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# Audit 5 Questions

cpa
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Compare population 1 to population 2.
1. Size =
2. Variability=
3. specified tolerable misstatement =
4. spec risk of incorrect acceptance is greater.
The sample size from population is what compared to population 2.
a. Larger than the required sample size from population 2.
Choice "a" is correct. A lower risk of incorrect acceptance requires a greater sample size.
Compare population 1 to population 2.
1. Size =
2. Variability larger
3. specified tolerable misstatement larger
4. spec risk of incorrect acceptance is =
In case 2 the required sample size from population 1 is:
Choice "d" is correct. The effect on sample size cannot be determined , because there is more than one
change occurring . In this case, the increase in population variability results in an increase in sample size,
whereas the larger tolerable misstatement results in a decrease in sample size. The overall effect on sample
size will depend on which of the two effects is greater, but this cannot be determined from the information
provided.
Compare population 1 to population 2.
1. Size smaller
2. Variability smaller
3. specified tolerable misstatement =
4. spec risk of incorrect acceptance is higher
In case 4 the required sample size from population 1 is:
Choice "c" is correct. There are two changes occurring, but they both have the same effect on sample size.
A decrease in population variability and an increase in the risk of incorrect acceptance both result in a
decrease in the required sample size. Note that the number of items in the population is generally assumed
to have virtually no effect on sample size.
Compare population 1 to population 2.
1. Size larger
2. Variability equal
3. specified tolerable misstatement equal
4. spec risk of incorrect acceptance is lower
In case 4 the required sample size from population 1 is:
a. Larger than the required sample size from population 2.
Choice "a" is correct. A lower risk of incorrect acceptance results in an increase in sample size. Note that the
number of items in the population is generally assumed to have virtually no effect on sample size.
In a probability-proportional-to-size sample with a sampling interval of \$1 0,000, an auditor discovered that a
selected account receivable with a recorded amount of \$5,000 had an audited amount of \$4,000. If this were
the only misstatement discovered by the auditor, the projected misstatement of this sample would be:
a. \$1,000
b. \$2,000
c. \$5,000
d. \$10,000
Choice "b" is correct. The sample error of \$1 ,000 (\$5,000 - \$4,000) is projected to the entire interval through
use of a "tainting factor" of 20% (\$1 ,000/\$5,000). If this were the only misstatement discovered by the
auditor, the projected misstatement of this sample would be 20% of \$1 0,000, or \$2,000.
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:
a. 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.
b. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual
overstatements and understatements.
c. The asset account is fairly stated because the total projected misstatement is less than the tolerable
misstatement.
d. The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual
overstatements and understatements.
Choice "a" is correct. Selection of every twentieth item results in a sample that is 5% (60/12 = .05) of the
population. The sample results indicate a net overstatement of \$3,500 (= \$3,700 - \$200), which is then
projected to the total population as \$70,000 (= \$3,500 I .05). (Alternatively, 3,500 x 20 = 70,000). Since the
projected misstatement of \$70,000 exceeds the tolerable misstatement of \$60,000, there is an unacceptably
high risk that the actual misstatement in the population will exceed the tolerable misstatement
The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the:
a. Allowable risk of tolerable misstatement.
b. Preliminary estimates of materiality levels.
c. Efficiency of the audit.
d. Effectiveness of the audit.
Choice "d" is correct. Both the risk of incorrect acceptance and the risk of assessing control risk too low
relate to the effectiveness of an audit in detecting an existing material misstatement.
As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing.
This assessment occurred because the true deviation rate in the population was:
a. Less than the risk of assessing control risk too low, based on the auditor's sample.
b. Less than the deviation rate in the auditor's sample.
c. More than the risk of assessing control risk too low, based on the auditor's sample.
d. More than the deviation rate in the auditor's sample.
Choice "d" is correct. If the actual deviation rate in the population exceeds the maximum deviation rate based
on the sample, control risk will be understated , since the control will be less effective than sample results
would indicate.
An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical
methods:
a. Can more easily convert the sample into a dual-purpose test useful for substantive testing.
b. Eliminate the need to use judgment in determining appropriate sample sizes.
c. Afford greater assurance than a nonstatistical sample of equal size.
d. Provide an objective basis for quantitatively evaluating sample risk.
Choice "d" is correct. By using statistical sampling, the auditor can quantify sampling risk to assist in limiting it
to a level considered acceptable.
In statistical sampling methods used in substantive testing , an auditor most likely would stratify a population
into meaningful groups if:
a. Probability proportional to size (PPS) sampling is used .
b. The population has highly variable recorded amounts.
c. The auditor's estimated tolerable misstatement is extremely small.
d. The standard deviation of recorded amounts is relatively small.
Choice "b" is correct. The auditor may be able to reduce the required sample size by separating items
subject to sampling into relatively homogenous groups on the basis of some characteristic related to the
specific audit objective.
The use of the ratio estimation sampling technique is most effective when:
a. The calculated audit amounts are approximately proportional to the client's book amounts.
b. A relatively small number of differences exist in the population.
c. Estimating populations whose records consist of quantities, but not book values.
d. Large overstatement differences and large understatement differences exist in the population.
Choice "a" is correct. Ratio estimation is most effective if there is a correlation between book values and audit
amounts.
Which of the following statements is correct concerning statistical sampling in tests of controls?
a. As the population size increases, the sample size should increase proportionately.
b. Deviations from specific control activities at a given rate ordinarily result in misstatements at a lower rate.
c. There is an inverse relationship between the expected population deviation rate and the sample size.
d. In determining tolerable rate, an auditor considers detection risk and the sample size.
Choice "b" is correct. Deviations from control activities do not necessarily result in misstatements. Therefore,
deviations from pertinent control activities at a given rate would ordinarily be expected to result in
misstatements at a lower rate.
The likelihood of assessing control risk too high is the risk that the sample selected to test controls:
a. Does not support the auditor's planned assessed level of control risk when the true operating
effectiveness of internal control justifies such an assessment.
b. Contains misstatements that could be material to the financial statements when aggregated with
misstatements in other account balances or transactions classes.
c. Contains proportionately fewer monetary errors or deviations from prescribed internal controls than exist
in the balance or class as a whole.
d. Does not support the tolerable error for some or all of management's assertions.
Choice "a" is correct. The risk of assessing control risk too high is the risk that the assessed level of control
risk based on the sample is greater than the true risk based on the actual operating effectiveness of the
control.
Which of the following sample planning factors would influence the sample size for a substantive test of
details for a specific account?
1. expected amount of misstatement
2. measure of tolerable misstatement
Yes to both
When planning a particular sample for a substantive test of details, the auditor should
consider how much monetary misstatement in the account might exist without causing the financial
statements to be materially misstated (tolerable misstatement) as well as the expected size and frequency of misstatements.
While performing a test of details during an audit, an auditor determined that the sample results supported the
conclusion that the recorded account balance was materially misstated. It was, in fact, not materially
misstated. This situation illustrates the risk of:
a. Assessing control risk too high.
b. Assessing control risk too low.
c. Incorrect rejection .
d. Incorrect acceptance.
Choice "c" is correct. Erroneously concluding that an account balance is materially misstated is an example
of incorrect rejection.
The sample size of a test of controls varies inversely with:
1. Expected population deviation rate
2. tolerable rate.
1. NO 2. yes
The sample size for a test of controls varies directly with the expected deviation rate
and inversely with the tolerable rate. If the auditor expects more errors, he or she would increase sample
size; conversely, if the tolerable rate of deviation increases, not as many items need to be selected.
An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor
designed a statistical sample that would provide 1 % risk of assessing control risk too low (99% confidence)
that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience
that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of
them were lacking approval. The auditor then determined the upper deviation rate to be 8%.
In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of
control risk because the:
a. Tolerable rate (7%) was less than the upper deviation rate (8%).
b. Expected deviation rate (7%) was more than the percentage of errors in the sample (3.5%).
c. Upper deviation rate (8%) was more than the percentage of errors in the sample (3.5%).
d. Expected deviation rate (2.5%) was less than the tolerable rate (7%).
Choice "a" is correct. The auditor decided to increase the level of the preliminary assessment of control risk
because the 7% tolerable rate (maximum rate of deviations that an auditor would be willing to accept without
altering his/her planned reliance on the control) was less than the 8% upper deviation rate.
Which of the following statements is correct about the sample size in statistical sampling when testing internal
controls?
a. The auditor should consider the tolerable rate of deviation from the controls being tested in determining
sample size.
b. As the likely rate of deviation decreases, the auditor should increase the planned sample size.
c. The allowable risk of assessing control risk too low has no effect on the planned sample size.
d. Of all the factors to be considered, the population size has the greatest effect on the sample size.
Choice "a" is correct. There is an inverse relationship between the tolerable deviation rate and sample size:
as the auditor is willing to accept a greater deviation rate, a smaller sample size can be used.
Which of the following is the primary objective of probability proportional to sample size?
a. To identify overstatement errors.
b. To increase the proportion of smaller-value items in the sample.
c. To identify items where controls were not properly applied.
d. To identify zero and negative balances.
Choice "a" is correct. PPS sampling is a method designed to estimate overstatement errors. Zero balances,
negative balances, and understated balances require special design considerations.
Which of the following would be a consideration in planning an auditor's sample for a test of controls?
a. Preliminary judgments about materiality levels.
b. The auditor's allowable risk of assessing control risk too high.
c. The level of detection risk for the account.
d. The auditor's allowable risk of assessing control risk too low.
Choice "d" is correct. The auditor's allowable risk of assessing control risk too low has an inverse relationship
with sample size when planning a sample for a test of controls.
Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts?
a. Preliminary judgments about materiality levels.
b. The amount of bad debt write-offs in the prior year.
c. The size of the intercompany receivable balance.
d. The auditor's allowable risk of assessing control risk is too low.
Choice "a" is correct. When planning a sample for a test of subsequent cash receipts, the auditor should
consider preliminary judgments about materiality levels.
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.
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.
An auditor's letter issued on significant deficiencies relating to a non issuer'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.
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. ).
Which of the following statements is correct concerning an auditor's required communication of significant
deficiencies in internal control noted during a financial statement audit of a non issuer?
a. A significant deficiency previously communicated during the prior year's audit that remains uncorrected
causes a scope limitation.
b. An auditor should perform tests of controls on significant deficiencies before communicating them to the
client.
c. An auditor's report on significant deficiencies should include a restriction on the distribution of the report.
d. An auditor should communicate significant deficiencies after tests of controls, but before commencing
substantive tests.
Choice "c" is correct. The report should state that the communication is intended solely for the use of
management, those charged with governance, and others within the organization.
Any report issued on significant deficiencies noted during an audit 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 significant deficiencies, and (3) include a restriction on the use of
the report.
How do the scope, procedures, and purpose of tests of controls in an examination of the internal control of a
non issuer compare to those for obtaining an understanding of internal control and assessing control risk as
part of a financial statement audit of a non issuer? similar/different
Scope
Procedures
Purpose
Choice "d" is correct. In an engagement to express a separate opinion on an entity's internal control, the
scope is extensive, and the purpose is directed primarily toward the internal control report. In an audit, the
scope is less extensive, and the purpose is to determine the nature, timing, and extent of auditing procedures.
Similar procedures generally would be used in both types of engagements.
In a financial statement audit of a non issuer, a previously communicated significant deficiency that has not
been corrected, ordinarily should be communicated again:
a. Only if the deficiency has a material effect on the auditor's assessment of control risk.
b. Unless the entity accepts that degree of risk because of cost-benefit considerations.
c. Only if the deficiency is considered a material weakness.
d. In writing , during the current audit.
Choice "d" is correct. A previously communicated significant deficiency that has not been corrected ordinarily
should be communicated again in writing, during the current audit.
Rachel , CPA, is conducting an audit of Eaton Enterprises, a non issuer. Rachel has conducted her audit in
accordance with generally accepted auditing standards, and she wishes to emphasize in her report that such
standards do not require the same level of testing and reporting on internal control as is required for audits of
issuers under the Sarbanes-Oxley Act. Which report modification would be most appropriate in this situation?
a. Only the scope paragraph should be modified .
b. An explanatory paragraph should be added following the opinion paragraph.
c. An explanatory paragraph should be added preceding the opinion paragraph, and the opinion paragraph
should state, "Except for the matter discussed in the preceding paragraph ... "
d. No report modification should be made in this scenario.
Choice "a" is correct. The auditor may expand the scope paragraph to state that internal control was
considered as a basis for designing appropriate audit procedures, but not for the purpose of expressing an
opinion on the effectiveness of internal control. This serves to emphasize that the extended level of testing
and reporting on internal control required by the Sarbanes-Oxley Act did not apply in this case.
Hannah, CPA, has been engaged to perform financial statement audits for three different clients. The first two
clients, McCormick Surf Shop and Kleinpeter Technologies, are both non issuers, while the third client, Bender
Industries, is an issuer. Hannah is required to follow PCAOB standards in her audit of Bender Industries.
She has also been asked to conduct the Kleinpeter audit in accordance with both generally accepted auditing
standards and the auditing standards of the PCAOB. Regarding the McCormick engagement, Hannah has
decided to follow only generally accepted auditing standards, and not the standards of the PCAOB. Which of
the following best describes the scope of Hannah's work related to internal control in these three
engagements?
a. Hannah must express an opinion on the effectiveness of internal control in all three engagements.
b. Hannah must express an opinion on the effectiveness of internal control in both the Bender and
Kleinpeter engagements, but is not required to express such an opinion in the McCormick engagement.
c. Hannah must express an opinion on the effectiveness of internal control in the Bender engagement, but is
not required to express such an opinion in the Kleinpeter and McCormick engagements.
d. Hannah is not required to express an opinion on the effectiveness of internal control in any of the three
engagements, since she was hired to perform a financial statement audit and not to report on internal
control.
Choice "c" is correct. While it is true that Hannah is following PCAOB standards in both the Bender and
Kleinpeter engagements, PCAOB standards do not require expanded testing and reporting on internal control
for non issuers. Therefore, only in the Bender engagement would Hannah be required to express an opinion
on the effectiveness of internal control.
Management of Eva Industries, an issuer as defined under the Sarbanes-Oxley Act, believes it has eliminated
a material weakness previously noted in its assessment of internal control, and has hired Henna and
Company, CPAs, to attest to the improvements in internal control. Which of the following is true of this
engagement?
a. It is required by PCAOB standards.
b. It is only required if Eva Industries elects to have an audit in accordance with PCAOB standards.
c. Eva's management must provide a written report to accompany Henna and Company's report.
d. It is required by generally accepted auditing standards.
Choice "c" is correct. Eva's management must provide a written report to accompany Henna and Company's
report.
Jackson is auditing the financial statements of Saffer Company, an issuer. Which of the following is true?
a. Jackson is not required to audit internal control, but should report any significant deficiencies or material
weaknesses noted.
b. Saffer is required to obtain an audit of its internal control, but a professional other than Jackson may be
hired for this purpose.
c. Jackson is required to audit and report on Saffer's internal control.
d. If Jackson provides an adverse opinion on the financial statements, an audit of Saffer's internal control is
not permitted .
Choice "c" is correct. PCAOB Auditing Standard NO.5 requires Jackson to perform an integrated audit,
auditing both the financial statements and management's assessment of the effectiveness of internal control.
In which case might an auditor of an issuer render a qualified opinion on internal control?
a. When there is a scope limitation .
b. When there is a material weakness in internal control.
c. Both "a" and "b".
d. Neither "a" nor "b".
Choice "d" is correct. A scope limitation requires the auditor to disclaim an opinion or withdraw from the
engagement, and a material weakness in internal control requires the auditor to issue an adverse opinion.
Neither situation would result in a qualified opinion.
Which of the following actions should the auditor take in response to discovering a deviation from the
prescribed control procedure?
a. Make inquiries to understand the potential consequence of the deviation.
b. Assume that the deviation is an isolated occurrence without audit significance.
c. Report the matter to the next higher level of authority within the entity.
d. Increase sample size of tests of controls.
Choice "a" is correct. In response to discovering a deviation from a prescribed control procedure, the auditor
should make inquiries to understand the potential consequence of the deviation
In identifying matters for communication with those charged with governance, an auditor most likely would ask
management whether:
a. The turnover in the accounting department was unusually high.
b. It consulted with another CPA firm about accounting matters.
c. There were any subsequent events of which the auditor was unaware.
d. It agreed with the auditor's assessed level of control risk.
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
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.
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.
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.
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.
Which of the following disagreements between the auditor and management do not have to be
communicated by the auditor to those charged with governance?
a. Disagreements regarding management's judgment about accounting estimates for goodwill.
b. Disagreements about the scope of the audit.
c. Disagreements in the application of accounting principles relating to software development costs.
d. Disagreements of the amount of the LIFO inventory layer based on preliminary information
Choice "d" is correct. Disagreements based upon preliminary information need not be communicated by the
auditor to those charged with governance.
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.
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.
"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. Report on internal control.
b. Special report.
c. Management representation letter.
d. Letter for underwriters.
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.
Which of the following matters would an auditor most likely include in a management representation letter?
a. Communications with those charged with governance concerning weaknesses in internal control.
b. The completeness and availability of minutes of stockholders' and directors' meetings.
c. Plans to acquire or merge with other entities in the subsequent year.
d. Management's acknowledgment of its responsibility for the detection of employee fraud .
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.
The date of the management representation letter should coincide with the date of the:
a. Balance sheet.
b. Latest interim financial information.
c. Auditor's report.
d. Latest related party transaction.
Choice "c" is correct. Because the auditor is concerned with events occurring through the date of the audit
report that may require adjustment to or disclosure in the financial statements, the management
representation letter should be dated as of the date of the auditor's report.
Which of the following statements might be included among additional written client representations obtained
by the auditor?
a. Compensating balances and other arrangements involving restrictions on cash balances have been
disclosed .
b. Management acknowledges responsibility for illegal actions committed by employees.
c. Sufficient audit evidence has been made available to permit the issuance of an unqualified opinion.
d. Management acknowledges that there are no material weaknesses in internal control.
Choice "a" 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 might
include acknowledgment that all compensating balances or other restrictions on cash have been disclosed.
Which of the following factors most likely would cause an auditor to question the integrity of management?
a. Management has an aggressive attitude toward financial reporting and meeting profit goals.
b. Audit tests detect material fraud that was known to management, but not disclosed to the auditor.
c. Managerial decisions are dominated by one person who is also a stockholder.
d. Weaknesses in internal control reported to the audit committee are not corrected by management.
Choice "b" is correct. Management is required to disclose all material matters to the independent auditor,
including information concerning material fraud . This disclosure is so important that it is included in writing, in
the management representation letter. Failure of management to disclose material fraud to the auditor would
cause the auditor to question management's integrity and perhaps even to withdraw from the engagement.
Which of the following expressions most likely would be included in a management representation letter?
a. No events have occurred subsequent to the balance sheet date that require adjustment to, or disclosure
in , the financial statements.
b. There are no significant deficiencies in internal control identified during the prior-year's audit of which
those charged with governance are unaware.
c. We do not intend to provide any information that may be construed to constitute a waiver of the attorneyclient
privilege.
d. Certain computer files and other required audit evidence may exist only for a short period of time and only
Choice "a" is correct. It is appropriate for the representation letter to contain a statement regarding
subsequent events.
Which of the following matters most likely would be included in a management representation letter?
a. An assessment of the risk factors concerning the misappropriation of assets.
b. An evaluation of the litigation that has been filed against the entity.
c. A confirmation that the entity has complied with contractual agreements.
d. A statement that all material internal control weaknesses have been corrected .
Choice "c" is correct. The management representation letter should include information on recognition,
measurement, and disclosure, and will generally state that the company has complied with all aspects of
contractual agreements that may materially affect the financial statements.
Which of the following statements ordinarily is not included among the written client representations made by
the chief executive officer and the chief financial officer?
a. "Sufficient audit evidence has been made available to the auditor to permit the issuance of an unqualified
opinion."
b. "There are no unasserted claims or assessments that our lawyer has advised us are probable of
assertion and must be disclosed ."
c. "We have no plans or intentions that may materially affect the carrying value or classification of assets
and liabilities."
d. "No events have occurred subsequent to the balance sheet date that would require adjustment to, or
disclosure in , the financial statements."
Choice "a" is correct. The sufficiency of audit evidence and the type of opinion to be rendered are determined
by the auditor, who applies professional judgment in making such determinations. Management
representations are not necessary for the auditor to make such judgments, but rather would be used to
confirm representations given to the auditor regarding the financial statements, completeness of information ,
recognition , measurement, and disclosure, and subsequent events.
Which of the following management roles would typically be acknowledged in a management representation
letter?
a. Management has the responsibility for the design of controls to detect fraud.
b. Management communicates its views on ethical behavior to its employees.
c. Management's knowledge of fraud is communicated to the audit committee.
d. Management's compensation is contingent upon operating results.
Choice "a" is correct. Management acknowledges its responsibility for the design of controls to detect and
prevent fraud in its management representation letter.
The auditor's report on compliance and internal control over compliance designed to meet the requirements of
Government Auditing Standards (the Yellow Book), should include:
I. The scope of the auditor's testing of internal controls.
II. Uncorrected misstatements that were determined by management to be immaterial.
Choice "a" is correct. The scope of the auditor's testing of internal controls is required to be included in the
auditor's report on internal controls and compliance with laws and regulations in accordance with Government
Auditing Standards (the Yellow Book).
In performing an audit in accordance with Generally Accepted Government Auditing Standards (the "Yellow
Book"), the auditor:
a. Accepts less responsibility in conducting fieldwork than is accepted in a GAAS audit, since the specific
requirements of the Generally Accepted Government Auditing Standards reduce required professional
judgment.
b. Accepts shared responsibility with Federal Inspectors General, who are equally responsible for
compliance evaluation, control, and reporting .
c. Accepts greater reporting responsibilities than accepted under a GAAS audit, since the auditor must
report on compliance with laws, rules, and regulations, violations of which may affect financial statement
amounts, and on the organization's internal control over financial reporting.
d. Accepts equal reporting responsibilities with that accepted under GAAS audits, since compliance
evaluation and reporting have implied financial statement implications and require expanded treatment as
a material contingency.
Choice "c" is correct. An auditor's reporting requirements under Generally Accepted Government Auditing
Standards (GAGAS or the Yellow Book) are expanded to include reports on the audited entity's compliance
with laws, rules, and regulations that have a material impact on the financial statements and on internal
controls over financial reporting.
Rule: Reporting responsibilities under GAGAS are expanded to include:
1. Reports on compliance with laws, rules, and regulations, violations of which may affect financial
statement amounts, and
2. Reports on internal control over financial reporting.
Gearty & Duffy, certified public accountants, have been engaged to perform a single audit of Sleepy Knoll
Township, a local government receiving substantial federal financial assistance for community development
and housing assistance. A single audit represents:
a. An audit of annual activity of only federal financial assistance programs over the course of the town's
fiscal year.
b. An inception to date audit of only federal financial assistance programs over the course of the grant year
specified by the grant award.
c. An audit of the township's financial statements and of compliance with federal regulations relating to
federal financial assistance as prescribed by the Single Audit Act and OMB Circular A-133.
d. An audit of the township's financial statements and the fair presentation of the revenues derived from
federal financial assistance.
Choice "c" is correct. A single audit represents a combined audit of both an entity's financial statements and
federal financial assistance programs. The single audit provides audited organizations with the opportunity to
capitalize on the efficiency of satisfying their audit requirements with a single audit. Auditors are governed by
the Single Audit Act and OMB Circular A-133.
An audit performed in accordance with OMB Circular A-133 will expand the auditor's responsibilities beyond
generally accepted auditing standards. The auditor's expanded responsibilities include:
a. Performance of additional procedures to test and report on compliance with laws, rules, regulations and
provisions of contracts or grant agreements that have any effect on federal award programs.
b. Performance of additional procedures to test for noncompliance with laws, rules and regulations targeted
for review by the Office of the Inspector General.
c. Performance of additional procedures to test and report on compliance with laws, rules, regulations and
provisions of contracts or grant agreements that have a direct and material effect on major federal award
programs.
d. Performance of additional procedures to test and report on achievement of program objectives.
Choice "c" is correct. OMB Circular A-133 expands the auditor's responsibilities to include procedures
designed to test and report on compliance matters having a direct and material effect on major federal award
programs.
Gearty & Duffy, certified public accountants, have been engaged to perform an audit of Sleepy Knoll
Township in accordance with OMB Circular A-133. In connection with that engagement, Gearty & Duffy will
determine major programs:
a. Using a list of programs included in the work plan of the Office of the Inspector General.
b. By applying only a specific dollar threshold, where all programs exceeding the threshold would be
considered major.
c. By applying a risk-based approach.
d. By testing enough grants to achieve a single specific coverage percentage.
Choice "c" is correct. OMB Circular A-133 allows auditors to use a risk-based approach to determine major
grants.
An auditor most likely would be responsible for communicating significant deficiencies in the design of internal
control:
a. To the Securities and Exchange Commission when the client is a publicly-held entity.
b. To specific legislative and regulatory bodies when reporting under Government Auditing Standards.
c. To a court-appointed creditors' committee when the client is operating under Chapter 11 of the Federal
Bankruptcy Code.
d. To shareholders with significant influence (more than 20% equity ownership) when the signficant
deficiencies (reportable conditions) are deemed to be material weaknesses.
Choice "b" is correct. When reporting under Government Auditing Standards, the auditor should consider
whether any noted deficiencies in such internal controls should be reported to specific legislative and
regulatory bodies.
An auditor was engaged to conduct a performance audit of a governmental entity in accordance with
Government Auditing Standards. These standards do not require, as part of this auditor's report:
a. A statement of the audit objectives and a description of the audit scope.
b. Indications or instances of illegal acts that could result in criminal prosecution discovered during the audit.
c. The pertinent views of the entity's responsible officials concerning the auditor's findings.
d. A concurrent opinion on the financial statements taken as a whole.
Choice "d" is correct. A concurrent opinion on the financial statements taken as a whole is not a required part
of the auditor's report.
For an entity that does not receive governmental financial assistance, an auditor's standard report on financial
statements generally would not refer to:
a. Significant estimates made by management.
b. An assessment of the entity's accounting principles.
c. Management's responsibility for the financial statements.
d. The entity's internal control.
Choice "d" is correct. The auditor's standard report does not refer to the entity's internal control.
Which of the following is a documentation requirement that an auditor should follow when auditing in
accordance with Government Auditing Standards?
a. The auditor should obtain written representations from management acknowledging responsibility for
correcting instances of fraud , abuse, and waste.
b. Audit documentation should contain sufficient information so that supplementary oral explanations are not
required.
c. The auditor should document the procedures that assure discovery of all illegal acts and contingent
liabilities resulting from noncompliance.
d. Audit documentation should contain a caveat that all instances of material errors and fraud may not be
identified.
Choice "b" is correct. Per Government Auditing Standards, audit documentation should contain sufficient
information so that supplementary oral explanations are not required.
In performing a financial statement audit in accordance with Government Auditing Standards, an auditor is
required to report on the entity's compliance with laws and regulations. This report should:
a. State that the audit should be planned to obtain reasonable assurance about whether noncompliance
could have a material effect on the entity's programs.
b. Describe the laws and regulations that the entity must comply with.
c. Provide an opinion on overall compliance with laws and regulations.
d. Provide negative assurance of the entity's legal compliance.
Choice "a" is correct. Basic elements of a report on compliance include a statement that the audit should be
planned to obtain reasonable assurance about whether noncompliance could have a material effect on the
programs audited.
For financial statement audits, generally accepted government auditing standards (GAGAS) incorporate the
Statements on Auditing Standards (SAS) that are issued by the AICPA. GAG AS prescribe additional
standards on:
1. Direct reporting of illegal acts
2. Reporting on internal controls
1. Yes to both
Choice "a" is correct. Generally accepted government auditing standards (GAGAS) prescribe additional
standards on the direct reporting of illegal acts. For example, the auditor is required to directly report illegal
acts discovered during the audit to federal inspector generals if management fails to disclose such illegal acts
to the grantor or fails to take appropriate remedial action. In addition, GAGAS also prescribe additional
standards related to internal control reporting, such as requiring that the auditor provide a written report on
internal control in every financial statement audit and specific reporting over internal control over compliance.
Auditors conducting an audit in accordance with the Single Audit Act use a risk-based approach designed to:
a. Focus the audit on grants related to large federal programs.
b. Focus the audit on high-risk programs.
c. Reduce audit risk by providing an equal opportunity for all grants to be tested .
d. Reduce audit risk by providing an equal opportunity for all expended federal dollars to be tested.
Choice "b" is correct. The risk-based approach of the Single Audit Act is designed to focus the auditor's tests
of federal financial assistance on the programs with the highest risk.
An enterprise engaged a CPA to audit its financial statements in accordance with Government Auditing
Standards (the Yellow Book) because of the provisions of government grant funding agreements. Under
these circumstances, the CPA is required to report on the enterprise's internal controls either in the report on
the financial statements or in:
a. The report on the performance audit.
b. The notes to the financial statements.
c. A letter to the government funding agency.
d. A separate report.
Choice "d" is correct. The report on the audit of the financial statements should describe the scope of the
auditor's testing of compliance with laws and regulations and internal control over financial reporting, and
should either present the results of those tests or refer to a separate report containing that information.
Reporting standards for financial audits under Government Auditing Standards (the Yellow Book) differ from
reporting under generally accepted auditing standards in that Government Auditing Standards require the
auditor to:
a. Provide positive assurance that control activities regarding segregation of duties are consistent with the
entity's control objectives.
b. Present the results of the auditor's tests of controls.
c. Provide negative assurance that the auditor discovered no evidence of intentional override of internal
controls.
d. Describe the scope of the auditor's principal substantive tests.
Choice "b" is correct. The report on the audit of financial statements should describe the scope of the
auditor's testing of compliance with laws and regulations and internal control over financial reporting, and
present the results of those tests.
Management's written representation to the auditor in connection with a governmental audit would most likely
include:
a. A statement that management had identified and disclosed all material government programs to the
auditor.
b. Representation that all known noncompliance had been reported or negative assurance that other
noncompliance likely does not exist.
c. Negative assurance that the government has complied with compliance requirements.
d. Identification of management's interpretation of compliance requirements that are subject to different
interpretations.
Choice "d" is correct. The management letter will include identification of management's interpretation of
compliance requirements that are subject to different interpretations.
A report on internal control over compliance will include which of the following assertions?
a. A disclaimer of opinion on internal control over compliance.
b. An opinion as to whether internal controls were adequate to provide reasonable assurance that the
organization would comply, in all material respects, with laws rules and regulations.
c. Identification of material weakness in the event an adverse opinion is expressed.
d. Disclaimer of opinion in the event that significant weaknesses are identified
Choice "a" is correct. The audit opinion states that the audit was conducted in order to express an opinion on
compliance but not for the purpose of expressing an opinion on the effectiveness of internal control over
compliance.
Compliance audit workpapers will include all of the following documentation except:
a. Risk assessment procedures performed including those related to gaining an understanding of the
internal control over compliance.
b. Responses to the assessed risk of noncompliance including tests of compliance and tests of controls
c. Materiality levels.
d. Final basis for the opinion on the effectiveness of internal control over compliance.
Choice "d" is correct. The auditor will not express an opinion on the effectiveness of internal control over
compliance. Documentation of conclusions for an opinion would not be appropriate.
The auditors' purpose in establishing materiality levels in a compliance audit includes all of the following
except:
a. Determining the nature and extent of risk assessment procedures.
b. Determining the nature, timing and extent of additional audit procedures.
c. Evaluate whether the entity has complied with applicable requirements.
d. Establishing the basis for the opinion on effectiveness of internal control over compliance.
Choice "d" is correct. The auditor does not express an opinion on the effectiveness of internal control over
compliance. Materiality limits would not contribute to that nonexistent objective.
The auditor's objectives in a compliance audit of a governmental entity includes:
a. Forming an opinion on whether the government complied in all material respects with applicable
compliance requirements.
b. Providing negative assurance regarding a legal determination of compliance.
c. Limiting auditing procedures and audit exposure to the standards described by GAAS and GAGAS.
d. Minimizing control risk of noncompliance.
Choice "a" is correct. An objective of a compliance audit of a governmental entity is to form an opinion on
whether that government complied with applicable compliance requirements in all material respects, and
then to report at the level specified by the governmental audit requirement.
Detection risk of noncompliance is inversely related to:
a. Audit risk of noncompliance.
b. Risk of material noncompliance.
c. Inherent risk of noncompliance.
d. Control risk of noncompliance.
Choice "b" is correct. As risk of material noncompliance increases, detection risk of noncompliance should
decrease to reach a desired level of overall audit risk of noncompliance. This concept is identical to the
relationship between risk of material misstatement and detection risk.
How does Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Nonprofit
Organizations, define a subrecipient?
As a nonfederal entity that expends federal awards received from another entity to carry out a federal
program.
A nonfederal entity that expends federal financial assistance administered by another
entity is a sub recipient. For example, a state might receive federal funds and in turn provides those funds to
a not-for-profit organization to accomplish an objective (e.g., mental health care, homeless relief, etc.). The
not-for-profit organization would be the sub recipient.
A written client representation letter most likely would be an auditor's best source of corroborative information
of a client's plans to:
a. Terminate an employee pension plan.
b. Make a public offering of its common stock.
c. Settle an outstanding lawsuit for an amount less than the accrued loss contingency.
d. Discontinue a line of business.
Choice "d" is correct. A written client representation letter should include representations regarding matters
that may affect recognition, measurement, and disclosure. Management's plans to discontinue a line of
business may affect financial statement disclosure, since the results of operations of a component classified
as "held for sale" would be reported separately in the income statement under "discontinued operations."
A purpose of a management representation letter is to reduce:
a. Audit risk to an aggregate level of misstatement that could be considered material.
b. An auditor's responsibility to detect material misstatements only to the extent that the letter is relied on.
c. The possibility of a misunderstanding concerning management's responsibility for the financial
statements.
d. The scope of an auditor's procedures concerning related party transactions and subsequent events.
Choice "c" is correct. A purpose of a management representation letter is to reduce the possibility of a
misunderstanding concerning management's responsibility for the financial statements. The first
representation made in the letter states "we are responsible for the fair presentation in the financial
statements of financial position, results of operations and cash flows in conformity with GAAP."
Should an auditor communicate the following matters to those charged with governance of a public entity?
1. Significant audit adjustments recorded by the entity
2. Management's consultation with other accountants
Unless all of those charged with governance are also involved with managing the entity,
significant audit adjustments and significant matters relating to consultation with other accountants should be
communicated to those charged with governance.
A principal advantage of statistical methods of attribute sampling over nonstatistical methods is that they
provide a scientific basis for planning the:
a. Risk of overreliance.
b. Tolerable rate.
c. Expected population deviation rate.
d. Sample size.
Choice "d" is correct. A principal advantage of statistical methods of attribute sampling over nonstatistical
methods is that they provide a scientific basis for planning the sample size.
Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than unstratified
MPU because it usually:
a. May be applied to populations where many monetary errors are expected to occur.
b. Produces an estimate having a desired level of precision with a smaller sample size.
c. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.
d. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the
population.
Choice "b" is correct. A stratified sample generally is more efficient than an unstratified sample since the
population is classified in a manner that emphasizes the higher dollar value items. The result is an estimate
having a desired level of precision with a smaller sample size.
To determine the sample size for a test of controls, an auditor should consider the tolerable deviation rate, the
allowable risk of assessing control risk too low, and the:
a. Expected deviation rate.
b. Upper deviation rate.
c. Risk of incorrect acceptance.
d. Risk of incorrect rejection.
Choice "a" is correct. When determining the sample size for a test of controls, the auditor should consider the
expected deviation rate (which is the auditor's best estimate of the deviation rate in the population before the
sampling plan is executed), the tolerable deviation rate, and the allowable risk of assessing control risk too
low.
Which of the following statements is correct concerning probability proportional to size (PPS) sampling, also
known as dollar unit sampling?
a. The sampling distribution should approximate the normal distribution .
b. Overstated units have a lower probability of sample selection than units that are understated .
c. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan.
d. The sampling interval is calculated by dividing the number of physical units in the population by the
sample size.
Choice "c" is correct. In PPS sampling, the auditor controls the risk of incorrect acceptance by specifying that
risk level for the sampling plan. The inputs for PPS are tolerable error, risk of incorrect acceptance, number
of errors allowed, and the recorded amount of the population being sampled.
When using classical variables sampling for estimation, an auditor normally evaluates the sampling results by
calculating the possible error in either direction. This statistical concept is known as:
a. Precision .
b. Reliability.
c. Projected error.
d. Standard deviation.
Choice "a" is correct. The statistical concept of precision is used to describe the auditor's evaluation of
sampling results by calculating the possible error in either direction.
In a probability-proportional-to-size sample with a sampling interval of \$5,000, an auditor discovered that a
selected account receivable with a recorded amount of \$10,000 had an audit amount of \$8,000. If this were
the only error discovered by the auditor, the projected error of this sample would be:
Recorded
Amount
\$10,000

Audit
Amount -
\$8,000 -

Tainting
Percentage x
N/A

Sample
Interval -
N/A

Projected
Error
\$2,000
Which of the following statements is correct concerning statistical sampling in tests of controls?
a. Deviations from control procedures at a given rate usually result in misstatements at a higher rate.
b. As the population size doubles, the sample size should also double.
c. The qualitative aspects of deviations are not considered by the auditor.
d. There is an inverse relationship between the sample size and the tolerable rate.
Choice "d" is correct. As the auditor's tolerable rate decreases (the auditor cannot accept as large an error
rate) , the sample size increases and vice-versa. Therefore, there is an inverse relationship between the
sample size and the tolerable rate.
An auditor may decide to decrease the acceptable level of risk when:
a. Increased reliability from the sample is desired.
b. Many differences (audit value minus recorded value) are expected.
c. Initial sample results do not support the planned level of control risk.
d. The cost and effort of selecting additional sample items is low.
Choice "d" is correct. Decreasing the acceptable level of risk will result in a larger sample size, which the
auditor might not want to do unless the cost and effort of selecting additional sample items is low.
In determining the number of documents to select for a test to obtain assurance that all sales returns have
been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity.
The auditor should also consider the:

I. Likely rate of deviations.
II. Allowable risk of assessing control risk too high.
.In determining the number of sample items to select in a test of controls, the auditor
would also consider the likely rate of deviations. The higher the expected rate, the greater the number of
items selected.
When engaged to express an opinion on a nonissuer's internal control, an accountant should:
a. Obtain rnanagement's written assertions regarding whether the company has maintained effective internal
control.
b. Qualify any opinion concerning management's assertion that the cost of correcting any weaknesses
exceeds the benefits.
c. Keep informed of events subsequent to the date of the report that might have affected the accountant's
opinion.
d. Disclaim an opinion on whether the system taken as a whole is sufficient to prevent or detect material
errors or irregularities.
Choice "a" is correct. An auditor should obtain management's written assertion about the effectiveness of the
entity's internal control.

Choice "d" is incorrect. The accountant provides an opinion (and not a disclaimer) on the effective operation
of internal control.
Which of the following statements concerning material weaknesses and significant deficiencies is correct with
respect to an audit of a non issuer?
a. An auditor need not identify and communicate material weaknesses separately from significant
deficiencies.
b. All material weaknesses are significant deficiencies.
c. An auditor should report immediately material weaknesses and significant deficiencies discovered during
an audit.
d. All significant deficiencies are material weaknesses.
Choice "b" is correct. Since a material weakness in internal control is important enough to merit attention by
those charged with governance, it would also be considered a significant deficiency.

Choice "d" is incorrect. A material weakness is a significant deficiency that results in a reasonable likelihood
that a material misstatement in the financial statements will not be prevented or detected/corrected. Not all
significant deficiencies will meet this description.
The management of Cain Company, a non issuer, engaged Bell , CPA, to express an opinion on Cain's internal
control. Bell's report described several material weaknesses and potential errors and irregularities that could
occur. Subsequently, management included Bell's report in its annual report to the Board of Directors with a
statement that the cost of correcting the weaknesses would exceed the benefits. Bell should:
a. Disclaim an opinion as to management's cost-benefit statement.
b. Advise the Board that Bell either agrees or disagrees with management's statement.
c. Advise management that Bell's report was restricted for use only by management.
d. Advise both management and the Board that Bell was withdrawing the opinion.
Choice "a" is correct. The auditor should disclaim an opinion as to management's cost-benefit statement (i.e. ,
"We do not express an opinion or any other form of assurance on management's cost-benefit statement.").
When reporting on conditions relating to an entity's internal control observed during an audit of the financial
statements of a non issuer, the auditor should include a:
a. Description of tests performed to search for material weaknesses.
b. Statement of positive assurance on internal control.
c. Paragraph describing the inherent limitations of internal control.
d. Restriction on the use of the report.
Choice "d" is correct. When reporting on conditions relating to an entity's internal control observed during an
audit of the financial statements, the auditor should include a restriction on the use of the report.
An engagement to express an opinion on the internal control of a non issuer will generally:
a. Require procedures that duplicate those already applied in assessing control risk during a financial
statement audit.
b. Increase the reliability of the financial statements that are being audited.
c. Be more extensive in scope than the assessment of control risk made during a financial statement audit.
d. Be more limited in scope than the assessment of control risk made during a financial statement audit.
Choice "c" is correct. An engagement to express an opinion on internal control will generally be more
extensive in scope than the assessment of control risk made during a financial statement audit of a non issuer.
This occurs because assessing control risk is the primary purpose of an engagement to express an opinion
on internal control, whereas it is an incidental result of an audit of a nonissuer.
Which of the following statements concerning an auditor's communication of significant deficiencies identified
during the audit of a non issuer is correct?
a. The auditor should request a meeting with management one level above the source of the significant
deficiencies to discuss suggestions for remedial action.
b. Any report issued on significant deficiencies should indicate that providing assurance on internal control
was not the purpose of the audit.
c. Significant deficiencies discovered and communicated at an interim date should be reexamined with tests
of controls before completing the engagement.
d. Suggestions concerning administration efficiencies and business strategies should not be communicated
in the same report with significant deficiencies.
Choice "b" is correct. Any report issued on significant deficiencies should indicate that providing assurance
on internal control was not the purpose of the audit.
Which of the following representations should not be included in a report on internal control related matters
noted in an audit of a non issuer?
a. Significant deficiencies related to internal control design exist, but there are no material weaknesses.
b. There are no significant deficiencies in the design or operation of internal control.
c. Corrective follow-up action is recommended due to the relative significance of material weaknesses
discovered during the audit.
d. The auditor's consideration of internal control would not necessarily disclose all significant deficiencies
that exist.
Choice "b" is correct. A report on internal control related matters noted in an audit should not state that there
are no significant deficiencies in internal control, since this statement might erroneously imply that the auditor
searched for such conditions.
Our audit is designed to provide reasonable assurance of detecting misstatements that, in our judgment,
could have a material effect on the financial statements taken as a whole. Consequently, our audit will not
necessarily detect all misstatements that exist due to error, fraudulent financial reporting , or misappropriation
of assets.
A. Practitioner's report on management's assertion about an entity's compliance with specified requirements.
B. Auditor's communications on significant deficiencies in internal control.
C. Audit inquiry letter to legal counsel.
D. Lawyer's response to audit inquiry letter.
E. Communication from those charged with governance to the auditor.
F. Auditor's communication to those charged with governance (other than with respect to significant
deficiencies in internal control).
G. Report on the application of accounting principles.
H. Auditor's engagement letter.
I. Letter for underwriters.
J.
K.
L.
M.
N.
O.
P.
Accounts receivable confirmation request.
Request for bank cutoff statement.
Explanatory paragraph of an auditor's report on financial statements.
Partner's engagement review notes.
Management representation letter.
Successor auditor's communication with predecessor auditor.
Predecessor auditor's communication with successor auditor.
Choice "H" is correct. An understanding with the client should be established , and this understanding
should be documented through an engagement letter. The understanding, and the letter, should include the
auditor's responsibilities, including the fact that an audit is designed to provide only reasonable assurance of
detecting material misstatements, and therefore may not necessarily detect all misstatements that exist.
Nothing came to our attention that caused us to believe that at October 31, 20XX, there was any change in
the capital stock, increase in long-term debt, or decrease in consolidated net current assets or stockholders'
equity as compared with the amounts shown in the September 30, 20XX unaudited condensed consolidated
balance sheet.
Choice "I" is correct. In a comfort letter, negative assurance is provided with respect to changes in selected
financial statement items during a period subsequent to the date and period of the latest financial statements
included in the registration statement.
As discussed in Note 4 to the financial statements, the company experienced a net loss for the year ended
July 31 , 20XX, and is currently in default under substantially all of its debt agreements. In addition, on
September 25, 20XX, the company filed a prenegotiated voluntary petition for relief under Chapter 11 of the
U.S. Bankruptcy Code. These matters raise substantial doubt about the company's ability to continue as a
gOing concern.
Choice "L" is correct. When there is substantial doubt about an entity's ability to continue as a going
concern, the auditor would state his or her concerns in an explanatory paragraph of the auditor's report.
During the year under audit, we were advised that management consulted with Better & Best, CPAs. The
purpose of this consultation was to obtain another CPA firm's opinion concerning the company's recognition
of certain revenue that we believe should be deferred to future periods. Better & Best's opinion was
consistent with our opinion, so management did not recognize the revenue in the current year.
Choice "F" is correct. Unless all of those charged with governance are also involved with managing the
entity, the auditor should discuss with those charged with governance significant accounting or auditing
matters that were the subject of outside consultation.
The company believes that all material expenditures that have been deferred to future periods will be
recoverable
Choice "N" is correct. Management's discussion of its belief that all material expenditures that have been
deferred to future periods will be recoverable provides information regarding recognition , measurement, and
disclosure, and would be included in the management representation letter.
Our use of professional judgment and the assessment of audit risk and materiality for the purpose of our audit
mean that matters may have existed that would have been assessed differently by you. We make no
representation as to the sufficiency or appropriateness of the information in our audit documentation for your
purposes.
Choice "P" is correct. An audit of a new client may be facilitated by review of the predecessor's audit
documentation . The predecessor should make it clear that they are not responsible for the sufficiency or
appropriateness of the information in their audit documentation for the successor auditor's purposes.
2011