Sample Questions
Question 1
Easy
Which is most likely a related party of a manufacturer?
Solution
D is correct. The controller's adult son is the strongest related-party indicator because the family relationship may allow influence over transactions, regardless of separate residence. Related-party status follows the applicable financial reporting framework. A supplier, lessor, or lender does not qualify solely from the volume or materiality of its transactions. See AU-C 550, Related Parties.
Question 2
Medium
Under the Sarbanes-Oxley Act, which responsibility belongs to an issuer's audit committee?
Solution
B is correct.
The audit committee of an issuer is directly responsible for the appointment, compensation, and oversight of the work of the registered public accounting firm, and its members must be independent, under Sarbanes-Oxley Section 301. Certification of the financial statements is a management responsibility of the CEO and CFO under Section 302. Design and implementation of internal control over financial reporting is management's responsibility under Section 404(a). Approving journal entries is an operational function that remains with management.
The audit committee of an issuer is directly responsible for the appointment, compensation, and oversight of the work of the registered public accounting firm, and its members must be independent, under Sarbanes-Oxley Section 301. Certification of the financial statements is a management responsibility of the CEO and CFO under Section 302. Design and implementation of internal control over financial reporting is management's responsibility under Section 404(a). Approving journal entries is an operational function that remains with management.
Question 3
Hard
In planning the audit of a retailer with historically stable margins, an auditor setting preliminary materiality should:
Solution
C is correct.
AU-C 320, Materiality in Planning and Performing an Audit, notes at AU-C 320.A4 that the determination of materiality requires the exercise of professional judgment. A percentage applied to a chosen benchmark is a common starting point; typical benchmarks include pretax income (5-10%), revenues (0.5-1%), and total assets (0.5-1%), with the appropriate benchmark depending on the nature of the entity and what measures users are likely to focus on. For a stable retail company where profitability is a key metric, pretax income at 5-10% is often appropriate; revenues may be more stable when earnings are volatile. Documenting the rationale for benchmark selection is required.
AU-C 320, Materiality in Planning and Performing an Audit, notes at AU-C 320.A4 that the determination of materiality requires the exercise of professional judgment. A percentage applied to a chosen benchmark is a common starting point; typical benchmarks include pretax income (5-10%), revenues (0.5-1%), and total assets (0.5-1%), with the appropriate benchmark depending on the nature of the entity and what measures users are likely to focus on. For a stable retail company where profitability is a key metric, pretax income at 5-10% is often appropriate; revenues may be more stable when earnings are volatile. Documenting the rationale for benchmark selection is required.
