have their own characteristics which the auditor must carefully consider before using in a given audit situation

They enable the auditor to perform all manual test procedures less expensively.

23. ACL is an example of

An EDI software package

An IT software package

Software that allows auditors to retrieve data from client systems

A type of networking
24. 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 because

The evaluation of weaknesses is subjective enough that an auditor should not express an opinion on the internal accounting controls alone

The audit cost-benefit relationship permits an auditor to express only reasonable assurance that the system operates as designed

Management may change the internal accounting controls to correct weaknesses

Only those controls on which an auditor intends to rely are reviewed, tested, and evaluated
25. Which of the following statements is correct concerning statistical sampling in tests of controls?


As the population size increases, the sample size should increase proportionately

Deviations from specific internal control procedures at a given rate ordinarily result in misstatements at a lower rate

There is an inverse relationship between the expected population deviation rate and the sample size

In determining tolerable deviation rate, an auditor considers detection risk and the sample size
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  1. Tutorial # 00004784 Posted By: vikas Posted on: 12/09/2013 01:16 AM
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