1-B
2-C
3-B
4-B
5-B
6-A
1) Correct Answer B: The title of a special-purpose framework report should be “Independent Auditor's Report.”
The management of the company is responsible for the financial statements, not the auditor. Because the auditor is preparing the auditor's report under a special-purpose framework, he or she would sign the report (not the company controller). The financial statements are prepared using a special-purpose framework. The audit report would state that the audit was conducted in accordance with auditing standards generally accepted in the United States of America.
2) Correct Answer C: AU-C 315.A7–.A10 indicates that analytical procedures should be used to assist in planning the audit. Further, this section indicates that in using analytical procedures to assist in audit planning, the procedures should concentrate on enhancing the auditor's understanding of the client's business and identifying areas of specific risk.
Analytical procedures are also used as a substantive test to test individual account balances that depend on accounting estimates and in the overall final review stage to evaluate the adequacy of evidence gathered concerning unusual balances.
Analytical procedures provide little, if any, help in identifying material weaknesses in internal control.
3) Correct Answer B: The allowance for sampling risk is 4.5%. It is the difference between the upper precision limit of 8% and the sample deviation rate of 3.5% (seven errors in a sample of 200 items).
4) Correct Answer B: Evidence is appropriate if it is reliable and relevant.
In general, the reliability of evidence is greater:
• when it is obtained from knowledgeable independent sources outside the entity,
• when the related controls imposed by the entity are effective,
• when the evidence is personally obtained by the auditor, versus obtained indirectly or by inference,
• when it exists in documentary form (written versus oral), and
• when it is provided by original documents instead of photocopies or facsimiles.
In this light, the evidence with the greater reliability (and therefore the more appropriate evidence) would be a confirmation of account information (an original document in written form) that is mailed directly to the auditor from a source outside the entity.
5) Correct Answer B: Examples of accounting estimates are allowances for loan losses, annual effective tax rate in interim reporting, and the percent of completion under contracts. Accounts receivable in itself is not an accounting estimate. The collectibility and thus any allowance is an estimate.
6) Correct Answer A: Application controls are designed to achieve specific control objectives related to specific accounting tasks. They pertain to the processing of individual applications. Application controls are manual or automated procedures that operate at a business process level..
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