FINAL EXAM Flashcards
Generally accepted auditing standards are
a. Required procedures to be used to gather evidence to
support financial statements.
b. Policies and procedures designed to provide reasonable
assurance that the CPA firm and its personnel comply
with professional standards.
c. Pronouncements issued by the Auditing Standards Board.
d. Rules acknowledged by the accounting profession
because of their universal application.
C
Which of the following is a conceptual difference between
the attestation standards and generally accepted auditing
standards?
a. The attestation standards do not apply to audits of
historical financial statements, while the generally
accepted auditing standards do.
b. The requirement that the practitioner be independent in
mental attitude is omitted from the attestation standards.
c. The attestation standards do not permit an attest
engagement to be part of a business acquisition study
or a feasibility study.
d. The attestation standards include reviews, while
generally accepted auditing standards do not.
A
Which of the following is not an attestation standard?
a. Sufficient evidence shall be obtained to provide a
reasonable basis for the conclusion that is expressed in
the report.
b. The report shall identify the subject matter on the
assertion being reported on and state the character of
the engagement.
c. The work shall be adequately planned and assistants,
if any, shall be properly supervised.
d. A sufficient understanding of internal control shall be
obtained to plan the engagement.
D
Which of the following is most likely to be unique to
the audit work of CPAs as compared to work performed by
practitioners of other professions?
a. Due professional care.
b. Competence.
c. Independence.
d. Complex body of knowledge.
C
The Public Company Accounting Oversight Board’s
standards require that due care is to be exercised in the
performance of an audit. This standard is ordinarily interpreted
to require
a. Thorough review of the existing safeguards over
access to assets and records.
b. Limited review of the indications of employee fraud
and illegal acts.
c. Objective review of the adequacy of the technical
training and proficiency of firm personnel.
d. Critical review of the judgment exercised at every
level of supervision
D
For which of the following can a member of the AICPA
receive an automatic expulsion from the AICPA?
I. Member is convicted of a crime punishable by imprisonment
for more than one year..
II. Member files his own fraudulent tax return.
III. Member files fraudulent tax return for a client knowing that it
is fraudulent.
a. I only.
b. I and II only.
c. I and III only.
d. I, II, and III.
D
Which of the following is an example of a safeguard
imple mented by the client that might mitigate a threat to
independence?
a. Required continuing education for all attest engage
ment team members.
b. An effective corporate governance structure.
c. Required second partner review of an attest engagement.
d. Management selection of the CPA firm.
B
Which of the following is a “self review” threat to
member independence?
a. An engagement team member has a spouse that serves
as CFO of the attest client.
b. A second partner review is required on all attest en
gagements.
c. An engagement team member prepares invoices for
the attest client.
d. An engagement team member has a direct financial
interest in the attest client.
C
According to the standards of the profession, which of the
following circumstances will prevent a CPA performing audit
engagements from being independent?
a. Obtaining a collateralized automobile loan from a fi
nan cial institution client.
b. Litigation with a client relating to billing for con
sulting services for which the amount is imma terial.
c. Employment of the CPA’s spouse as a client’s di rector
of internal audit.
d. Acting as an honorary trustee for a not for profit organization client.
C
The profession’s ethical standards most likely would
be considered to have been violated when a CPA represents
that specific consulting services will be performed for a
stated fee and it is apparent at the time of the representation
that the
a. Actual fee would be substantially higher.
b. Actual fee would be substantially lower than
the fees charged by other CPAs for comparable
services.
c. CPA would not be independent.
d. Fee was a competitive bid.
A
According to the ethical standards of the profession,
which of the following acts is generally prohibited?
a. Issuing a modified report explaining a failure
to fol low a governmental regulatory agency’s
stan dards when conducting an attest service for a
client.
b. Revealing confidential client information during a
qual ity review of a professional practice by a team
from the state CPA society.
c. Accepting a contingent fee for representing a client in
an examination of the client’s federal tax return by an
IRS agent.
d. Retaining client records after an engagement is terminated prior to completion and the client has demanded
their return.
D
Answer (d) is correct because when
an engagement is terminated prior to completion, the Acts Discreditable Rule states that a member is required to return only client records.
According to the profession’s ethical standards, which of
the following events may justify a departure from a Statement
of the Governmental Accounting Standards Board?
New
legislation
Evolution of a new form
of business transaction
a. No Yes
b. Yes No
c. Yes Yes
d. No No
C
May a CPA hire for the CPA’s public accounting firm
a non-CPA systems analyst who specializes in developing
computer systems?
a. Yes, provided the CPA is qualified to perform each of
the specialist’s tasks.
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product.
c. No, because non CPA professionals are not permitted
to be associated with CPA firms in public practice.
d. No, because developing computer systems is
not recognized as a service performed by public
accountants.
B
During an audit Bill Adams believes that his
supervisor’s position on an accounting matter, although
consistent with the client’s desires, materially departs
from GAAP—the basis followed for the client’s financial
statements. Bill discussed his concerns with his supervisor and
the matter is still not resolved. Following the AICPA Code of
Professional Conduct, which of the following is least likely to
be appropriate?
a. Bill should consider consulting with legal counsel.
b. Bill should determine whether there are
responsibilities to communicate the matter to third
parties.
c. Bill should document his understanding of the
situation in the working papers.
d. Bill should use the discreditable acts framework to
determine whether his supervisor is involved in an act
discreditable to the profession.
D
According to the standards of the profession, which of
the following activities would most likely not impair a CPA’s
independence?
a. Providing advisory services for a client.
b. Contracting with a client to supervise the client’s of
fice personnel.
c. Signing a client’s checks in emergency situations.
d. Accepting a luxurious gift from a client.
A
Which of the following reports may be issued only by an
accountant who is independent of a client?
a. Standard report on an examination of a financial fore cast.
b. Report on consulting services.
c. Compilation report on historical financial state ments.
d. Compilation report on a financial projection.
A
According to the requirements of the public accounting
profession, which of the following activities may be required
in exercising due care?
Consulting
with experts
Obtaining
specialty accreditation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
B
Larry Sampson is a CPA and is serving as an expert
witness in a trial concerning a corporation’s financial state
ments. Which of the following is(are) true?
I. Sampson’s status as an expert witness is based upon his
specialized knowledge, experience, and training.
II. Sampson is required by AICPA ruling to present his posi tion
objectively.
III. Sampson may regard himself as acting as an advocate.
a. I only.
b. I and II only.
c. I and III only.
d. III only
B
According to the ethical standards of the profession,
which of the following acts is generally prohibited?
a. Purchasing a product from a third party and resell ing
it to a client.
b. Writing a financial management newsletter pro moted
and sold by a publishing company.
c. Accepting a commission for recommending a prod uct
to an audit client.
d. Accepting engagements obtained through the ef forts
of third parties.
C
To exercise due professional care an auditor should
a. Critically review the judgment exercised by those as
sist ing in the audit.
b. Examine all available corroborating evidence sup port
ing managements assertions.
c. Design the audit to detect all instances of illegal acts.
d. Attain the proper balance of professional expe rience
and formal education.
A
Kar, CPA, is a staff auditor participating in the audit
engage ment of Fort, Inc. Which of the following circum
stances impairs Kar’s independence?
a. During the period of the professional engagement,
Fort gives Kar tickets to a football game worth $75.
b. Kar owns stock in a corporation that Fort’s 401(k)
plan also invests in.
c. Kar’s friend, an employee of another local account ing
firm, prepares Fort’s tax returns.
d. Kar’s sibling is director of internal audit at Fort.
D
On June 1, 20X8, a CPA obtained a $100,000 personal
loan from a financial institution client for whom the CPA
provided compilation services. The loan was fully secured
and considered material to the CPA’s net worth. The CPA paid
the loan in full on December 31, 20X9. On April 3, 20X9, the
client asked the CPA to audit the client’s financial statements
for the year ended December 31, 20X9. Is the CPA considered
independent with respect to the audit of the client’s December
31, 20X9 financial statements?
a. Yes, because the loan was fully secured.
b. Yes, because the CPA was not required to be inde
pend ent at the time the loan was granted.
c. No, because the CPA had a loan with the client dur ing
the period of a professional engagement.
d. No, because the CPA had a loan with the client dur ing
the period covered by the financial state ments.
B
Which of the following statements is(are) correct regard ing
a CPA employee of a CPA firm taking copies of information
con tained in client files when the CPA leaves the firm?
I. A CPA leaving a firm may take copies of information con
tained in client files to assist another firm in serving that cli ent.
II. A CPA leaving a firm may take copies of information
con tained in client files as a method of gaining tech nical
expertise.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
D
Which of the following statements is correct regarding an
accountant’s working papers?
a. The accountant owns the working papers and gener
ally may disclose them as the accountant sees fit.
b. The client owns the working papers but the accoun tant
has custody of them until the accoun tant’s bill is paid
in full.
c. The accountant owns the working papers but gener ally
may not disclose them without the client’s consent or
a court order.
d. The client owns the working papers but, in the ab
sence of the accountant’s consent, may not disclose
them without a court order.
C
Which of the following is an authoritative body desig
nated to promulgate attestation standards?
a. Auditing Standards Board.
b. Governmental Accounting Standards Board.
c. Financial Accounting Standards Board.
d. General Accounting Office.
A
The auditor with final responsibility for an
engagement and one of the assistants have a difference of
opinion about the results of an auditing procedure. If the
assistant believes it is necessary to be disassociated from the
matter’s resolution, the CPA firm’s procedures should enable
the assistant to
a. Refer the disagreement to the AICPA’s Quality
Review Committee.
b. Document that member’s disagreement with
the conclusions reached after appropriate
consultation.
c. Discuss the disagreement with the entity’s
management or its audit committee.
d. Report the disagreement to an impartial peer review
monitoring team
B
The nature and extent of a CPA firm’s quality control
policies and procedures depend on
The CPA
firm’s size
The nature of
the CPA firm’s
practice
Cost-benefit
considerations
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes
A
A CPA firm may communicate its quality control policies
and procedures to its personnel in which manner(s):
Orally Written
a. No No
b. No Yes
c. Yes No
d. Yes Yes
D
Which of the following is not an element of quality
control?
a. Acceptance and continuance of client relationships
and specific engagements.
b. Human resources.
c. Internal control.
d. Monitoring.
C
Quality control for a CPA firm, as referred to in
Statements on Quality Control Standards, applies to
a. Auditing services only.
b. Auditing and management advisory services.
c. Auditing and tax services.
d. Auditing and accounting and review services.
D
One of a CPA firm’s basic objectives is to provide
professional services that conform with professional standards.
Reasonable assurance of achieving this basic objective is
provided through
a. A system of quality control.
b. A system of peer review.
c. Continuing professional education.
d. Compliance with generally accepted accounting
principles.
A
Which of the following is correct concerning PCAOB
guidance that uses the term “should”?
a. The auditor must fulfill the responsibilities.
b. The auditor must comply with requirements unless
s/he demonstrates that alternative actions were
sufficient to achieve the objectives of the standard.
c. The auditor should consider performing the procedure;
whether the auditor performs depends on the exercise
of professional judgment in the circumstances.
d. The auditor has complete discretion as to whether to
perform the procedure
B
Under the SarbanesOxley Act, most audit working papers
must be saved
a. 5 years.
b. 7 years.
c. 10 years.
d. Indefinitely as there is no time limitation provided.
B
Passage of the SarbanesOxley Act led to the establish
ment of the
a. Auditing Standards Board.
b. Accounting Enforcement Releases Board.
c. Public Company Accounting Oversight Board.
d. Securities and Exchange Commission.
C
Under Title II of the SarbanesOxley Act, the auditor of an
issuer cannot legally perform which type of service for that issuer?
a. Tax services.
b. Review of interim information.
c. Internal audit outsourcing services.
d. Audit of internal control over financial reporting.
C
The audit partner in charge of an audit of a public com
pany may only
a. Be in charge of the audit of that one company.
b. Perform the role as long as he or she also performs the
“second partner review” for that audit.
c. Perform that role for five consecutive years.
d. Perform the role if he or she has proper AICPA is suer
accreditation.
C
Which of the following is correct concerning member ship
on the Public Company Accounting Oversight Board?
a. Only two of its members may be CPAs.
b. It is composed of nine members.
c. All members must also currently be active in pub lic
accounting.
d. A majority of members must be or have been ac count
ing educators.
A
The Public Company Accounting Oversight Board
(PCAOB) is not responsible for standards related to
a. Accounting.
b. Attestation.
c. Auditing.
d. Quality control
A
A PCAOB engagement that focuses on the sufficiency
of a CPA firm’s quality control system is most likely to be
referred to as a(n)
a. Financial statement audit.
b. Inspection.
c. Peer review.
d. Quality control
B
Which statement below is correct concerning communi
cating the results of a PCAOB inspection?
a. The entire report issued by the PCAOB is publicly
available.
b. The portion of the report issued on a CPA firm’s qual
ity control is not ordinarily publicly available.
c. The report issued is only available to Congress.
d. The report is available only to PCAOB members.
B
Which of the following sets of standards does the Public
Company Accounting Oversight Board not have the authority
to establish for audits of public companies?
a. Auditing standards.
b. Quality control standards.
c. Accounting standards.
d. Independence standards
C
In relation to the AICPA Code of Professional Conduct,
the IFAC Code of Ethics for Professional Accountants
a. Has more outright prohibitions.
b. Has fewer outright prohibitions.
c. Has no outright prohibitions.
d. Applies only to professional accountants in busi ness
B
Based on the IFAC Code of Ethics for Professional
Accountants, threats to independence arise from all of the
following except:
a. Self interest.
b. Advocacy.
c. The audit relationship.
d. Intimidation
C
If an audit firm discovers threats to independence with
re spect to an audit engagement, the IFAC Code of Ethics for
Professional Accountants indicates that the firm should
a. Immediately resign from the engagement.
b. Notify the appropriate regulatory body.
c. Document the issue.
d. Evaluate the significance of the threats and apply appro
priate safeguards to reduce them to an acceptable level.
D
With respect to the acceptance of contingent fees for
profes sional services, the IFAC Code of Ethics for Profes
sional Accountants indicates that the accounting firm
a. Should not accept contingent fees.
b. Should establish appropriate safeguards around ac
ceptance of a contingent fee.
c. Should accept contingent fees only for assurance ser
vices other than audits of financial statements.
d. Should accept contingent fees if it is customary in the
country.
B
With regard to marketing professional services, the IFAC
Code of Ethics for Professional Accountants indicates that
a. Direct marketing is prohibited.
b. Marketing is allowed if lawful.
c. Marketing should be honest and truthful.
d. Marketing of audit services is prohibited.
C
What body establishes international auditing standards?
a. The Public Company Accounting Oversight Board.
b. The International Federation of Accountants.
c. The World Bank.
d. The International Assurance Body
B
Which of the following is not true about international
auditing standards?
a. International auditing standards do not require an au
dit of internal control.
b. International auditing standards do not allow refer ence
to division of responsibilities in the audit re port.
c. International auditing standards require obtaining an
attorney’s letter.
d. International auditing standards are based on a risk as
sessment approach.
C
Which of the following is most likely to be required in an audit performed in conformity with international auditing stan
dards?
a. Confirmation of accounts receivable.
b. Audit report modification for a change in account ing
principles.
c. An opinion on internal control.
d. Audit report inclusion of the location in which the
auditor practices.
D
Independence standards of the GAO for audits in accor
dance with generally accepted government auditing stan dards
describe three types of impairments of independence. Which
of the following is not one of these types of impair ments?
a. Personal.
b. Organizational.
c. External.
d. Unusual.
D
In accordance with the independence standards of the GAO
for performing audits in accordance with generally accepted
gov ernment auditing standards, which of the fol lowing is not an
ex ample of an external impairment of inde pendence?
a. Reducing the extent of audit work due to pressure
from management to reduce audit fees.
b. Selecting audit items based on the wishes of an em
ployee of the organization being audited.
c. Bias in the items the auditors decide to select for
testing.
d. Influence by management on the personnel as signed
to the audit
C
Under the independence standards of the GAO for
perform ing audits in accordance with generally accepted
govern ment auditing standards, which of the following are
over reaching principles for determining whether a nonaudit
service impairs independence?
I. Auditors must not perform nonaudit services that in volve
performing management functions or making management
decisions.
II. Auditors must not audit their own work or provide
non audit services in situations in which the nonaudit
ser vices are sig nificant or material to the subject matter
of the audit.
III. Auditors must not perform nonaudit services which require
independence.
a. I only.
b. I and II only.
c. I, II and III.
d. II and III only
B
Which of the following bodies enforce the audit require
ments of the Employee Retirement Security Act of 1974
(ERISA) with respect to employee benefit plans?
a. The Department of Labor.
b. The Department of Pension Management.
c. The Securities and Exchange Commission.
d. The Public Company Accounting Oversight Board.
A
The requirement for independence by the auditor regard ing
audits of employee benefit plans apply to the plan as well as
a. Investment companies doing business with the plan.
b. Members of the plan.
c. The plan sponsor.
d. The actuary firm doing services for the plan
C
Financial statement assertions are established for account
balances,
Classes of transactions/Disclosures
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
Which of the following isnot a fi nancial statement
assertion relating to account balances?
a. Completeness.
b. Existence.
c. Rights and obligations.
d. Valuation and competence.
D
As the acceptable level of detection risk decreases, an
auditor may
a. Reduce substantive testing by relying on the
assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from
interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from
consideration as a planning factor.
d. Lower the assessed level of control risk from the
maximum level to below the maximum.
B
The risk that an auditor will conclude, based on substantive
tests, that a material misstatement doesnot exist in an account
balance when, in fact, such misstatement does exist is
referred to as
a. Sampling risk.
b. Detection risk.
c. Nonsampling risk.
d. Inherent risk.
B
As the acceptable level of detection risk decreases, the
assurance directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.
A
Which of the following audit risk components may be
assessed in nonquantitative terms?
Control risk/Detection risk/Inherent risk
a. Yes Yes No
b. Yes No Yes
c. Yes Yes Yes
d. No Yes Yes
C
Inherent risk and control risk differ from detection risk in
that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or
nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.
C
On the basis of the audit evidence gathered and evaluated,
an auditor decides to increase the assessed level of control risk
from that originally planned. To achieve an overall audit risk
level that is substantially the same as the planned audit risk
level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality levels
B
Relationship between control risk and detection risk is
ordinarily
a. Parallel.
b. Inverse.
c. Direct.
d. Equal.
B
Which of the following would an auditor most likely
use in determining the auditor’s preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive
tests.
b. The entity’s annualized interim fi nancial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter
B
Which of the following statements isnot correct about
materiality?
a. The concept of materiality recognizes that some
matters are important for fair presentation of fi nancial
statements in conformity with GAAP, while other
matters are not important.
b. An auditor considers materiality for planning
purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the
fi nancial statements.
c. Materiality judgments are made in light of
surrounding circumstances and necessarily involve
both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is infl uenced
by the auditor’s perception of the needs of a reasonable
person who will rely on the fi nancial statements.
B
Which of the following is a function of the risks of
material misstatement and detection risk?
a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Audit risk.
D
Which of the following is correct concerning performance
materiality on an audit?
a. It will ordinarily be less than fi nancial statement
materiality.
b. It should be established at beginning of an audit and
not be revised thereafter.
c. It should be established at separate amounts for the
various fi nancial statements.
d. It need not be documented in the working papers.
A
Which of the following would an auditor most likely
use in determining the auditor’s preliminary judgment about
materiality?
a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s fi nancial statements of the prior year.
d. The assertions that are embodied in the fi nancial
statements.
C
Holding other planning considerations equal, a decrease
in the amount of misstatement in a class of transactions that an
auditor could toleratemost likely would cause the auditor to
a. Apply the planned substantive tests prior to the
balance sheet date.
b. Perform the planned auditing procedures closer to the
balance sheet date.
c. Increase the assessed level of control risk for relevant
fi nancial statement assertions.
d. Decrease the extent of auditing procedures to be
applied to the class of transactions.
B
When issuing an unmodifi ed opinion, the auditor who
evaluates the audit fi ndings should be satisfi ed that the
a. Amount of known misstatement is documented in the
management representation letter.
b. Estimate of the total likely misstatement is less than a
material amount.
c. Amount of known misstatement is acknowledged and
recorded by the client.
d. Estimate of the total likely misstatement includes the
adjusting entries already recorded by the client.
B
Which of the following is an example of fraudulent
fi nancial reporting?
a. Company management changes inventory count tags
and overstates ending inventory, while understating
cost of goods sold.
b. The treasurer diverts customer payments to his
personal due, concealing his actions by debiting an
expense account, thus overstating expenses.
c. An employee steals inventory and the “shrinkage” is
recorded in cost of goods sold.
d. An employee steals small tools from the company
and neglects to return them; the cost is reported as a
miscellaneous operating expense.
A
Which of the followingbest describes what is meant by
the term “fraud risk factor?”
a. Factors whose presence indicates that the risk of fraud
is high.
b. Factors whose presence often have been observed in
circumstances where frauds have occurred.
c. Factors whose presence requires modifi cation of
planned audit procedures.
d. Material weaknesses identifi ed during an audit
B
Which of the following is correct concerning
requirements about auditor communications about fraud?
a. Fraud that involves senior management should be
reported directly to the audit committee regardless of
the amount involved.
b. Fraud with a material effect on the fi nancial
statements should be reported directly by the auditor
to the Securities and Exchange Commission.
c. Fraud with a material effect on the fi nancial
statements should ordinarily be disclosed by the
auditor through use of an “emphasis of a matter”
paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud
outside the entity under any circumstances.
A
When performing a fi nancial statement audit, auditors are
required to explicitly assess the risk of material misstatement
due to
a. Errors.
b. Fraud.
c. Illegal acts.
d. Business risk.
B
Audits of financial statements are designed to obtain
assurance of detecting misstatement due to
Errors/Fraudulent
financial reporting/Misappropriation
of assets
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes No
A
An auditor is unable to obtain absolute assurance that
misstatements due to fraud will be detected for all of the
followingexcept
a. Employee collusion.
b. Falsifi ed documentation.
c. Need to apply professional judgment in evaluating
fraud risk factors.
d. Professional skepticism.
D
An attitude that includes a questioning mind and a critical
assessment of audit evidence is referred to as
a. Due professional care.
b. Professional skepticism.
c. Reasonable assurance.
d. Supervision.
B
Professional skepticism requires that an auditor assume
that management is
a. Honest, in the absence of fraud risk factors.
b. Dishonest until completion of audit tests.
c. Neither honest nor dishonest.
d. Offering reasonable assurance of honesty.
C
The most diffi cult type of misstatement to detect is fraud
based on
a. The overrecording of transactions.
b. The nonrecording of transactions.
c. Recorded transactions in subsidiaries.
d. Related-party receivables.
B
When considering fraud risk factors relating to
management’s characteristics, which of the following isleast
likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known signifi cant defi ciency on a
timely basis.
b. Nonfi nancial management’s preoccupation with the
selection of accounting principles.
c. Signifi cant portion of management’s compensation
represented by bonuses based upon achieving unduly
aggressive operating results.
d. Use of unusually conservative accounting practices.
D
Which of the following conditions identifi ed during
fi eldwork of an audit is most likely to affect the auditor’s
assessment of the risk of misstatement due to fraud?
a. Checks for signifi cant amounts outstanding at year
end.
b. Computer generated documents.
c. Missing documents.
d. Year-end adjusting journal entries.
C
Which of the following ismostlikely to be a response to
the auditor’s assessment that the risk of material misstatement
due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations
on an unannounced basis.
b. Perform analytical procedures rather than taking test
counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations
be counted on different dates so as to allow the same
auditor to be present at every count.
A
Which of the following ismostlikely to be an example of
fraud?
a. Defalcations occurring due to invalid electronic
approvals.
b. Mistakes in the application of accounting principles.
c. Mistakes in processing data.
d. Unreasonable accounting estimates arising from
oversight.
A
Which of the following characteristicsmost likely
would heighten an auditor’s concern about the risk of
intentional manipulation of fi nancial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the
entity’s stock.
c. Management places substantial emphasis on meeting
earnings projections.
d. The rate of change in the entity’s industry is slow.
C
Which of the following statements refl ects an auditor’s
responsibility for detecting misstatements due to errors and
fraud?
a. An auditor is responsible for detecting employee
errors and simple fraud, but not for discovering
fraud involving employee collusion or management
override.
b. An auditor should plan the audit to detect
misstatements due to errors and fraud that are caused
by departures from GAAP.
c. An auditor is not responsible for detecting
misstatements due to errors and fraud unless
the application of GAAS would result in such
detection.
d. An auditor should design the audit to provide
reasonable assurance of detecting misstatements due
to errors and fraud that are material to the fi nancial
statements
D
Disclosure of fraud to parties other than a client’s senior
management and its audit committee or board of directors
ordinarily is not part of an auditor’s responsibility. However,
to which of the following outside parties may a duty to
disclose fraud exist?
To the SEC when the client reports an auditor change/To a successor
auditor when the successor makes appropriate inquiries/To a
government funding agency from which the client receives financial assistance
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes
D
Under Statements on Auditing Standards, which of the
following would be classifi ed as an error?
a. Misappropriation of assets for the benefi t of
management.
b. Misinterpretation by management of facts that existed
when the financial statements were prepared.
c. Preparation of records by employees to cover a
fraudulent scheme.
d. Intentional omission of the recording of a transaction
to benefit a third party.
B
What assurance does the auditor provide that misstatements
due to errors, fraud, and direct effect illegal acts that are material
to the financial statements will be detected?
Errors/Fraud/Direct effect
of illegal acts
a. Limited Negative Limited
b. Limited Limited Reasonable
c. Reasonable Limited Limited
d. Reasonable Reasonable Reasonable
D
Because of the risk of material misstatement, an audit of
fi nancial statements in accordance with generally accepted
auditing standards should be planned and performed with an
attitude of
a. Objective judgment.
b. Independent integrity.
c. Professional skepticism.
d. Impartial conservatism.
C
Which of the following most accurately summarizes what
is meant by the term “material misstatement?”
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material
fraud.
c. Material error, material fraud, and certain illegal
acts.
d. Material error and material illegal acts.
C
Which of the following statementsbest describes
the auditor’s responsibility to detect conditions relating to
fi nancial stress of employees or adverse relationships between
a company and its employees?
a. The auditor is required to plan the audit to detect these
conditions on all audits.
b. These conditions relate to fraudulent fi nancial
reporting, and an auditor is required to plan the audit
to detect these conditions when the client is exposed
to a risk of misappropriation of assets.
c. The auditor is required to plan the audit to detect
these conditions whenever they may result in
misstatements.
d. The auditor is not required to plan the audit to
discover these conditions, but should consider them if
he or she becomes aware of them during the audit.
D
When the auditor believes a misstatement is or may be
the result of fraud but that the effect of the misstatement is not
material to the fi nancial statements, which of the following
steps is required?
a. Consider the implications for other aspects of the
audit.
b. Resign from the audit.
c. Commence a fraud examination.
d. Contact regulatory authorities.
A
Which of the following statements is correct relating to
the auditor’s consideration of fraud?
a. The auditor’s interest in fraud consideration relates to
fraudulent acts that cause a material misstatement of
fi nancial statements.
b. A primary factor that distinguishes fraud from error
is that fraud is always intentional, while errors are
generally, but not always, intentional.
c. Fraud always involves a pressure or incentive to
commit fraud, and a misappropriation of assets.
d. While an auditor should be aware of the possibility of
fraud, management, and not the auditor, is responsible
for detecting fraud.
A
Which of the following factors or conditions is an auditor
least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management.
c. Inadequate monitoring of signifi cant controls.
d. Inability to generate positive cash fl ows from operations
A
Which of the following ismost likely to be an overall
response to fraud risks identifi ed in an audit?
a. Supervise members of the audit team less closely and
rely more upon judgment.
b. Use less predictable audit procedures.
c. Only use certifi ed public accountants on the
engagement.
d. Place increased emphasis on the audit of objective
transactions rather than subjective transactions.
B
At which stage(s) of the audit may fraud risk factors be
identified?
Planning/Obtaining
understanding/Conducting
fieldwork
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes Yes
A
Which of the following isleast likely to be required on an
audit?
a. Test appropriateness of journal entries and adjustment.
b. Review accounting estimates for biases.
c. Evaluate the business rationale for signifi cant unusual
transactions.
d. Make a legal determination of whether fraud has
occurred.
D
Management’s attitude toward aggressive fi nancial
reporting and its emphasis on meeting projected profi t goals
most likely would signifi cantly infl uence an entity’s control
environment when
a. External policies established by parties outside the
entity affect its accounting practices.
b. Management is dominated by one individual who is
also a shareholder.
c. Internal auditors have direct access to the board of
directors and the entity’s management.
d. The audit committee is active in overseeing the
entity’s financial reporting policies.
B
Which of the following isleast likely to be included in an
auditor’s inquiry of management while obtaining information
to identify the risks of material misstatement due to fraud?
a. Are fi nancial reporting operations controlled by and
limited to one location?
b. Does it have knowledge of fraud or suspect fraud?
c. Does it have programs to mitigate fraud risks?
d. Has it reported to the audit committee the nature of
the company’s internal control?
A
Individuals who commit fraud are ordinarily able to
rationalize the act and also have an
Incentive/Opportunity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
What is an auditor’s responsibility who discovers
management involved in what is fi nancially immaterial fraud?
a. Report the fraud to the audit committee.
b. Report the fraud to the Public Company Oversight
Board.
c. Report the fraud to a level of management at least one
below those involved in the fraud.
d. Determine that the amounts involved are immaterial,
and if so, there is no reporting responsibility.
A
Which of the following ismostlikely to be considered a
risk factor relating to fraudulent fi nancial reporting?
a. Domination of management by top executives.
b. Large amounts of cash processed.
c. Negative cash fl ows from operations.
d. Small high-dollar inventory items.
C
Which of the following ismostlikely to be presumed to
represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the
property, plant, and equipment asset account.
b. Improper revenue recognition.
c. Improper interest expense accrual.
d. Introduction of significant new products.
B
An auditor who discovers that a client’s employees paid
small bribes to municipal offi cialsmost likely would withdraw
from the engagement if
a. The payments violated the client’s policies regarding
the prevention of illegal acts.
b. The client receives fi nancial assistance from a federal
government agency.
c. Documentation that is necessary to prove that the
bribes were paid does not exist.
d. Management fails to take the appropriate remedial
action.
D
Which of the following factorsmost likely would cause a
CPA tonot accept a new audit engagement?
a. The prospective client has already completed its
physical inventory count.
b. The CPA lacks an understanding of the prospective
client’s operation and industry.
c. The CPA is unable to review the predecessor auditor’s
working papers.
d. The prospective client is unwilling to make all
fi nancial records available to the CPA.
D
Which of the following factors wouldmost likely
heighten an auditor’s concern about the risk of fraudulent
fi nancial reporting?
a. Large amounts of liquid assets that are easily
convertible into cash.
b. Low growth and profi tability as compared to other
entities in the same industry.
c. Financial management’s participation in the initial
selection of accounting principles.
d. An overly complex organizational structure involving
unusual lines of authority.
D
An auditor who discovers that a client’s employees
have paid small bribes to public offi cialsmost likely would
withdraw from the engagement if the
a. Client receives fi nancial assistance from a federal
government agency.
b. Evidence that is necessary to prove that the illegal acts
were committed does not exist.
c. Employees’ actions affect the auditor’s ability to rely
on management’s representations.
d. Notes to the fi nancial statements fail to disclose the
employees’ actions.
C
Which of the following illegal acts should an audit be
designed to obtain reasonable assurance of detecting?
a. Securities purchased by relatives of management
based on knowledge of inside information.
b. Accrual and billing of an improper amount of revenue
under government contracts.
c. Violations of antitrust laws.
d. Price fixing.
B
Which of the following relatively small misstatements
most likely could have a material effect on an entity’s fi nancial
statements?
a. An illegal payment to a foreign offi cial that was not
recorded.
b. A piece of obsolete offi ce equipment that was not
retired.
c. A petty cash fund disbursement that was not properly
authorized.
d. An uncollectible account receivable that was not
written off
A
The most likely explanation why the auditor’s
examination cannot reasonably be expected to bring
noncompliance with all laws by the client to the auditor’s
attention is that
a.
Illegal acts are perpetrated by management override of
internal control.
b. Illegal acts by clients often relate to operating aspects
rather than accounting aspects.
c.
The client’s internal control may be so strong that the
auditor performs only minimal substantive testing.
d. Illegal acts may be perpetrated by the only person in
the client’s organization with access to both assets and
the accounting records.
B
During the annual audit of Ajax Corp., a publicly held
company, Jones, CPA, a continuing auditor, determined that
illegal political contributions had been made during each of the
past seven years, including the year under audit. Jones notifi ed
the board of directors about the illegal contributions, but they
refused to take any action because the amounts involved were
immaterial to the fi nancial statements. Jones should reconsider
the intended degree of reliance to be placed on the
a.
Letter of audit inquiry to the client’s attorney.
b. Prior years’ audit plan.
c.
Management representation letter.
d. Preliminary judgment about materiality levels.
C
If specifi c information comes to an auditor’s attention
that implies noncompliance with laws that could result in a
material, but indirect effect on the fi nancial statements, the
auditor should next
a.
Apply audit procedures specifi cally directed to
ascertaining whether noncompliance has occurred.
b. Seek the advice of an informed expert qualifi ed to
practice law as to possible contingent liabilities.
c.
Report the matter to an appropriate level of
management at least one level above those involved.
d. Discuss the evidence with the client’s audit committee,
or others with equivalent authority and responsibility.
A
Under the Private Securities Litigation Reform Act
of 1995, Baker, CPA, reported certain uncorrected illegal
acts to Supermart’s board of directors. Baker believed that
failure to take remedial action would warrant a qualifi ed
audit opinion because the illegal acts had a material effect
on Supermart’s fi nancial statements. Supermart failed to
take appropriate remedial action and the board of directors
refused to inform the SEC that it had received such notifi cation from Baker. Under these circumstances, Baker is
required to
a. Resign from the audit engagement within ten business
days.
b. Deliver a report concerning the illegal acts to the SEC
within one business day.
c.
Notify the stockholders that the fi nancial statements
are materially misstated.
d. Withhold an audit opinion until Supermart takes
appropriate remedial action.
B
An auditor who discovers that client employees have
committed an illegal act that has a material effect on the
client’s fi nancial statements most likely would withdraw from
the engagement if
a.
The illegal act is a violation of generally accepted
accounting principles.
b
. The client does not take the remedial action that the
auditor considers necessary.
c.
The illegal act was committed during a prior year that
was not audited.
d. The auditor has already assessed control risk at the
maximum level.
B
Which of the following factors would most likely cause a
CPA to decide not to accept a new audit engagement?
a.
The CPA’s lack of understanding of the prospective
client’s internal auditor’s computer-assisted audit
techniques.
b. Management’s disregard of its responsibility to
maintain an adequate internal control environment.
c.
The CPA’s inability to determine whether related-party
transactions were consummated on terms equivalent to
arm’s-length transactions.
d. Management’s refusal to permit the CPA to perform
substantive tests before the year-end
B
Which of the following would be least likely to be
considered an audit planning procedure?
a. Use an engagement letter.
b. Develop the overall audit strategy.
c.
Perform risk assessment.
d. Develop the audit plan.
C
Before accepting an engagement to audit a new client, a
CPA is required to obtain
a.
An understanding of the prospective client’s industry
and business.
b. The prospective client’s signature to the engagement
letter.
c. A preliminary understanding of the prospective
client’s control environment.
d. The prospective client’s consent to make inquiries of
the predecessor auditor, if any
D
Before accepting an audit engagement, a successor
auditor should make specifi c inquiries of the predecessor
auditor regarding
a.
Disagreements the predecessor had with the client
concerning auditing procedures and accounting
principles.
b. The predecessor’s evaluation of matters of continuing
accounting significance.
c. The degree of cooperation the predecessor received
concerning the inquiry of the client’s lawyer.
d. The predecessor’s assessments of inherent risk and
judgments about materiality.
A
An auditor is required to establish an understanding
with a client regarding the services to be performed for each
engagement. This understanding generally includes
a. Management’s responsibility for errors and the illegal
activities of employees that may cause material
misstatement.
b. The auditor’s responsibility for ensuring that the audit
committee is aware of any signifi cant defi ciencies in
internal control that come to the auditor’s attention.
c. Management’s responsibility for providing the
auditor with an assessment of the risk of material
misstatement due to fraud.
d. The auditor’s responsibility for determining preliminary
judgments about materiality and audit risk factors.
B
Before accepting an audit engagement, a successor
auditor should make specifi c inquiries of the predecessor
auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the
predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of
auditors.
c. Awareness of the consistency in the application of
GAAP between periods.
d. Evaluation of all matters of continuing accounting
signifi cance
B
Which of the following matters is generally included in an
auditor’s engagement letter?
a. Management’s responsibility for the entity’s
compliance with laws and regulations.
b. The factors to be considered in setting preliminary
judgments about materiality.
c. Management’s vicarious liability for illegal acts
committed by its employees.
d. The auditor’s responsibility to search for signifi cant
internal control defi ciencies.
A
During the initial planning phase of an audit, a CPA most
likely would
a. Identify specifi c internal control activities that are
likely to prevent fraud.
b. Evaluate the reasonableness of the client’s accounting
estimates.
c. Discuss the timing of the audit procedures with the
client’s management.
d. Inquire of the client’s attorney as to whether any
unrecorded claims are probable of assertion.
C
Which of the following documentation is not required for an t
audit in accordance with generally accepted auditing standards?
a. A written audit plan setting forth the procedures
necessary to accomplish the audit’s objectives.
b. An indication that the accounting records agree or
reconcile with the fi nancial statements.
c. A client engagement letter that summarizes the timing
and details of the auditor’s planned fi eldwork.
d. The assessment of the risks of material misstatement
C
Which of the following statements wouldleast likely
appear in an auditor’s engagement letter?
a. Fees for our services are based on our regular per diem
rates, plus travel and other out-of-pocket expenses.
b. During the course of our audit we may observe
opportunities for economy in, or improved controls
over, your operations.
c. Our engagement is subject to the risk that material
misstatements or fraud, if they exist, will not be
detected.
d. After performing our preliminary analytical procedures
we will discuss with you the other procedures we
consider necessary to complete the engagement.
D
An engagement letter should ordinarily include
information on the objectives of the engagement and
CPA responsibilities/Client
responsibilities/Limitation of
engagement
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No No No
A
Arrangements concerning which of the following areleast
likely to be included in engagement letter?
a. A predecessor auditor.
b. Fees and billing.
c. CPA investment in client securities.
d. Other services to be provided in addition to the audit.
C
Which of the following factorsmost likely would
infl uence an auditor’s determination of the auditability of an
entity’s fi nancial statements?
a. The complexity of the accounting system.
b. The existence of related-party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control
|procedures.
C
The auditor should document the understanding
established with a client through a(n)
a. Oral communication with the client.
b. Written communication with the client.
c. Written or oral communication with the client.
d. Completely detailed audit plan.
B
Which of the following ismost likely to require special
planning considerations related to asset valuation?
a. Inventory is comprised of diamond rings.
b. The client has recently purchased an expensive copy
machine
c. Assets costing less than $250 are expensed even when
the expected life exceeds one year.
d. Accelerated depreciation methods are used for
amortizing the costs of factory equipment.
A
A CPA wishes to determine how various publicly held
companies have complied with the disclosure requirements of
a new fi nancial accounting standard. Which of the following
information sources would the CPA most likely consult for
information?
a.
AICPA Codifi cation of Statements on Auditing
Standards.
b. AICPA Accounting Trends and Techniques.
c.
SEC Quality Control Review.
d. SEC Statement 10-K Guide.
B
An auditor should design the audit plan so that
a.
All material transactions will be selected for
substantive testing.
b. Substantive tests prior to the balance sheet date will be
minimized.
c.
The audit procedures selected will achieve specifi c
audit objectives.
d. Each account balance will be tested under either tests
of controls or tests of transactions.
C
The audit plan generally is modifi ed when
a.
Results of tests of control differ from expectations.
b. An engagement letter has been signed by the auditor
and the client.
c.
A signifi cant defi ciency has been communicated
to the audit committee of the board of directors.
d. The search for unrecorded liabilities has been
performed and obtained results as had been expected
during the planning of the audit.
A
Audit plans should be designed so that
a.
Most of the required procedures can be performed
as interim work.
b. Inherent risk is assessed at a suffi ciently low
level.
c. The auditor can make constructive suggestions to
management.
d. The audit evidence gathered supports the auditor’s
conclusions.
D
In designing written audit plans, an auditor should
establish specifi c audit objectives that relate primarily
to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
D
With respect to planning an audit, which of the following
statements is always true?
a.
It is acceptable to perform a portion of the audit of a
continuing audit client at interim dates.
b. An engagement should not be accepted after the
client’s year-end.
c. An inventory count must be observed at year-end.
d. Final staffi ng decisions must be made prior to
completion of the planning stage.
A
The element of the audit planning process most likely to
be agreed upon with the client before implementation of the
audit strategy is the determination of the
a.
Evidence to be gathered to provide a suffi cient basis
for the auditor’s opinion.
b. Procedures to be undertaken to discover litigation,
claims, and assessments.
c. Pending legal matters to be included in the inquiry of
the client’s attorney.
d. Timing of inventory observation procedures to be
performed.
D
To obtain an understanding of a continuing client’s
business, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent
file for the client.
c. Read current issues of specialized industry journals.
d. Reevaluate the client’s internal control environment.
B
On an audit engagement performed by a CPA firm with one
offi ce, at the minimum, knowledge of the relevant professional
accounting and auditing standards should be held by
a.
The auditor with fi nal responsibility for the audit.
b. All professionals working upon the audit.
c.
All professionals working upon the audit and the
partner in charge of the CPA fi rm.
d. All professionals working in the office.
A
An auditor obtains knowledge about a new client’s
business and its industry to
a.
Make constructive suggestions concerning
improvements to the client’s internal control.
b. Develop an attitude of professional skepticism
concerning management’s fi nancial statement
assertions.
c.
Evaluate whether the aggregation of known
misstatements causes the fi nancial statements taken as
a whole to be materially misstated.
d. Understand the events and transactions that may have
an effect on the client’s fi nancial statements.
D
Which of the following procedures would an auditor least
likely perform while obtaining an understanding of a client in
a fi nancial statement audit?
a. Coordinating the assistance of entity personnel in data
preparation.
b. Discussing matters that may affect the audit with fi rm
personnel responsible for nonaudit services to the
entity.
c. Selecting a sample of vendors’ invoices for
comparison to receiving reports.
d. Reading the current year’s interim fi nancial
statements.
C
Ordinarily, the predecessor auditor permits the successor
auditor to review the predecessor’s working paper analyses
relating to
Contingencies/Balance sheet accounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
In auditing the fi nancial statements of Star Corp., Land
discovered information leading Land to believe that Star’s
prior year’s fi nancial statements, which were audited by Tell,
require substantial revisions. Under these circumstances,
Land should
a. Notify Star’s audit committee and stockholders that
the prior year’s fi nancial statements cannot be relied
on.
b. Request Star to reissue the prior year’s fi nancial
statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries
about the integrity of Star’s management.
d. Request Star to arrange a meeting among the three
parties to resolve the matter.
D
A successor auditor should request the new client to
authorize the predecessor auditor to allow a review of the
predecessor’s
Engagement letter/Working papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No
C
Which of the following procedures would an auditor most
likely perform in planning a fi nancial statement audit?
a. Inquiring of the client’s legal counsel concerning
pending litigation.
b. Comparing the fi nancial statements to anticipated
results.
c. Examining computer generated exception reports to
verify the effectiveness of internal control.
d. Searching for unauthorized transactions that may aid
in detecting unrecorded liabilities.
B
The in-charge auditor most likely would have a
supervisory responsibility to explain to the staff assistants
a. That immaterial fraud is not to be reported to the
client’s audit committee.
b. How the results of various auditing procedures
performed by the assistants should be evaluated.
c. What benefi ts may be attained by the assistants’
adherence to established time budgets.
d. Why certain documents are being transferred from the
current fi le to the permanent fi le.
B
The audit work performed by each assistant should be
reviewed to determine whether it was adequately performed
and to evaluate whether the
a. Auditor’s system of quality control has been
maintained at a high level.
b. Results are consistent with the conclusions to be
presented in the auditor’s report.
c. Audit procedures performed are approved in the
professional standards.
d. Audit has been performed by persons having adequate
technical training and profi ciency as auditors
B
Analytical procedures used during risk assessment in an
audit should focus on
a. Reducing the scope of tests of controls and substantive
tests.
b. Providing assurance that potential material
misstatements will be identifi ed.
c. Enhancing the auditor’s understanding of the client’s
business.
d. Assessing the adequacy of the available evidence.
C
A primary purpose of performing analytical procedures
as risk assessment procedures is to identify the existence of
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal
control weaknesses.
c. Related-party transactions.
d. Recorded transactions that were not properly
authorized.
A
Which of the following nonfi nancial information would
an auditor most likely consider in performing analytical
procedures during risk assessment?
a. Turnover of personnel in the accounting
department.
b. Objectivity of audit committee members.
c. Square footage of selling space.
d. Management’s plans to repurchase stock
C
The accounts receivable turnover ratio increased during
20X2. This is consistent with:
a. Items shipped on consignment during December were
recorded as credit sales; no cash receipts have yet
been received on these consignments.
b. The company increased credit sales by 10% by
allowing more lenient credit terms—30 days are
now allowed whereas previously only 20 days were
allowed.
c. A major credit sale on which title passed as of
December 31, 20X2 was recorded in January of 20X3.
d. Sales for each month are approximately 25% higher
than those of the preceding year.
C
A company’s gross margin percentage increased in 20X2.
This is consistent with which of the following occurring in 20X2?
a. An increase in the tax rate on income.
b. An increase in units sold.
c. A decrease in the rate of sales commissions paid to
sales personnel.
d. Outsourcing of a part of the manufacturing process
which resulted in no additional costs
B
The following summarizes your client’s inventory
turnover for Years 1 and 2.
Year 1/Year 2
Inventory turnover 7.00/6.00
This change is most consistent with
a. A number of expense items were erroneously
included in cost of goods sold (but not in ending
inventory).
b. While inventory levels remained the same in Year
2, total sales increased and a higher percentage of
customers are paying their accounts.
c. Although sales for Year 2 were the same as for Year 1,
inventory is a bit higher than normal because the last
month of year 2’s sales were lower than anticipated.
d. The year-end physical inventory count omitted a
number of signifi cant items. A periodic accounting
inventory system is in use.
C
While assessing the risks of material misstatement
auditors identify risks, relate risk to what could go wrong,
consider the magnitude of risks and
a. Assess the risk of misstatements due to illegal acts.
b. Consider the complexity of the transactions involved.
c. Consider the likelihood that the risks could result in
material misstatements.
d. Determine materiality levels
C
Which of the following are considered further audit
procedures that may be designed after assessing the risks of
material misstatement?
Substantive tests of details/Risk assessment
procedures
a. Yes Yes
b. Yes No
c. No Yes
d. No No
B
Which of the following isleast likely to be considered a
risk assessment procedure?
a. Analytical procedures.
b. Confi rmation of ending accounts receivable.
c. Inspection of documents.
d. Observation of the performance of certain accounting
procedures.
B
In an audit of a nonissuer (nonpublic) company, the
auditors identify signifi cant risks. These risks often
a. Involve routine, high-volume transactions.
b. Do not require special audit attention.
c. Involve items with lower levels of inherent risk.
d. Involve judgmental matters.
D
After fi eldwork audit procedures are completed, a
partner of the CPA fi rm who has not been involved in the audit
performs a second or wrap-up working paper review. This
second review usually focuses on
a. The fair presentation of the fi nancial statements in
conformity with GAAP.
b. Fraud involving the client’s management and its
employees.
c. The materiality of the adjusting entries proposed by
the audit staff.
d. The communication of internal control weaknesses to
the client’s audit committee.
A
Which of the following statements is correct concerning
an auditor’s use of the work of a specialist?
a. The work of a specialist who is related to the client
may be acceptable under certain circumstances.
b. If an auditor believes that the determinations made by
a specialist are unreasonable, only a qualifi ed opinion
may be issued.
c. If there is a material difference between a specialist’s
fi ndings and the assertions in the fi nancial statements,
only an adverse opinion may be issued.
d. An auditor may not use a specialist in the
determination of physical characteristics relating to
inventories
A
In using the work of a specialist, an auditor may refer
to the specialist in the auditor’s report if, as a result of the
specialist’s fi ndings, the auditor
a. Becomes aware of conditions causing substantial
doubt about the entity’s ability to continue as a going
concern.
b. Desires to disclose the specialist’s fi ndings, which
imply that a more thorough audit was performed.
c. Is able to corroborate another specialist’s earlier
findings that were consistent with management’s representations.
d. Discovers significant deficiencies in the design of the
entity’s internal control that management does not
correct.
A
Which of the following statements is correct about the
auditor’s use of the work of a specialist?
a. The specialist should not have an understanding of the auditor’s corroborative use of the specialist’s
findings.
b. The auditor is required to perform substantive
procedures to verify the specialist’s assumptions and findings.
c. The client should not have an understanding
of the nature of the work to be performed by the
specialist.
d. The auditor should obtain an understanding of the
methods and assumptions used by the specialist.
D
In using the work of a specialist, an auditor referred to
the specialist’s fi ndings in the auditor’s report. This would be
an appropriate reporting practice if the
a. Client is not familiar with the professional
certifi cation, personal reputation, or particular
competence of the specialist.
b. Auditor, as a result of the specialist’s fi ndings, adds an
explanatory paragraph emphasizing a matter regarding
the fi nancial statements.
c. Client understands the auditor’s corroborative
use of the specialist’s fi ndings in relation to the
representations in the fi nancial statements.
d. Auditor, as a result of the specialist’s fi ndings, decides
to indicate a division of responsibility with the
specialist
B
In using the work of a specialist, an understanding
should exist among the auditor, the client, and the specialist
as to the nature of the specialist’s work. The documentation of
this understanding should cover
a. A statement that the specialist assumes no
responsibility to update the specialist’s report for
future events or circumstances.
b. The conditions under which a division of responsibility may be necessary.
c. The specialist’s understanding of the auditor’s
corroborative use of the specialist’s findings.
d. The auditor’s disclaimer as to whether the specialist’s
findings corroborate the representations in the
financial statements.
C
Which of the following is not a specialist upon whose
work an auditor may rely?
a. Actuary.
b. Appraiser.
c. Internal auditor.
d. Engineer.
C
In identifying matters for communication with those
charged with governance of an audit client, an auditor most
likely would ask management whether
a. The turnover in the accounting department was
unusually high.
b. It consulted with another CPA fi rm 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.
B
Which of the following statements is correct concerning
an auditor’s required communication with those charged with
governance of an audit client?
a. This communication is required to occur before the
auditor’s report on the financial statements is issued.
b. This communication should include discussion of
any significant disagreements with management
concerning the financial statements.
c. Any significant matter communicated to the audit
committee also should be communicated to management.
d. Signifi cant audit adjustments proposed by the
auditor and recorded by management need not be
communicated to those charged with governance.
B
An auditor would least likely initiate a discussion with
those charged with governance of an audit client 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.
B
Which of the following statements is correct about an
auditor’s required communication with those charged with
governance of an audit client?
a.
Any matters communicated to the entity’s audit
committee also are required to be communicated to
the entity’s management.
b. The auditor is required to inform those charged
with governance about signifi cant misstatements
discovered by the auditor and subsequently corrected
by management.
c. Disagreements with management about the
application of accounting principles are required to
be communicated in writing to those charged with
governance.
d. Weaknesses in internal control previously reported
to those charged with governance need not be
recommunicated.
B
Which of the following matters is an auditor required to
communicate to an entity’s audit committee?
I. Disagreements with management about matters
significant to the entity’s financial statements that have
been satisfactorily resolved.
II. Initial selection of significant accounting policies in
emerging areas that lack authoritative guidance.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II
A
Should an auditor communicate the following matters to
those charged with governance of an audit client?
Significant audit adjustments
recorded by the entity/ Management’s consultation with other accountants about significant accounting matters
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
Which of the following most likely would not be
considered an inherent limitation of the potential
effectiveness of an entity’s internal control?
a. Incompatible duties.
b. Management override.
c. Mistakes in judgment.
d. Collusion among employees.
A
When considering internal control, an auditor should
be aware of the concept of reasonable assurance, which
recognizes that
a. Internal control may be ineffective due to mistakes in
judgment and personal carelessness.
b. Adequate safeguards over access to assets and
records should permit an entity to maintain proper
accountability.
c. Establishing and maintaining internal control is an
important responsibility of management.
d. The cost of an entity’s internal control should not
exceed the benefi ts expected to be derived.
D
Proper segregation of functional responsibilities calls
for separation of the functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody.
c. Custody, execution, and reporting.
d. Authorization, payment, and recording.
B
An entity’s ongoing monitoring activities often include
a. Periodic audits by the audit committee.
b. Reviewing the purchasing function.
c. The audit of the annual fi nancial statements.
d. Control risk assessment in conjunction with quarterly
reviews.
B
The overall attitude and awareness of an entity’s board of
directors concerning the importance of internal control usually
is refl ected in its
a. Computer-based controls.
b. System of segregation of duties.
c. Control environment.
d. Safeguards over access to assets
C
Management philosophy and operating stylemost likely
would have a signifi cant infl uence on an entity’s control
environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate
specifi c duties
d. The audit committee actively oversees the fi nancial
reporting process.
B
Which of the following factors are included in an entity’s
control environment?
Audit committee/Integrity and
ethical values/Organizational
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes
D
Which of the following isnot a component of an entity’s
internal control?
a. Control risk.
b. Control activities.
c. Monitoring.
d. Control environment.
A
Which of the following is a provision of the Foreign
Corrupt Practices Act?
a. It is a criminal offense for an auditor to fail to detect and
report a bribe paid by an American business entity to a
foreign offi cial for the purpose of obtaining business.
b. The auditor’s detection of illegal acts committed
by offi cials of the auditor’s publicly held client in
conjunction with foreign offi cials should be reported
to the Enforcement Division of the Securities and
Exchange Commission.
c. If the auditor of a publicly held company concludes
that the effects on the fi nancial statements of a bribe
given to a foreign offi cial are not susceptible to
reasonable estimation, the auditor’s report should be
modifi ed.
d. Every publicly held company must devise, document,
and maintain internal control suffi cient to provide
reasonable assurances that internal control objectives
are met.
D
An auditor suspects that certain client employees are
ordering merchandise for themselves over the Internet without
recording the purchase or receipt of the merchandise. When
vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee
destroys the invoices and the related vouchers. In gathering
evidence regarding the fraud, the auditor mostlikely would
select items for testing from the fi le of all
a. Cash disbursements.
b. Approved vouchers.
c. Receiving reports.
d. Vendors’ invoices
A
Which of the following proceduresmost likely would
provide an auditor with evidence about whether an entity’s
internal control activities are suitably designed to prevent or
detect material misstatements?
a. Reperforming the activities for a sample of
transactions.
b. Performing analytical procedures using data
aggregated at a high level.
c. Vouching a sample of transactions directly related to
the activities.
d. Observing the entity’s personnel applying the activities.
D
Which statement is correct concerning the relevance of
various types of controls to a fi nancial audit?
a. An auditor may ordinarily ignore a consideration of
controls when a substantive audit approach is taken.
b. Controls over the reliability of fi nancial reporting are
ordinarily most directly relevant to an audit, but other
controls may also be relevant.
c. Controls over safeguarding of assets and liabilities
are of primary importance, while controls over the
reliability of fi nancial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.
B
In an audit of fi nancial statements in accordance with
generally accepted auditing standards, an auditor is required to
a. Document the auditor’s understanding of the entity’s
internal control.
b. Search for signifi cant defi ciencies in the operation of
internal control.
c. Perform tests of controls to evaluate the effectiveness
of the entity’s internal control.
d. Determine whether controls are suitably designed to
prevent or detect material misstatements
A
In obtaining an understanding of an entity’s internal
control relevant to audit planning, an auditor is required to
obtain knowledge about the
a. Design of the controls pertaining to internal control
components.
b. Effectiveness of controls that have been implemented.
c. Consistency with which controls are currently being
applied.
d. Controls related to each principal transaction class and
account balance.
A
An auditor should obtain suffi cient knowledge of an
entity’s information system to understand the
a. Safeguards used to limit access to computer facilities.
b. Process used to prepare signifi cant accounting
estimates.
c. Controls used to assure proper authorization of
transactions.
d. Controls used to detect the concealment of fraud.
B
When obtaining an understanding of an entity’s internal
control, an auditor should concentrate on the substance of
controls rather than their form because
a. The controls may be operating effectively but may not
be documented.
b. Management may establish appropriate controls but
not enforce compliance with them.
c. The controls may be so inappropriate that no reliance
is contemplated by the auditor.
d. Management may implement controls whose costs
exceed their benefi ts.
B
Decision tables differ from program fl owcharts in that
decision tables emphasize
a. Ease of manageability for complex programs.
b. Logical relationships among conditions and actions.
c. Cost benefi t factors justifying the program.
d. The sequence in which operations are performed.
B
During the consideration of internal control in a fi nancial
statement audit, an auditor isnot obligated to
a. Search for signifi cant defi ciencies in the operation of
the internal control.
b. Understand the internal control and the information
system.
c. Determine whether the control activities relevant to
audit planning have been implemented.
d. Perform procedures to understand the design of
internal control.
A
A primary objective of procedures performed to
obtain an understanding of internal control is to provide an
auditor with
a. Knowledge necessary to assess the risks of material
misstatements.
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. An evaluation of the consistency of application of
management’s policies.
A
Which of the following statements regarding auditor
documentation of the client’s internal control is correct?
a. Documentation must include fl owcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is
desirable.
d. No one particular form of documentation is necessary,
and the extent of documentation may vary.
D
In obtaining an understanding of an entity’s internal
control, an auditor is required to obtain knowledge about the
Operating effectiveness of controls/Design of
controls
a. Yes Yes
b. No Yes
c. Yes No
d. No No
B
Which of the following may not be required on a
particular audit of a nonissuer (nonpublic) company?
a. Risk assessment procedures.
b. Tests of controls.
c. Substantive procedures.
d. Analytical procedures.
B
Control risk should be assessed in terms of
a. Specific controls.
b. Types of potential fraud.
c. Financial statement assertions.
d. Control environment factors.
C
After assessing control risk, an auditor desires to seek a
further reduction in the assessed level of control risk. At this
time, the auditor would consider whether
a. It would be efficient to obtain an understanding of the
entity’s information system.
b. The entity’s controls have been implemented.
c. The entity’s controls pertain to any financial statement
assertions.
d. Additional audit evidence sufficient to support a
further reduction is likely to be available.
D
Assessing control risk at a low level most likely would
involve
a.
Performing more extensive substantive tests with
larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions
relevant to signifi cant account balances.
c. Changing the timing of substantive tests by omitting
interim-date testing and performing the tests at year-end.
d. Identifying specifi c controls relevant to specifi c
assertions.
D
An auditor assesses control risk because it
a. Is relevant to the auditor’s understanding of the
control environment.
b. Provides assurance that the auditor’s materiality levels
are appropriate.
c.
Indicates to the auditor where inherent risk may be the
greatest.
d. Affects the level of detection risk that the auditor may
accept.
D
When an auditor increases the assessed level of control
risk because certain control activities were determined to be
ineffective, the auditor would most likely increase the
a. Extent of tests of controls.
b. Level of detection risk.
c. Extent of tests of details.
d. Level of inherent risk.
C
An auditor uses the knowledge provided by the
understanding of internal control and the assessed level of the
risk of material misstatement primarily to
a.
Determine whether procedures and records concerning
the safeguarding of assets are reliable.
b. Ascertain whether the opportunities to allow any
person to both perpetrate and conceal fraud are
minimized.
c.
Modify the initial assessments of inherent risk and
preliminary judgments about materiality levels.
d. Determine the nature, timing, and extent of
substantive tests for financial statement assertions.
D
An auditor may compensate for a weakness in internal
control by increasing the
a.
Level of detection risk.
b. Extent of tests of controls.
c.
Preliminary judgment about audit risk.
d. Extent of analytical procedures.
D
Which of the following statements is correct concerning
an auditor’s assessment of control risk?
a.
Assessing control risk may be performed concurrently
during an audit with obtaining an understanding of the
entity’s internal control.
b. Evidence about the operation of internal control in
prior audits may not be considered during the current
year’s assessment of control risk.
c
. The basis for an auditor’s conclusions about the
assessed level of control risk need not be documented
unless control risk is assessed at the maximum level.
d. The lower the assessed level of control risk, the less
assurance the evidence must provide that the control
procedures are operating effectively.
A
Regardless of the assessed level of control risk, an auditor
would perform some
a.
Tests of controls to determine the effectiveness of
internal control policies.
b. Analytical procedures to verify the design of internal
control.
c.
Substantive tests to restrict detection risk for
signifi cant transaction classes.
d. Dual-purpose tests to evaluate both the risk of
monetary misstatement and preliminary control risk
C
How frequently must an auditor test operating
effectiveness of controls that appear to function as they have
in past years and on which the auditor wishes to rely in the
current year?
a.
Monthly.
b. Each audit.
c.
At least every second audit.
d. At least every third audit.
D
Before assessing control risk at a level lower than the
maximum, the auditor obtains reasonable assurance that
controls are in use and operating effectively. This assurance is
most likely obtained in part by
a. Preparing flowcharts.
b. Performing substantive tests.
c. Analyzing tests of trends and ratios.
d. Inspection of documents.
D
An auditor generally tests the segregation of duties related
to inventory by
a.
Personal inquiry and observation.
b. Test counts and cutoff procedures.
c.
Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.
A
The objective of tests of details of transactions performed
as tests of controls is to
a.
Monitor the design and use of entity documents such
as prenumbered shipping forms.
b. Determine whether controls have been implemented.
c.
Detect material misstatements in the account balances
of the fi nancial statements.
d. Evaluate whether controls operated effectively.
D
After obtaining an understanding of internal control and
assessing the risk of material misstatement, an auditor decided
to perform tests of controls. The auditor most likely decided
that
a.
It would be effi cient to perform tests of controls that
would result in a reduction in planned substantive
tests.
b. Additional evidence to support a further reduction in
the risk of material misstatement is not available.
c.
An increase in the assessed level of the risk of
material misstatement is justifi ed for certain fi nancial
statement assertions.
d. There were many internal control weaknesses that
could allow misstatements to enter the accounting
system.
A
In assessing control risk, an auditor ordinarily selects
from a variety of techniques, including
a.
Inquiry and analytical procedures.
b. Reperformance and observation.
c.
Comparison and confirmation.
d. Inspection and verification.
B
Which of the following types of evidence would an
auditor most likely examine to determine whether controls are
operating as designed?
a.
Confi rmations of receivables verifying account
balances.
b. Letters of representations corroborating inventory
pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer
programs
D
Which of the following is not a step in an auditor’s
assessment of control risk?
a.
Evaluate the effectiveness of internal control with tests
of controls.
b. Obtain an understanding of the entity’s information
system and control environment.
c.
Perform tests of details of transactions to detect
material misstatements in the fi nancial statements.
d. Consider whether controls can have a pervasive effect
on fi nancial statement assertions.
C
To obtain audit evidence about control risk, an auditor
selects tests from a variety of techniques including
a.
Inquiry.
b. Analytical procedures.
c.
Calculation.
d. Confirmation.
A
Which of the following is least likely to be evidence the
auditor examines to determine whether controls are operating
effectively?
a.
Records documenting usage of computer programs.
b. Canceled supporting documents.
c.
Confirmations of accounts receivable.
d. Signatures on authorization forms.
C
Which of the following procedures concerning accounts
receivable would an auditor most likely perform to obtain
evidence in support of an assessed level of control risk below
the maximum?
a. Observing an entity’s employee prepare the schedule
of past due accounts receivable.
b.
Sending confi rmation requests to an entity’s principal
customers to verify the existence of accounts
receivable.
c. Inspecting an entity’s analysis of accounts receivable
for unusual balances.
d. Comparing an entity’s uncollectible accounts expense
to actual uncollectible accounts receivable.
A
Which of the following procedures would an auditor
most likely perform to test controls relating to management’s
assertion about the completeness of cash receipts for cash sales
at a retail outlet?
a.
Observe the consistency of the employees’ use of cash
registers and tapes.
b. Inquire about employees’ access to recorded but
undeposited cash.
c.
Trace deposits in the cash receipts journal to the cash
balance in the general ledger.
d. Compare the cash balance in the general ledger with
the bank confi rmation request.
A
Sound internal control dictates that immediately upon
receiving checks from customers by mail, a responsible
employee should
a.
Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered
sales invoice.
c.
Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.
C
Tracing shipping documents to prenumbered sales
invoices provides evidence that
a.
No duplicate shipments or billings occurred.
b. Shipments to customers were properly invoiced.
c.
All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.
B
Which of the following controls most likely would
t
reduce the risk of diversion of customer receipts by an entity’s
employees?
a.
A bank lockbox system.
b. Prenumbered remittance advices.
c.
Monthly bank reconciliations.
d. Daily deposit of cash receipts.
A
An auditor suspects that a client’s cashier is misappropriating
cash receipts for personal use by lapping customer checks
received in the mail. In attempting to uncover this embezzlement
scheme, the auditor most likely would compare the
t
a.
Dates checks are deposited per bank statements with
the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash
receipts journal entries.
c.
Individual bank deposit slips with the details of the
monthly bank statements.
d. Dates uncollectible accounts are authorized to be
written off with the dates the write-offs are actually
recorded.
A
Upon receipt of customers’ checks in the mailroom, a
responsible employee should prepare a remittance listing that is
forwarded to the cashier. A copy of the listing should be sent to the
a.
Internal auditor to investigate the listing for unusual
transactions.
b. Treasurer to compare the listing with the monthly
bank statement.
c.
Accounts receivable bookkeeper to update the
subsidiary accounts receivable records.
d. Entity’s bank to compare the listing with the cashier’s
deposit slip.
C
Which of the following procedures most likely would not
be a control designed to reduce the risk of misstatements in the
billing process?
a. Comparing control totals for shipping documents with
corresponding totals for sales invoices.
b. Using computer programmed controls on the pricing
and mathematical accuracy of sales invoices.
c. Matching shipping documents with approved sales
orders before invoice preparation.
d. Reconciling the control totals for sales invoices with
the accounts receivable subsidiary ledger.
D
Which of the following audit procedures would an auditor
most likely perform to test controls relating to management’s
assertion concerning the completeness of sales transactions?
a.
Verify that extensions and footings on the entity’s
sales invoices and monthly customer statements have
been recomputed.
b. Inspect the entity’s reports of prenumbered shipping
documents that have not been recorded in the sales
journal.
c.
Compare the invoiced prices on prenumbered sales
invoices to the entity’s authorized price list.
d. Inquire about the entity’s credit granting policies and
the consistent application of credit checks.
B
Which of the following controls most likely would
assure that all billed sales are correctly posted to the accounts
receivable ledger?
a.
Daily sales summaries are compared to daily postings
to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered
shipping document.
c.
The accounts receivable ledger is reconciled daily to
the control account in the general ledger.
d. Each shipment on credit is supported by a
prenumbered sales invoice.
A
An auditor tests an entity’s policy of obtaining credit
approval before shipping goods to customers in support of
management’s fi nancial statement assertion of
a.
Valuation or allocation.
b. Completeness.
c.
Existence or occurrence.
d. Rights and obligations.
A
Which of the following controls most likely would
help ensure that all credit sales transactions of an entity are
recorded?
a.
The billing department supervisor sends copies of
approved sales orders to the credit department for
comparison to authorized credit limits and current
customer account balances.
b. The accounting department supervisor independently
reconciles the accounts receivable subsidiary ledger to
the accounts receivable control account monthly.
c.
The accounting department supervisor controls the
mailing of monthly statements to customers and
investigates any differences reported by customers.
d.
The billing department supervisor matches
prenumbered shipping documents with entries in the
sales journal.
D
Which of the following controls most likely would be
effective in offsetting the tendency of sales personnel to
maximize sales volume at the expense of high bad debt
write-offs?
a. Employees responsible for authorizing sales and bad
debt write-offs are denied access to cash.
b. Shipping documents and sales invoices are matched
by an employee who does not have authority to write
off bad debts.
c. Employees involved in the credit-granting function are
separated from the sales function.
d. Subsidiary accounts receivable records are reconciled
to the control account by an employee independent of
the authorization of credit
C
Proper authorization of write-offs of uncollectible
accounts should be approved in which of the following
departments?
a.
Accounts receivable.
b. Credit.
c.
Accounts payable.
d. Treasurer.
D
Employers bond employees who handle cash receipts
because fi delity bonds reduce the possibility of employing
dishonest individuals and
a.
Protect employees who make unintentional
misstatements from possible monetary damages
resulting from their misstatements.
b. Deter dishonesty by making employees aware that
insurance companies may investigate and prosecute
dishonest acts.
c.
Facilitate an independent monitoring of the receiving
and depositing of cash receipts.
d. Force employees in positions of trust to take periodic
vacations and rotate their assigned duties.
B
During the consideration of a small business client’s
internal control, the auditor discovered that the accounts
receivable clerk approves credit memos and has access to cash.
Which of the following controls would be most effective in
offsetting this weakness?
a.
The owner reviews errors in billings to customers and
postings to the subsidiary ledger.
b. The controller receives the monthly bank statement
directly and reconciles the checking accounts.
c.
The owner reviews credit memos after they are
recorded.
d. The controller reconciles the total of the detail
accounts receivable accounts to the amount shown in
the ledger.
C
When a customer fails to include a remittance advice
with a payment, it is common practice for the person
opening the mail to prepare one. Consequently, mail
should be opened by which of the following four company
employees?
a. Credit manager.
b. Receptionist.
c. Sales manager.
d. Accounts receivable clerk.
B
Remittances should be opened by
an individual such as a receptionist who is independent of
the sales function
To provide assurance that each voucher is submitted
and paid only once, an auditor most likely would examine
a sample of paid vouchers and determine whether each
voucher is
a. Supported by a vendor’s invoice.
b. Stamped “paid” by the check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.
B
In testing controls over cash disbursements, an auditor most
likely would determine that the person who signs checks also
a.
Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c.
Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
D
In assessing control risk for purchases, an auditor vouches
a sample of entries in the voucher register to the supporting
documents. Which assertion would this test of controls most
likely support?
a.
Completeness.
b. Existence or occurrence.
c.
Valuation or allocation.
d. Rights and obligations.
B
Which of the following controls is not usually performed
in the vouchers payable department?
a.
Matching the vendor’s invoice with the related
receiving report.
b. Approving vouchers for payment by having an
authorized employee sign the vouchers.
c.
Indicating the asset and expense accounts to be debited.
d. Accounting for unused prenumbered purchase orders
and receiving reports.
D
With properly designed internal control, the same
employee most likely would match vendors’ invoices with
receiving reports and also
a.
Post the detailed accounts payable records.
b. Recompute the calculations on vendors’ invoices.
c.
Reconcile the accounts payable ledger.
d. Cancel vendors’ invoices after payment.
B
An entity’s internal control requires for every check
request that there be an approved voucher, supported by a
prenumbered purchase order and a prenumbered receiving
report. To determine whether checks are being issued for
unauthorized expenditures, an auditor most likely would select
items for testing from the population of all
a.
Purchase orders.
b. Canceled checks.
c.
Receiving reports.
d. Approved vouchers.
B
Which of the following questions would most likely be
included in an internal control questionnaire concerning the
completeness assertion for purchases?
a. Is an authorized purchase order required before the
receiving department can accept a shipment or the
vouchers payable department can record a voucher?
b. Are purchase requisitions prenumbered and
independently matched with vendor invoices?
c.
Is the unpaid voucher fi le periodically reconciled with
inventory records by an employee who does not have
access to purchase requisitions?
d. Are purchase orders, receiving reports, and vouchers
prenumbered and periodically accounted for?
D
For effective internal control, the accounts payable
department generally should
a.
Stamp, perforate, or otherwise cancel supporting
documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price,
quantity, and quality by an authorized employee.
c.
Obliterate the quantity ordered on the receiving
department copy of the purchase order.
d. Establish the agreement of the vendor’s invoice with
the receiving report and purchase order.
D
Internal control is strengthened when the quantity of
merchandise ordered is omitted from the copy of the purchase
order sent to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.
B
A client erroneously recorded a large purchase twice.
Which of the following internal control measures would
be most likely to detect this error in a timely and efficient
manner?
a. Footing the purchases journal.
b. Reconciling vendors’ monthly statements with
subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger
accounts.
d. Sending written quarterly confirmations to all vendors.
B
With well-designed internal control, employees in the same
department most likely would approve purchase orders, and also
a. Reconcile the open invoice fi le.
b. Inspect goods upon receipt.
c. Authorize requisitions of goods.
d. Negotiate terms with vendors.
D
In obtaining an understanding of a manufacturing entity’s
internal control over inventory balances, an auditor most likely
would
a. Analyze the liquidity and turnover ratios of the
inventory.
b. Perform analytical procedures designed to identify
cost variances.
c. Review the entity’s descriptions of inventory policies
and procedures.
d. Perform test counts of inventory during the entity’s
physical count.
C
Which of the following controls most likely would be
used to maintain accurate inventory records?
a. Perpetual inventory records are periodically com
pared with the current cost of individual inventory
items.
b. A just-in-time inventory ordering system keeps
inventory levels to a desired minimum.
c. Requisitions, receiving reports, and purchase orders
are independently matched before payment is
approved.
d. Periodic inventory counts are used to adjust the
perpetual inventory records.
D
A client maintains perpetual inventory records in both
quantities and dollars. If the assessed level of control risk is
high, an auditor would probably
a.
Insist that the client perform physical counts of
inventory items several times during the year.
b. Apply gross profi t tests to ascertain the reasonableness
of the physical counts.
c.
Increase the extent of tests of controls of the inventory
cycle.
d. Request the client to schedule the physical inventory
count at the end of the year.
D
Which of the following controls most likely addresses the
completeness assertion for inventory?
a.
Work in process account is periodically reconciled
with subsidiary records.
b. Employees responsible for custody of fi nished goods
do not perform the receiving function.
c.
Receiving reports are prenumbered and periodically
reconciled.
d. There is a separation of duties between payroll
department and inventory accounting personnel
C
Sound internal control dictates that defective
merchandise returned by customers should be presented
initially to the
a.
Salesclerk.
b. Purchasing clerk.
c.
Receiving clerk.
d. Inventory control clerk.
C
Alpha Company uses its sales invoices for posting
perpetual inventory records. Inadequate controls over the
invoicing function allow goods to be shipped that are not
invoiced. The inadequate controls could cause an
a.
Understatement of revenues, receivables, and
inventory.
b. Overstatement of revenues and receivables, and an
understatement of inventory.
c.
Understatement of revenues and receivables, and an
overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory
C
Which of the following is a question that the auditor
would expect to fi nd on the production cycle section of an
internal control questionnaire?
a.
Are vendors’ invoices for raw materials approved for
payment by an employee who is independent of the
cash disbursements function?
b. Are signed checks for the purchase of raw materials
mailed directly after signing without being
returned to the person who authorized the invoice
processing?
c.
Are all releases by storekeepers of raw materials
from storage based on approved requisition
documents?
d. Are details of individual disbursements for raw
materials balanced with the total to be posted to the
appropriate general ledger account?
C
The objectives of internal control for a production
cycle are to provide assurance that transactions are properly
executed and recorded, and that
a.
Production orders are prenumbered and signed by a
supervisor.
b. Custody of work in process and of fi nished goods is
properly maintained.
c.
Independent internal verifi cation of activity reports is
established.
d. Transfers to fi nished goods are documented by a
completed production report and a quality control
report.
B
An auditor vouched data for a sample of employees
in a payroll register to approved clock card data to provide
assurance that
a. Payments to employees are computed at authorized
rates.
b. Employees work the number of hours for which they
are paid.
c.
Segregation of duties exist between the preparation
and distribution of the payroll.
d. Controls relating to unclaimed payroll checks are
operating effectively.
B
Which of the following is a control that most likely could
help prevent employee payroll fraud?
a.
The personnel department promptly sends employee
termination notices to the payroll supervisor.
b. Employees who distribute payroll checks forward
unclaimed payroll checks to the absent employees’
supervisors.
c.
Salary rates resulting from new hires are approved by
the payroll supervisor.
d. Total hours used for determination of gross pay are
calculated by the payroll supervisor.
A
In determining the effectiveness of an entity’s controls
relating to the existence or occurrence assertion for payroll
transactions, an auditor most likely would inquire about
and
a. Observe the segregation of duties concerning
personnel responsibilities and payroll disbursement.
b. Inspect evidence of accounting for prenumbered
payroll checks.
c. Recompute the payroll deductions for employee fringe
benefi ts.
d.
Verify the preparation of the monthly payroll account
bank reconciliation.
A
An auditor most likely would assess control risk at a high
level if the payroll department supervisor is responsible for
a.
Examining authorization forms for new employees.
b. Comparing payroll registers with original batch
transmittal data.
c.
Authorizing payroll rate changes for all employees.
d. Hiring all subordinate payroll department employees.
C
Which of the following controls most likely
would prevent direct labor hours from being charged to
manufacturing overhead?
a.
Periodic independent counts of work in process for
comparison to recorded amounts.
b. Comparison of daily journal entries with approved
production orders.
c.
Use of time tickets to record actual labor worked on
production orders.
d. Reconciliation of work-in-process inventory with
periodic cost budgets.
C
In meeting the control objective of safeguarding of assets,
which department should be responsible for
Distribution of paychecks/ Custody of
unclaimed paychecks
a. Treasurer Treasurer
b. Payroll Treasurer
c. Treasurer Payroll
d. Payroll Payroll
A
Proper internal control over the cash payroll function
would mandate which of the following?
a.
The payroll clerk should fi ll the envelopes with cash
and a computation of the net wages.
b. Unclaimed pay envelopes should be retained by the
paymaster.
c.
Each employee should be asked to sign a receipt.
d. A separate checking account for payroll be
maintained.
C
The purpose of segregating the duties of hiring personnel
and distributing payroll checks is to separate the
a.
Authorization of transactions from the custody of
related assets.
b. Operational responsibility from the recordkeeping
responsibility.
c.
Human resources function from the controllership
function.
d. Administrative controls from the internal accounting
controls.
A
To minimize the opportunities for fraud, unclaimed cash
payroll should be
a.
Deposited in a safe-deposit box.
b. Held by the payroll custodian.
c.
Deposited in a special bank account.
d. Held by the controller
C
Which of the following departments most likely would
approve changes in pay rates and deductions from employee
salaries?
a.
Personnel.
b. Treasurer.
c.
Controller.
d.
Payroll
A
Which of the following questions would an auditor most
likely include on an internal control questionnaire for notes
payable?
a. Are assets that collateralize notes payable critically
needed for the entity’s continued existence?
b. Are two or more authorized signatures required on
checks that repay notes payable?
c. Are the proceeds from notes payable used for the
purchase of noncurrent assets?
d. Are direct borrowings on notes payable authorized by
the board of directors?
D
Theprimary responsibility of a bank acting as registrar
of capital stock is to
a. Ascertain that dividends declared do not exceed
the statutory amount allowable in the state of
incorporation.
b. Account for stock certifi cates by comparing the total
shares outstanding to the total in the shareholders
subsidiary ledger.
c. Act as an independent third party between the board
of directors and outside investors concerning mergers,
acquisitions, and the sale of treasury stock.
d.
Verify that stock is issued in accordance with the
authorization of the board of directors and the articles
of incorporation.
D
Where no independent stock transfer agents are
employed and the corporation issues its own stocks and
maintains stock records, canceled stock certifi cates should
a. Be defaced to prevent reissuance and attached to their
corresponding stubs.
b. Not be defaced but segregated from other stock
certifi cates and retained in a canceled certifi cates fi le.
c.
Be destroyed to prevent fraudulent reissuance.
d. Be defaced and sent to the secretary of state.
A
Which of the following is not a control that is designed
to protect investment securities?
a.
Custody over securities should be limited to
individuals who have recordkeeping responsibility
over the securities.
b. Securities should be properly controlled physically in
order to prevent unauthorized usage.
c. Access to securities should be vested in more than one
individual.
d. Securities should be registered in the name of the
owner.
A
Which of the following controls would a company
most likely use to safeguard marketable securities when an
independent trust agent is not employed?
a. The investment committee of the board of directors
periodically reviews the investment decisions
delegated to the treasurer.
b. Two company offi cials have joint control of
marketable securities, which are kept in a bank safe
deposit box.
c. The internal auditor and the controller independently
trace all purchases and sales of marketable securities
from the subsidiary ledgers to the general ledger.
d. The chairman of the board verifi es the marketable
securities, which are kept in a bank safe-deposit box,
each year on the balance sheet date.
B
A weakness in internal control over recording
retirements of equipment may cause an auditor to
a.
Inspect certain items of equipment in the plant and
trace those items to the accounting records.
b. Review the subsidiary ledger to ascertain whether
depreciation was taken on each item of equipment
during the year.
c
. Trace additions to the “other assets” account to search for
equipment that is still on hand but no longer being used.
d. Select certain items of equipment from the accounting
records and locate them in the plant
D
Which of the following questions would an auditor least
likely include on an internal control questionnaire concerning
the initiation and execution of equipment transactions?
a. Are requests for major repairs approved at a higher
level than the department initiating the request?
b. Are prenumbered purchase orders used for equipment
and periodically accounted for?
c.
Are requests for purchases of equipment reviewed for
consideration of soliciting competitive bids?
d. Are procedures in place to monitor and properly
restrict access to equipment?
D
Which of the following controls would be most effective
in assuring that the proper custody of assets in the investing
cycle is maintained?
a.
Direct access to securities in the safe-deposit box is
limited to only one corporate offi cer
b. Personnel who post investment transactions to
the general ledger are not permitted to update the
investment subsidiary ledger.
c.
The purchase and sale of investments are executed on
the specifi c authorization of the board of directors.
d. The recorded balances in the investment subsidiary
ledger are periodically compared with the contents of
the safe-deposit box by independent personnel.
D
A company holds bearer bonds as a short-term
investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections
probably should be delegated to the
a.
Chief Accountant.
b. Internal Auditor.
c.
Cashier.
d. Treasurer.
D
Which of the following controls would an entity most
likely use to assist in satisfying the completeness assertion
related to long-term investments?
a.
Senior management verifi es that securities in the
bank safe-deposit box are registered in the entity’s
name.
b. The internal auditor compares the securities in the
bank safe-deposit box with recorded investments.
c.
The treasurer vouches the acquisition of securities by
comparing brokers’ advices with canceled checks.
d. The controller compares the current market prices
of recorded investments with the brokers’ advices
on fi le.
B
Which of the following controls would an entity most
likely use in safeguarding against the loss of marketable
securities?
a.
An independent trust company that has no direct
contact with the employees who have recordkeeping
responsibilities has possession of the securities.
b. The internal auditor verifi es the marketable securities
in the entity’s safe each year on the balance sheet
date.
c.
The independent auditor traces all purchases and sales
of marketable securities through the subsidiary ledgers
to the general ledger.
d. A designated member of the board of directors
controls the securities in a bank safe-deposit box.
A
When there are numerous property and equipment
transactions during the year, an auditor who plans to assess
control risk at a low level usually performs
a.
Tests of controls and extensive tests of property and
equipment balances at the end of the year.
b. Analytical procedures for current year property and
equipment transactions.
c.
Tests of controls and limited tests of current year
property and equipment transactions.
d. Analytical procedures for property and equipment
balances at the end of the year.
C
In general, material fraud perpetrated by which of the
following are most difficult to detect?
a. Cashier.
b. Keypunch operator.
c. Internal auditor.
d. Controller.
D
Which of the following is not an accurate statement
about communication of internal control related matters to
management on a nonissuer (nonpublic) company?
a.
The auditor must communicate both material
weaknesses and signifi cant defi ciencies.
b. The auditor must communicate in writing.
c.
Previously communicated weaknesses that have not
been corrected need not be recommunicated.
d. A communication indicating that no signifi cant
defi ciencies were identifi ed should not be issued.
C
Which of the following matters would an auditor
most likely consider to be a material weakness to be
communicated to those charged with governance of an
audit client?
a,Management’s failure to renegotiate unfavorable long
term purchase commitments.
b. Recurring operating losses that may indicate going
concern problems.
c. Ineffective oversight of financial reporting by those
charged with governance.
d. Management’s current plans to reduce its ownership
equity in the entity.
C
Which of the following statements is correct concerning
signifi cant defi ciencies in an audit?
a. An auditor is required to search for signifi cant
defi ciencies during an audit.
b.
All signifi cant defi ciencies are also considered to be
material weaknesses.
c. An auditor may communicate signifi cant defi ciencies
during an audit or after the audit’s completion.
d. An auditor may report that no signifi cant defi ciencies
were noted during an audit
C
An auditor’s letter issued on signifi cant defi ciencies
relating to an entity’s internal control observed during a
f
i nancial statement audit should
a. Include a brief description of the tests of controls
performed in searching for signifi cant defi ciencies and
material weaknesses.
b. Indicate that the signifi cant defi ciencies 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 express an opinion on
internal control.
D
Which of the following statements is correct concerning
an auditor’s required communication of signifi cant
defi ciencies?
a.
A signifi cant defi ciency previously communicated
during the prior year’s audit that remains uncorrected
causes a scope limitation.
b. An auditor should perform tests of controls on
signifi cant defi ciencies before communicating them to
the client.
c.
An auditor’s report on signifi cant defi ciencies should
include a restriction on the distribution of the report.
d. An auditor should communicate signifi cant
defi ciencies after tests of controls, but before
commencing substantive tests.
C
Which of the following statements is correct concerning
signifi cant defi ciencies noted in an audit?
a.
Signifi cant defi ciencies are material weaknesses in
the design or operation of specifi c internal control
components.
b. The auditor is obligated to search for signifi cant
defi ciencies that could adversely affect the entity’s
ability to record and report fi nancial data.
c.
Signifi cant defi ciencies need not be recommunicated
each year if management has acknowledged its
understanding of such defi ciencies.
d. The auditor should separately communicate those
signifi cant defi ciencies considered to be material
weaknesses.
D
Which of the following representations should not be
included in a report on internal control related matters noted in
an audit?
a.
Signifi cant defi ciencies related to internal control exist.
b. There are no signifi cant defi ciencies in the design or
operation of internal control.
c.
Corrective follow-up action is recommended due
to the relative signifi cance of material weaknesses
discovered during the audit.
d. The auditor’s consideration of internal control would not
necessarily disclose all signifi cant defi ciencies that exist.
B
Which of the following statements concerning material
weaknesses and signifi cant defi ciencies is correct?
a.
An auditor should not identify and communicate
material weaknesses separately from signifi cant
defi ciencies.
b. Compensating controls may limit the severity of a
material weakness or signifi cant defi ciency.
c.
Upon discovery an auditor should immediately report
all material weaknesses and signifi cant defi ciencies
identifi ed during an audit.
d. All signifi cant defi ciencies are material weaknesses.
B
During the audit the independent auditor identifi ed the
existence of a weakness in the client’s internal control and
communicated this fi nding in writing to the client’s senior
management and those charged with governance. The auditor
should
a.
Consider the weakness a scope limitation and
therefore disclaim an opinion.
b. Consider the effects of the condition on the audit.
c.
Suspend all audit activities pending directions from
the client’s audit committee.
d. Withdraw from the engagement.
B
In assessing the competence of an internal auditor, an
independent CPA most likely would obtain information about
t
the
a.
Quality of the internal auditor’s working paper
documentation.
b. Organization’s commitment to integrity and ethical
values.
c.
Infl uence of management on the scope of the internal
auditor’s duties.
d. Organizational level to which the internal auditor
reports.
A
For which of the following judgments may an
independent auditor share responsibility with an entity’s
internal auditor who is assessed to be both competent and
objective?
Assessment of
inherent risk/Assessment of
control risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No
D
The work of internal auditors may affect the independent
auditor’s
I. Procedures performed in obtaining an understanding of
internal control.
II. Procedures performed in assessing the risk of material
misstatement.
III. Substantive procedures performed in gathering direct
evidence.
a. I and II only.
b. I and III only.
c. II and III only.
d. I, II, and III.
D
An internal auditor’s work would most likely affect the
nature, timing, and extent of an independent CPA’s auditing
procedures when the internal auditor’s work relates to
assertions about the
a.
Existence of contingencies.
b. Valuation of intangible assets.
c.
Existence of fixed asset additions.
d. Valuation of related-party transactions.
C
During an audit an internal auditor may provide direct
assistance to an independent CPA in
Obtaining an understanding of internal control/Performing
tests of controls/Performing
substantive
tests
a. No No No
b. Yes No No
c. Yes Yes No
d. Yes Yes Yes
D
When assessing the internal auditor’s competence, the
independent CPA should obtain information about the
a.
Organizational level to which the internal auditors report.
b. Educational background and professional certifi cation
of the internal auditors.
c.
Policies prohibiting the internal auditors from auditing
areas where relatives are employed.
d. Internal auditors’ access to records and information
that is considered sensitive.
B
In assessing the competence and objectivity of an
entity’s internal auditor, an independent auditor would least
likely consider information obtained from
a.
Discussions with management personnel.
b. External quality reviews of the internal auditor’s activities.
c.
Previous experience with the internal auditor.
d. The results of analytical procedures.
D
If the independent auditors decide that the work
performed by the internal auditor may have a bearing on their
own procedures, they should consider the internal auditor’s
a. Competence and objectivity.
b. Efficiency and experience.
c. Independence and review skills.
d. Training and supervisory skills.
A
In assessing the objectivity of internal auditors, an
independent auditor should
a.
Evaluate the quality control program in effect for the
internal auditors.
b. Examine documentary evidence of the work
performed by the internal auditors.
c. Test a sample of the transactions and balances that the
internal auditors examined.
d. Determine the organizational level to which the
internal auditors report..
D
Which of the following isnot an assertion relating to
classes of transactions?
a. Accuracy.
b. Consistency.
c. Cutoff.
d. Occurrence.
B
Which of the following is a general principle relating to the
reliability of audit evidence?
a. Audit evidence obtained from indirect sources ra ther
than directly is more reliable than evidence obtained
directly by the auditor.
b. Audit evidence provided by copies is more reliable
than that provided by facsimiles.
c. Audit evidence obtained from knowledgeable inde
pend ent sources outside the client company is more
reliable than audit evidence obtained from nonin de
pendent sources.
d. Audit evidence provided by original documents is
more reliable than audit evidence generated through a
system of effective controls.
C
Which of the following types of audit evidence is themost
persuasive?
a. Prenumbered client purchase order forms.
b. Client work sheets supporting cost allocations.
c. Bank statements obtained from the client.
d. Client representation letter.
C
Which of the following presumptions is correct about the
reliability of audit evidence?
a. Information obtained indirectly from outside sources
is the most reliable audit evidence.
b. To be reliable, audit evidence should be con vinc ing ra
ther than persuasive.
c. Reliability of audit evidence refers to the amount of
cor roborative evidence obtained.
d. Effective internal control provides more assurance
about the reliability of audit evidence.
D
Which of the following statements relating to the ap
propriate ness of audit evidence is always true?
a. Audit evidence gathered by an auditor from out side an
enterprise is reliable.
b. Accounting data developed under satisfactory condi
tions of internal control are more relevant than data
developed under unsatisfactory internal control condi
tions.
c. Oral representations made by management arenot
valid evidence.
d. Evidence gathered by auditors must be both valid and
relevant to be considered appropriate.
D
Which of the following types of audit evidence is theleast
persuasive?
a. Prenumbered purchase order forms.
b. Bank statements obtained from the client.
c. Test counts of inventory performed by the audi tor.
d. Correspondence from the client’s attorney about liti
ga tion.
A
In evaluating the reasonableness of an entity’s ac count ing
estimates, an auditor normally would be concerned about as
sumptions that are
a. Susceptible to bias.
b. Consistent with prior periods.
c. Insensitive to variations.
d. Similar to industry guidelines
A
Which of the following isnot a basic procedure used in an
audit?
a. Risk assessment procedures.
b. Substantive procedures.
c. Tests of controls.
d. Tests of direct evidence.
D
Which of the following procedures would an auditor
ordinar ily perform fi rst in evaluating management’s ac counting
estimates for reasonableness?
a. Develop independent expectations of manage ment’s
es timates.
b. Consider the appropriateness of the key factors or as
sumptions used in preparing the estimates.
c. Test the calculations used by management in de vel op
ing the estimates.
d. Obtain an understanding of how management de vel
oped its estimates.
D
In evaluating the reasonableness of an accounting esti
mate, an auditor most likely would concentrate on key fac tors
and as sumptions that are
a. Consistent with prior periods.
b. Similar to industry guidelines.
c. Objective andnot susceptible to bias.
d. Deviations from historical patterns.
D
In evaluating an entity’s accounting estimates, one
of an auditor’s objectives is to determine whether the
estimates are
a. Not subject to bias.
b. Consistent with industry guidelines.
c. Based on objective assumptions.
d. Reasonable in the circumstances.
D
In testing the existence assertion for an asset, an audi tor
ordinarily works from the
a.
Financial statements to the potentially unrecorded
items.
b. Potentially unrecorded items to the fi nancial state
ments.
c.
Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.
C
A client uses a suspense account for unresolved ques tions
whose fi nal accounting has not been determined. If a balance
remains in the suspense account at year-end, the auditor would
be most concerned about
a.
Suspense debits that management believes will bene fi t
future operations.
b. Suspense debits that the auditor verifi es will have re
aliza ble value to the client.
c.
Suspense credits that management believes should be
classifi ed as “Current liability.”
d. Suspense credits that the auditor determines to be cus
tomer deposits.
A
Which of the following would not be considered an
analyti cal procedure?
a.
Estimating payroll expense by multiplying the num ber
of employees by the average hourly wage rate and the
total hours worked.
b. Projecting an error rate by comparing the results of a
sta tistical sample with the actual population char acter
istics.
c.
Computing accounts receivable turnover by divid ing
credit sales by the average net receivables.
d. Developing the expected current year sales based on
the sales trend of the prior fi ve years.
B
What type of analytical procedure would an auditor most
likely use in developing relationships among balance sheet ac
counts when reviewing the fi nancial statements of a nonpublic
entity?
a. Trend analysis.
b. Regression analysis.
c. Ratio analysis.
d. Risk analysis.
C
An auditor may achieve audit objectives related to partic
ular assertions by
a. Performing analytical procedures.
b. Adhering to a system of quality control.
c. Preparing auditor working papers.
d. Increasing the level of detection risk
A
An entity’s income statements were misstated due to the
recording of journal entries that involved debits and credits
to an unusual combination of expense and revenue accounts.
The auditor most likely could have detected this fraudulent
financial reporting by
a. Tracing a sample of journal entries to the general
ledger.
b. Evaluating the effectiveness of internal control.
c. Investigating the reconciliations between controlling accounts and subsidiary records.
d. Performing analytical procedures designed to dis close
differences from expectations.
D
Auditors try to identify predictable relationships when
using analytical procedures. Relationships involving trans
actions from which of the following accounts most likely
would yield the high est level of evidence?
a.
Accounts receivable.
b. Interest expense.
c.
Accounts payable.
d. Travel and entertainment expense.
B
Analytical procedures used in the overall review stage of
an audit generally include
a.
Gathering evidence concerning account balances that
have not changed from the prior year.
b. Retesting control procedures that appeared to be in
effec tive during the assessment of control risk.
c.
Considering unusual or unexpected account bal ances
that were not previously identifi ed.
d. Performing tests of transactions to corroborate man
age ment’s financial statement assertions.
C
Which of the following tends to be most predictable for
purposes of analytical procedures applied as substantive proce
dures?
a.
Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c.
Relationships involving income statement ac counts.
d. Data subject to audit testing in the prior year.
C
A basic premise underlying the application of analyti cal
procedures is that
a.
The study of fi nancial ratios is an acceptable al terna
tive to the investigation of unusual fl uctua tions.
b. Statistical tests of fi nancial information may lead
to the discovery of material misstatements in the
f
i nancial statements.
c. Plausible relationships among data may reason ably
be expected to exist and continue in the ab sence of
known conditions to the contrary.
d.
These procedures cannot replace tests of balances and
transactions.
C
For all audits of fi nancial statements made in accor
dance with generally accepted auditing standards, the use of
analytical procedures is required to some extent
In the risk assessment stage/As a
substantive procedure/Near-audit
completion
a. Yes No Yes
b. No Yes No
c. No Yes Yes
d. Yes No No
A
An auditor’s analytical proceduresmost likely would be
facilitated if the entity
a. Segregates obsolete inventory before the physical
in ven tory count.
b. Uses a standard cost system that produces vari ance
re ports.
c. Corrects material weaknesses in internal control be
fore the beginning of the audit.
d. Develops its data from sources solely within the
entity.
B
Analytical procedures performed near the end of an
audit suggest that several accounts have unex pected rela
tionships. The results of these proceduresmost likely would
indicate that
a. Irregularities exist among the relevant account bal
ances.
b. Internal control activities arenot operating
effec tively.
c. Additional tests of details are required.
d. The communication with the audit committee should
be revised.
C
Which of the following comparisons would an auditor
most likely make in evaluating an entity’s costs and ex
penses?
a. The current year’s accounts receivable with the prior
year’s accounts receivable.
b. The current year’s payroll expense with the prior
year’s payroll expense.
c. The budgeted current year’s sales with the prior year’s
sales.
d. The budgeted current year’s warranty expense with
the current year’s contingent liabilities.
B
To be effective, analytical procedures performed near the
end of an audit engagement should be performed by
a. The staff accountant who performed the substan tive
au diting procedures.
b. The managing partner who has responsibility for all
au dit engagements at that practice offi ce.
c. A manager or partner who has a comprehensive
knowledge of the client’s business and industry.
d. The CPA fi rm’s quality control manager or partner
who has responsibility for the fi rm’s peer review
pro gram.
C
Which of the following is thebest example of a sub
stantive procedure?
a. Examining a sample of cash disbursements to test
whether expenses have been properly approved.
b. Confi rmation of balances of accounts receivable.
c. Comparison of signatures on checks to a list of autho
rized signers.
d. Flowcharting of the client’s cash receipts system.
B
The objective of tests of details of transactions per formed
as substantive procedures is to
a. Comply with generally accepted auditing stan dards.
b. Attain assurance about the reliability of the ac count
ing system.
c. Detect material misstatements in the fi nancial state ments.
d. Evaluate whether management’s policies and pro ce
dures operated effectively
C
In the context of an audit of fi nancial statements, sub stan
tive procedures are audit procedures that
a. May be eliminated under certain conditions.
b. Are designed to discover signifi cant subsequent events.
c. May be either tests of transactions, direct tests of
fi nan cial balances, or analytical tests.
d. Will increase proportionately with the auditor’s reli
ance on internal control.
C
The auditor willmost likely perform extensive tests for
possi ble understatement of
a. Revenues.
b. Assets.
c. Liabilities.
d. Capital.
C
In determining whether transactions have been re corded,
the direction of the audit testing should be from the
a. General ledger balances.
b. Adjusted trial balance.
c. Original source documents.
d. General journal entries.
C
Which statement is correct concerning the deletion of
audit documentation?
a. Superseded audit documentation should always be de
leted from the audit fi le.
b. After the audit fi le has been completed, the auditor
should not delete or discard audit documentation.
c. Auditors should use professional skepticism in de ter
mining which audit documentation should be deleted.
d. Audit documentation should never be deleted from the
audit fi le.
B
Ignoring any particular legal or regulatory requirement,
audit documentation should be retained
a. A minimum of fi ve years.
b. As long as lead schedules have relevance to forth com
ing audits.
c. Until three years after the client selects another audi tor.
d. Working papers must be maintained indefi nitely.
A
