FINAL EXAM Flashcards by Angel Lea Regalado

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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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.

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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.

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.

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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

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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.

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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.

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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.

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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.

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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

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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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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

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 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

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.

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.

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.

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

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.

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.

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.

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.

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.

The Public Company Accounting Oversight Board (PCAOB) is not responsible for standards related to a. Accounting. b. Attestation. c. Auditing. d. Quality control

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

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.

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

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

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

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.

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.

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.

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

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.

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.

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.

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

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

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.

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

Financial statement assertions are established for account balances, Classes of transactions/Disclosures a. Yes Yes b. Yes No c. No Yes d. No No

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.

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.

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.

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.

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

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.

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

Relationship between control risk and detection risk is ordinarily a. Parallel. b. Inverse. c. Direct. d. Equal.

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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

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.

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

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.

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.

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.

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.

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.

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

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.

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

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.

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.

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?

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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.

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

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.

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.

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

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.

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.

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

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.

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

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.

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.

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.

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 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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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.

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.

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

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.

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.

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

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.

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

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.

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

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

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.

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.

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.

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

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.

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.

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

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.

Which of the following is not a specialist upon whose work an auditor may rely? a. Actuary. b. Appraiser. c. Internal auditor. d. Engineer.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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

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.

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

Which of the following isnot a component of an entity’s internal control? a. Control risk. b. Control activities. c. Monitoring. d. Control environment.

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.

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

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.

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.

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

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.

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.

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.

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.

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 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.

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.

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

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.

Control risk should be assessed in terms of a. Specific controls. b. Types of potential fraud. c. Financial statement assertions. d. Control environment factors.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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 ## Footnote 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.

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.

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.

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.

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.

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.

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?

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.

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.

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.

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.

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.

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.

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.

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

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.

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

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?

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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

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?

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.

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.

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.

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.

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

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?

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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

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.

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.

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.

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..

Which of the following isnot an assertion relating to classes of transactions? a. Accuracy. b. Consistency. c. Cutoff. d. Occurrence.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

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.

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

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.

The auditor willmost likely perform extensive tests for possi ble understatement of a. Revenues. b. Assets. c. Liabilities. d. Capital.

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.

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.

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.

Which of the following pairs of accounts would an audi tor most likely analyze on the same working paper? a. Notes receivable and interest income. b. Accrued interest receivable and accrued interest pay able. c. Notes payable and notes receivable. d. Interest income and interest expense

An auditor’s working papers serve mainly to a. Provide the principal support for the auditor’s re port. b. Satisfy the auditor’s responsibilities concerning the Code of Professional Conduct. c. Monitor the effectiveness of the CPA fi rm’s qual ity con trol procedures. d. Document the level of independence maintained by the auditor.

The permanent fi le of an auditor’s working papers gener ally wouldnot include a. Bond indenture agreements. b. Lease agreements. c. Working trial balance. d. Flowchart of internal control.

An auditor ordinarily uses a working trial balance resem bling the fi nancial statements without footnotes, but containing columns for a. Cash fl ow increases and decreases. b. Audit objectives and assertions. c. Reclassifi cations and adjustments. d. Reconciliations and tick marks.

Which of the following isleast likely to be a factor in the auditor’s decision about the extent of the documentation of a particular audit area? a. The risk of material misstatement. b. The extent of the judgment involved in perform ing the procedures. c. The nature and extent of exceptions identifi ed. d. Whether or not the client has an internal audit func tion.

Which of the following is required documentation in an audit in accordance with generally accepted auditing stan dards? a. A fl owchart or narrative of the accounting system de scribing the recording and classifi cation of transactions for fi nancial reporting. b. The overall audit strategy and audit plan. c. A memo summarizing all major stakeholder groups. d. An internal control questionnaire identifying con trols that assure specifi c objectives will be achieved.

Which of the following factorsmost likely would af fect an auditor’s judgment about the quantity, type, and content of the auditor’s working papers? a. The assessed level of control risk. b. The likelihood of a review by a concurring (se c ond) partner. c. The number of personnel assigned to the audit. d. The content of the management representation let ter.

The audit working paper that refl ects the major com ponents of an amount reported in the fi nancial statements is the a. Interbank transfer schedule. b. Carryforward schedule. c. Supporting schedule. d. Lead schedule.

Which documentation is required for an audit in accordance with generally accepted auditing standards? a. A fl owchart or an internal control questionnaire that evaluates the effectiveness of the entity’s con trols. b. A client engagement letter that provides details of timing of each signifi cant audit procedure and personnel performing that procedure. c. An indication in the working papers that the ac count ing records agree or reconcile with the fi nan cial state ments. d. The basis for the auditor’s conclusions when the as sessed level of control risk is at the maximum level for all fi nancial statement assertions.

No deletions of audit documentation are allowed after the a. Client’s year-end. b. Documentation completion date. c. Last date of signifi cant fi eldwork. d. Report release date.

Under the requirements of the PCAOB, audit documenta tion must contain suffi cient information to allow what type of auditor to understand the nature, timing, extent, and results of procedures performed? a. An experienced audit team member. b. An experienced auditor having no previous connec tion with the engagement. c. Any certifi ed public accountant. d. An auditor qualifi ed as a peer review specialist.

Audit documentation for audits performed under the re quirements of the Public Company Accounting Oversight Board should be retained for a. The shorter of fi ve years, or the period required by law. b. Seven years. c. The longer of seven years, or the period required by law. d. Indefi nitely.

Which of the following sets of information does an auditor usually confi rm on one form? a. Accounts payable and purchase commitments. b. Cash in bank and collateral for loans. c. Inventory on consignment and contingent liabili ties. d. Accounts receivable and accrued interest receiv able.

The usefulness of the standard bank confi rmation re quest may be limited because the bank employee who com pletes the form may a. Not believe that the bank is obligated to verify confi den tial information to a third party. b. Sign and return the form without inspecting the accu racy of the client’s bank reconciliation. c. Not have access to the client’s cutoff bank state ment. d. Be unaware of all the fi nancial relationships that the bank has with the client.

An auditormost likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transac tions and the audi tor has already gathered evidence sup porting a. Opening and closing inventory balances. b. Cash receipts and accounts receivable. c. Shipping and receiving activities. d. Cutoffs of sales and purchases.

(refer to illustration in page 66) Which of the following checks might indicate kiting? a. #101 and #303. b. #202 and #404. c. #101 and #404. d. #202 and #303.

(refer to illustration in page 66) Which of the following checks illustrate deposits/ transfers in transit at December 31, 20X5? a. #101 and #202. b. #101 and #303. c. #202 and #404. d. #303 and #404.

An auditor should trace bank transfers for the last part of the audit period and fi rst part of the subsequent period to detect whether a. The cash receipts journal was held open for a few days after the year-end. b. The last checks recorded before the year-end were actu ally mailed by the year-end. c. Cash balances were overstated because of kiting. d. Any unusual payments to or receipts from related par ties occurred.

To gather evidence regarding the balance per bank in a bank reconciliation, an auditor would examine all of the followingexcept a. Cutoff bank statement. b. Year-end bank statement. c. Bank confi rmation. d. General ledger.

Which of the following cash transfers results in a mis statement of cash at December 31, 2005? Bank Transfer Schedule Disbursement Transfer Recorded in books Paid by bank Receipt Recorded in books Received by bank a. 12/31/X5 1/4/X6 12/31/X5 12/31/X5 b. 1/4/X6 1/5/X6 12/31/X5 1/4/X6 c. 12/31/X5 1/5/X6 12/31/X5 1/4/X6 d. 1/4/X6 1/11/X6 1/4/X6 1/4/X6

A cash shortage may be concealed by transporting funds from one location to another or by converting negotia ble assets to cash. Because of this, which of the following is vital? a. Simultaneous confi rmations. b. Simultaneous bank reconciliations. c. Simultaneous verifi cation. d. Simultaneous surprise cash count.

Theprimary purpose of sending a standard confi rma tion request to fi nancial institutions with which the client has done business during the year is to a. Detect kiting activities that may otherwise not be discov ered. b. Corroborate information regarding deposit and loan bal ances. c. Provide the data necessary to prepare a proof of cash. d. Request information about contingent liabilities and se cured transactions.

An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management’s fi nancial statement asser tion(s) of Presentation and disclosure/Existence or occurrence a. Yes Yes b. Yes No c. No Yes d. No No

(refer to illustration in page 67) The tick mark ◆ most likely indicates that the amount was traced to the a. December cash disbursements journal. b. Outstanding check list of the applicable bank rec on cilia tion. c. January cash disbursements journal. d. Year-end bank confi rmations.

The tick mark ▲most likely indicates that the amount was traced to the a. Deposits in transit of the applicable bank recon cilia tion. b. December cash receipts journal. c. January cash receipts journal. d. Year-end bank confi rmations

Which of the following statements is correct concern ing the use of negative confi rmation requests? a. Unreturned negative confi rmation requests rarely pro vide signifi cant explicit evidence. b. Negative confi rmation requests are effective when detec tion risk is low. c. Unreturned negative confi rmation requests indi cate that alternative procedures are necessary. d. Negative confi rmation requests are effective when un derstatements of account balances are sus pected.

When an auditor doesnot receive replies to positive re quests for year-end accounts receivable confi rmations, the audi tor most likely would a. Inspect the allowance account to verify whether the ac counts were subsequently written off. b. Increase the assessed level of detection risk for the valua tion and completeness assertions. c. Ask the client to contact the customers to request that the confi rmations be returned. d. Increase the assessed level of inherent risk for the reve nue cycle.

In confi rming a client’s accounts receivable in prior years, an auditor found that there were many differences between the re corded account balances and the confi rmation replies. These differences, which were not misstatements, required substantial time to resolve. In defi ning the sam pling unit for the current year’s audit, the auditor most likely would choose a. Individual overdue balances. b. Individual invoices. c. Small account balances. d. Large account balances.

Confi rmation is most likely to be a relevant form of evi dence with regard to assertions about accounts receivable when the auditor has concerns about the receivables’ a. Valuation. b. Classifi cation. c. Existence. d. Completeness.

An auditor should perform alternative procedures to substan tiate the existence of accounts receivable when a. No reply to a positive confi rmation request is re ceived. b. No reply to a negative confi rmation request is re ceived. c. Collectibility of the receivables is in doubt. d. Pledging of the receivables is probable.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable con fi rmations when the auditor did not receive replies to second requests? a. Review the cash receipts journal for the month prior to the year-end. b. Intensify the study of internal control concerning the revenue cycle. c. Increase the assessed level of detection risk for the exist ence assertion. d. Inspect the shipping records documenting the mer chan dise sold to the debtors.

In which of the following circumstances would the use of the negative form of accounts receivable confi rmation most likely be justifi ed? a. A substantial number of accounts may be in dis pute and the accounts receivable balance arises from sales to a few major customers. b. A substantial number of accounts may be in dis pute and the accounts receivable balance arises from sales to many customers with small bal ances. c. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers. d. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

To reduce the risks associated with accepting e-mail re sponses to requests for confi rmation of accounts receiv able, an auditor most likely would a. Request the senders to mail the original forms to the au ditor. b. Examine subsequent cash receipts for the ac counts in question. c. Consider the e-mail responses to the confi rma tions to be exceptions. d. Mail second requests to the e-mail respondents.

To reduce the risks associated with accepting fax re sponses to requests for confi rmations of accounts receivable, an auditor most likely would a. Examine the shipping documents that provide evi dence for the existence assertion. b. Verify the sources and contents of the faxes in tele phone calls to the senders. c. Consider the faxes to be nonresponses and evalu ate them as unadjusted differences. d. Inspect the faxes for forgeries or alterations and con sider them to be acceptable if none are noted

In auditing accounts receivable, the negative form of confi r mation request most likely would be used when a. The total recorded amount of accounts receivable is im material to the fi nancial statements taken as a whole. b. Response rates in prior years to properly designed posi tive confi rmation requests were inadequate. c. Recipients are likely to return positive confi rma tion re quests without verifying the accuracy of the infor mation. d. The combined assessed level of inherent risk and con trol risk relative to accounts receivable is low.

Under which of the following circumstances would the use of the blank form of confi rmations of accounts receiv a ble most likely be preferable to positive confi rmations? a. The recipients are likely to sign the confi rmations with out devoting proper attention to them. b. Subsequent cash receipts are unusually diffi cult to ver ify. c. Analytical procedures indicate that few excep tions are expected. d. The combined assessed level of inherent risk and con trol risk is low.

In confi rming accounts receivable, an auditor decided to confi rm customers’ account balances rather than individ ual in voices. Which of the following most likely would be included with the client’s confi rmation letter? a. An auditor-prepared letter explaining that a non re sponse may cause an inference that the account bal ance is correct. b. A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent. c. An auditor-prepared letter requesting the cus tomer to supply missing and incorrect information di rectly to the auditor. d. A client-prepared statement of account showing the de tails of the customer’s account balance.

Which of the following statements would an auditor most likely add to the negative form of confi rmations of accounts re ceivable to encourage timely consideration by the recipients? a . “This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.” b. “Report any differences on the enclosed statement di rectly to our auditors; no reply is necessary if this amount agrees with your records.” c. “If you do not report any differences within fi f teen days, it will be assumed that this statement is correct.” d. “The following invoices have been selected for confirmation and represent amounts that are over due.”

Which of the following strategiesmost likely could t improve the response rate of the confi rmation of accounts receivable? a. Including a list of items or invoices that constitute the ac count balance. b. Restricting the selection of accounts to be con fi rmed to those customers with relatively large bal ances. c. Requesting customers to respond to the confi rma tion requests directly to the auditor by fax or e-mail. d. Notifying the recipients that second requests will be mailed if they fail to respond in a timely man ner.

An auditor most likely would make inquiries of pro duction and sales personnel concerning possible obsolete or slow-moving inventory to support management’s fi nancial statement assertion of a. Valuation. b. Rights. c. Existence. d. Presentation.

While observing a client’s annual physical inventory, an auditor recorded test counts for several items and noticed that certain test counts were higher than the recorded quan tities in the client’s perpetual records. This situation could be the result of the client’s failure to record a. Purchase discounts. b. Purchase returns. c. Sales. d. Sales returns.

To gain assurance that all inventory items in a client’s inven tory listing schedule are valid, an auditor most likely would trace a. Inventory tags noted during the auditor’s observa tion to items listed in the inventory listing sched ule. b. Inventory tags noted during the auditor’s observa tion to items listed in receiving reports and ven dors’ in voices. c. Items listed in the inventory listing schedule to in ven tory tags and the auditor’s recorded count sheets. d. Items listed in receiving reports and vendors’ in voices to the inventory listing schedule.

To measure how effectively an entity employs its re sources, an auditor calculates inventory turnover by dividing average in ventory into a. Net sales. b. Cost of goods sold. c. Operating income. d. Gross sales.

Which of the following auditing proceduresmost likely would provide assurance about a manufacturing en tity’s inven tory valuation? a. Testing the entity’s computation of standard over head rates. b. Obtaining confi rmation of inventories pledged un der loan agreements. c. Reviewing shipping and receiving cutoff proce dures for inventories. d. Tracing test counts to the entity’s inventory list ing

A client maintains perpetual inventory records in both quanti ties and dollars. If the assessed level of control risk is high, an auditor would probably a. Increase the extent of tests of controls of the in ven tory cycle. b. Request the client to schedule the physical inven tory count at the end of the year. c. Insist that the client perform physical counts of in ven tory items several times during the year. d. Apply gross profi t tests to ascertain the rea sonable ness of the physical counts.

An auditor concluded that no excessive costs for idle plant were charged to inventory. This conclusionmost likely related to the auditor’s objective to obtain evidence about the fi nancial statement assertions regarding inventory, including presentation and disclosure and a. Valuation. b. Completeness. c. Existence. d. Rights.

An auditor selected items for test counts while observ ing a client’s physical inventory. The auditor then traced the test counts to the client’s inventory listing. This procedure most likely obtained evidence concerning management’s assertion of a. Rights. b. Completeness. c. Existence. d. Valuation.

An auditor most likely would analyze inventory turn over rates to obtain evidence concerning management’s as sertions about a. Existence. b. Rights. c. Presentation. d. Valuation.

An auditor usually examines receiving reports to sup port entries in the a. Voucher register and sales returns journal. b. Sales journal and sales returns journal. c. Voucher register and sales journal. d. Check register and sales journal.

When auditing inventories, an auditor wouldleast likely verify that a. The fi nancial statement presentation of invento ries is appropriate. b. Damaged goods and obsolete items have been properly accounted for. c. All inventory owned by the client is on hand at the time of the count. d. The client has used proper inventory pricing.

An auditor who physically examines securities should insist that a client representative be present in order to a. Detect fraudulent securities. b. Lend authority to the auditor’s directives. c. Acknowledge the receipt of securities returned. d. Coordinate the return of securities to the proper lo ca tions.

In establishing the existence and ownership of a long-term investment in the form of publicly traded stock, an auditor should inspect the securities or a. Correspond with the investee company to verify the number of shares owned. b. Inspect the audited fi nancial statements of the in ves tee company. c. Confi rm the number of shares owned that are held by an independent custodian. d. Determine that the investment is carried at the lower of cost or market.

When an auditor is unable to inspect and count a cli ent’s investment securities until after the balance sheet date, the bank where the securities are held in a safe-deposit box should be asked to a. Verify any differences between the contents of the box and the balances in the client’s subsidiary ledger. b. Provide a list of securities added and removed from the box between the balance sheet date and the security-count date. c. Confi rm that there has been no access to the box be tween the balance sheet date and the security-count date. d. Count the securities in the box so the auditor will have an independent direct verifi cation.

In testing long-term investments, an auditor ordinarily would use analytical procedures to ascertain the reasonable ness of the a. Completeness of recorded investment income. b. Classifi cation between current and noncurrent port fo lios. c. Valuation of marketable equity securities. d. Existence of unrealized gains or losses in the port fo lio.

Analysis of which account isleast likely to reveal evi dence relating to recorded retirement of equipment? a. Accumulated depreciation. b. Insurance expense. c. Property, plant, and equipment. d. Purchase returns and allowances.

Which of the following explanationsmost likely would sat isfy an auditor who questions management about signifi cant debits to the accumulated depreciation accounts? a. The estimated remaining useful lives of plant as sets were revised upward. b. Plant assets were retired during the year. c. The prior year’s depreciation expense was errone ously understated. d. Overhead allocations were revised at year-end.

In testing for unrecorded retirements of equipment, an audi tor most likely would a. Select items of equipment from the accounting rec ords and then locate them during the plant tour. b. Compare depreciation journal entries with similar prior year entries in search of fully depreciated equip ment. c. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. d. Scan the general journal for unusual equipment ad di tions and excessive debits to repairs and mainte nance expense.

An auditor analyzes repairs and maintenance accounts pri marily to obtain evidence in support of the audit assertion that all a. Noncapitalizable expenditures for repairs and mainte nance have been recorded in the proper pe riod. b. Expenditures for property and equipment have been rec orded in the proper period. c. Noncapitalizable expenditures for repairs and mainte nance have been properly charged to ex pense. d. Expenditures for property and equipment havenot been charged to expense.

The auditor ismost likely to seek information from the plant manager with respect to the a. Adequacy of the provision for uncollectible ac counts. b. Appropriateness of physical inventory observa tion pro cedures. c. Existence of obsolete machinery. d. Deferral of procurement of certain necessary in sur ance coverage.

Treetop Corporation acquired a building and arranged mortgage fi nancing during the year. Verifi cation of the re lated mortgage acquisition costs would beleast likely to include an examination of the related a. Deed. b. Canceled checks. c. Closing statement. d. Interest expense.

In testing plant and equipment balances, an auditor may inspect new additions listed on the analysis of plant and equip ment. This procedure is designed to obtain evidence concerning management’s assertions of Existence or occurrence/Presentation and disclosure a. Yes Yes b. Yes No c. No Yes d. No No

In auditing intangible assets, an auditor most likely would review or recompute amortization and determine whether the amortization period is reasonable in support of management’s fi nancial statement assertion of a. Valuation or allocation. b. Existence or occurrence. c. Completeness. d. Rights and obligations.

When auditing prepaid insurance, an auditor discovers that the original insurance policy on plant equipment is not available for inspection. The policy’s absence most likely indicates the possibility of a(n) a. Insurance premium due but not recorded. b. Defi ciency in the coinsurance provision. c. Lien on the plant equipment. d. Understatement of insurance expense

Which of the following procedures would an auditor most likely perform in searching for unrecorded liabilities? a. Trace a sample of accounts payable entries re corded just before year-end to the unmatched re ceiving report fi le. b. Compare a sample of purchase orders issued just af ter year-end with the year-end accounts payable trial bal ance. c. Vouch a sample of cash disbursements recorded just af ter year-end to receiving reports and vendor invoices. d. Scan the cash disbursements entries recorded just be fore year-end for indications of unusual trans ac tions.

When using confi rmations to provide evidence about the completeness assertion for accounts payable, the appro priate populationmost likely would be a. Vendors with whom the entity has previously done busi ness. b. Amounts recorded in the accounts payable sub sidi ary ledger. c. Payees of checks drawn in the month after the year-end. d. Invoices fi led in the entity’s open invoice fi le.

Auditor confi rmation of accounts payable balances at the balance sheet date may be unnecessary because a. This is a duplication of cutoff tests. b. Accounts payable balances at the balance sheet date may not be paid before the audit is com pleted. c. Correspondence with the audit client’s attorney will re veal all legal action by vendors for non pay ment. d. There is likely to be other reliable external evi dence to support the balances.

Which of the following is a sub stantive procedure that an auditor most likely would perform to verify the existence and valuation of recorded accounts payable? a. Investigating the open purchase order fi le to as cer tain that prenumbered purchase orders are used and ac counted for. b. Receiving the client’s mail, unopened, for a rea sona ble period of time after the year-end to search for unre corded vendors’ invoices. c. Vouching selected entries in the accounts payable sub sidiary ledger to purchase orders and receiving reports. d. Confi rming accounts payable balances with known sup pliers who have zero balances.

In auditing accounts payable, an auditor’s procedures most likely would focus primarily on management’s assertion of a. Existence. b. Presentation and disclosure. c. Completeness. d. Valuation.

When a CPA observes that the recorded interest ex pense seems to be excessive in relation to the balance in the bonds pay able account, the CPA might suspect that a. Discount on bonds payable is understated. b. Bonds payable are understated. c. Bonds payable are overstated. d. Premium on bonds payable is overstated.

An auditor most likely would inspect loan agreements under which an entity’s inventories are pledged to support man agement’s fi nancial statement assertion of a. Presentation and disclosure. b. Valuation or allocation. c. Existence or occurrence. d. Completeness.

In auditing long-term bonds payable, an auditor most likely would a. Perform analytical procedures on the bond pre mium and discount accounts. b. Examine documentation of assets purchased with bond proceeds for liens. c. Compare interest expense with the bond payable amount for reasonableness. d. Confi rm the existence of individual bond holders at year-end.

The auditor canbest verify a client’s bond sinking fund transactions and year-end balance by a. Confi rmation with individual holders of retired bonds. b. Confi rmation with the bond trustee. c. Recomputation of interest expense, interest pay able, and amortization of bond discount or pre mium. d. Examination and count of the bonds retired during the year.

An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s a. Minutes of board of directors meetings. b. Transfer agent’s records. c. Canceled stock certifi cates. d. Treasury stock certifi cate book.

In performing tests concerning the granting of stock op tions, an auditor should a. Confi rm the transaction with the Secretary of State in the state of incorporation. b. Verify the existence of option holders in the en tity’s pay roll records or stock ledgers. c. Determine that suffi cient treasury stock is avail able to cover any new stock issued. d. Trace the authorization for the transaction to a vote of the board of directors.

During an audit of an entity’s stockholders’ equity ac counts, the auditor determines whether there are restric tions on retained earnings resulting from loans, agreements, or state law. This audit procedure most likely is intended to verify manage ment’s assertion of a. Existence or occurrence. b. Completeness. c. Valuation or allocation. d. Presentation and disclosure.

When a client company doesnot maintain its own stock records, the auditor should obtain written confi rmation from the transfer agent and registrar concerning a. Restrictions on the payment of dividends. b. The number of shares issued and outstanding. c. Guarantees of preferred stock liquidation value. d. The number of shares subject to agreements to re pur chase.

An audit plan for the examination of the retained earn ings account should include a step that requires verifi cation of the a. Market value used to charge retained earnings to ac count for a two-for-one stock split. b. Approval of the adjustment to the beginning bal ance as a result of a write-down of an account re ceivable. c. Authorization for both cash and stock dividends. d. Gain or loss resulting from disposition of treasury shares.

An auditor usually tests the reasonableness of dividend income from investments in publicly held companies by comput ing the amounts that should have been received by referring to a. Dividend record books produced by investment advi sory services. b. Stock indentures published by corporate transfer agents. c. Stock ledgers maintained by independent regis trars. d. Annual audited fi nancial statements issued by the in ves tee companies.

Themost likely risk involved with a bill and hold trans action at year-end is a(n) a. Accrued liability may be overstated as of year-end. b. Buyer may have made an absolute purchase com mit ment. c. Sale may inappropriately have been recorded as of year-end. d. Buyer may have assumed the risk and reward of the pur chased product.

Which of the following accounts is the practice of “channel stuffi ng” for salesmost likely tomost directly af fect, and thereby result in additional audit procedures? a. Accrued liabilities. b. Allowance for sales returns. c. Cash. d. Marketable investments.

When control risk is assessed as low for assertions related to payroll, sub stantive procedures of payroll balancesmost likely would be limited to applying analytical procedures and a. Observing the distribution of paychecks. b. Footing and crossfooting the payroll register. c. Inspecting payroll tax returns. d. Recalculating payroll accruals.

Which of the following circumstancesmost likely would cause an auditor to suspect an employee payroll fraud scheme? a. There are signifi cant unexplained variances be tween standard and actual labor cost. b. Payroll checks are disbursed by the same em ployee each payday. c. Employee time cards are approved by individual de part mental supervisors. d. A separate payroll bank account is maintained on an im prest basis.

In auditing payroll, an auditor most likely would a. Verify that checks representing unclaimed wages are mailed. b. Trace individual employee deductions to entity jour nal entries. c. Observe entity employees during a payroll dis tribu tion. d. Compare payroll costs with entity standards or bud gets.

An auditor most likely would perform sub stantive proce dures of details on payroll transactions and balances when a. Cutoff tests indicate a substantial amount of ac crued pay roll expense. b. The assessed level of control risk relative to pay roll trans actions is low. c. Analytical procedures indicate unusual fl uctua tions in re curring payroll entries. d. Accrued payroll expense consists primarily of un paid commissions.

Recorded entries in which of the following accounts aremost likely to relate to the property, plant, and equip ment com pleteness assertion? a. Allowance for doubtful accounts. b. Marketable securities. c. Sales. d. Repairs and maintenance expense.

For which of the following matters should an auditor ob tain written management representations? a. Management’s cost-benefi t justifi cations for not cor recting internal control weaknesses. b. Management’s knowledge of future plans that may af fect the price of the entity’s stock. c. Management’s compliance with contractual agree ments that may affect the fi nancial state ments. d. Management’s acknowledgment of its respon sibil ity for employees’ violations of laws.

To which of the following matters would materiality limitsnot apply in obtaining written management represen tations? a. The availability of minutes of stockholders’ and di rec tors’ meetings. b. Losses from purchase commitments at prices in ex cess of market value. c. The disclosure of compensating balance arrange ments involving related parties. d. Reductions of obsolete inventory to net realizable value.

The date of the management representation letter should coincide with the date of the a. Balance sheet. b. Latest interim fi nancial information. c. Auditor’s report. d. Latest related-party transaction.

Which of the following matters would an auditor most likely include in a management representation letter? a. Communications with the audit committee con cern ing weaknesses in internal control. b. The completeness and availability of minutes of stock holders’ and directors’ meetings. c. Plans to acquire or merge with other entities in the sub sequent year. d. Management’s acknowledgment of its respon sibil ity for the detection of employee fraud.

The current chief executive and fi nancial offi cers have only been employed by ABC Company for the past fi ve months of year 2. ABC Company is presenting comparative fi nancial statements on Years 1 and 2, both of which were audited by Wil liam Jones, CPA. For which year(s) should Jones obtain written representations from these two indi viduals? Year 1 Year 2 a. No No b. No Yes c. Yes No d. Yes Yes

Which of the following statements ordinarily is in cluded among the written client representations obtained by the audi tor? a. Compensating balances and other arrangements in volv ing restrictions on cash balances have been dis closed. b. Management acknowledges responsibility for ille gal ac tions committed by employees. c. Suffi cient audit evidence has been made avail able to permit the issuance of an unqualifi ed opinion. d. Management acknowledges that there areno mate rial weaknesses in the internal control.

weaknesses in the internal control. 125. When considering the use of management’s written repre sentations as audit evidence about the completeness assertion, an auditor should understand that such representa tions a. Complement, but donot replace, sub stantive proce dures designed to support the assertion. b. Constitute suffi cient evidence to support the as ser tion when considered in combination with reli ance on in ternal control. c. Arenot part of the audit evidence considered to sup port the assertion. d. Replace reliance on internal control as evidence to sup port the assertion.

A written representation from a client’s management which, among other matters, acknowledges responsibility for the fair presentation of fi nancial statements, should normally be signed by the a. Chief executive offi cer and the chief fi nancial of fi cer. b. Chief fi nancial offi cer and the chairman of the board of directors. c. Chairman of the audit committee of the board of di rec tors. d. Chief executive offi cer, the chairman of the board of di rectors, and the client’s lawyer.

A limitation on the scope of the auditor’s examination suffi cient to preclude an unqualifi ed opinion will always result when management a. Prevents the auditor from reviewing the working pa pers of the predecessor auditor. b. Engages the auditor after the year-end physical in ven tory count is completed. c. Fails to correct a signifi cant defi ciency of internal con trol that had been identifi ed during the prior year’s au dit. d. Refuses to furnish a management representation let ter to the auditor.

A purpose of a management representation letter is to reduce a. Audit risk to an aggregate level of misstatement that could be considered material. b. An auditor’s responsibility to detect material mis state ments only to the extent that the letter is re lied on. c. The possibility of a misunderstanding concerning man agement’s responsibility for the fi nancial statements. d. The scope of an auditor’s procedures concerning related-party transactions and subsequent events

“There have been no communications from regulatory agencies concerning noncompliance with, or deficiencies in, financial reporting practices that could have a material effect on the financial statements.” The foregoing passage is most likely from a a. Report on internal control. b. Special report. c. Management representation letter. d. Letter for underwriters

A lawyer’s response to an auditor’s inquiry concerning litigation, claims, and assessments may be limited to matters that are considered individually or collectively material to the client’s fi nancial statements. Which parties should reach an under standing on the limits of materiality for this pur pose? a. The auditor and the client’s management. b. The client’s audit committee and the lawyer. c. The client’s management and the lawyer. d. The lawyer and the auditor

The refusal of a client’s attorney to provide informa tion requested in an inquiry letter generally is considered a. Grounds for an adverse opinion. b. A limitation on the scope of the audit. c. Reason to withdraw from the engagement. d. Equivalent to a signifi cant defi ciency.

Which of the following is an audit procedure that an audi tor most likely would perform concerning litigation, claims, and assessments? a. Request the client’s lawyer to evaluate whether the cli ent’s pending litigation, claims, and as sessments indi cate a going concern problem. b. Examine the legal documents in the client’s law yer’s pos session concerning litigation, claims, and assess ments to which the lawyer has devoted sub stantive at tention. c. Discuss with management its policies and proce dures adopted for evaluating and accounting for litigation, claims, and assessments. d. Confi rm directly with the client’s lawyer that all liti ga tion, claims, and assessments have been re corded or disclosed in the fi nancial statements.

The primary reason an auditor requests letters of in quiry be sent to a client’s attorneys is to provide the auditor with a. The probable outcome of asserted claims and pend ing or threatened litigation. b. Corroboration of the information furnished by man age ment about litigation, claims, and assess ments. c. The attorneys’ opinions of the client’s historical ex peri ences in recent similar litigation. d. A description and evaluation of litigation, claims, and as sessments that existed at the balance sheet date.

Which of the following is not an audit procedure that the independent auditor would perform concerning litiga tion, claims, and assessments? a. Obtain assurance from management that it has dis closed all unasserted claims that the lawyer has ad v ised are probable of assertion and must be dis closed. b. Confi rm directly with the client’s lawyer that all claims have been recorded in the fi nancial state ments. c. Inquire of and discuss with management the poli c ies and procedures adopted for identifying, evalu ating, and accounting for litigation, claims, and as sessments. d. Obtain from management a description and evalua tion of litigation, claims, and assessments existing at the balance sheet date.

The scope of an audit is not restricted when an attor ney’s response to an auditor as a result of a client’s letter of audit in quiry limits the response to a. Matters to which the attorney has given substan tive at tention in the form of legal representation. b. An evaluation of the likelihood of an unfavorable out come of the matters disclosed by the entity. c. The attorney’s opinion of the entity’s historical expe ri ence in recent similar litigation. d. The probable outcome of asserted claims and pend ing or threatened litigation.

A CPA has received an attorney’s letter in which no signifi cant disagreements with the client’s assessments of contingent liabilities were noted. The resignation of the client’s lawyer shortly after receipt of the letter should alert the auditor that a. Undisclosed unasserted claims may have arisen. b. The attorney was unable to form a conclusion with re spect to the signifi cance of litigation, claims, and as sessments. c. The auditor must begin a completely new ex amina tion of contingent liabilities. d. An adverse opinion will be necessary

Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarifi cation? a. “I believe that the possible liability to the com pany is nominal in amount.” b. “I believe that the action can be settled for less than the damages claimed.” c. “I believe that the plaintiff’s case against the com pany is without merit.” d. “I believe that the company will be able to defend this ac tion successfully.”

When auditing the fair value of an asset or liability, valua tion issues ordinarily arise at the point of Initial recording/Subsequent to initial recording a. Yes Yes b. Yes No c. No Yes d. No No

Which of the following is least likely to be an ap proach followed when auditing the fair values of assets and liabilities? a. Review and test management’s process of valua tion. b. Confi rm valuations with audit committee mem bers. c. Independently develop an estimate of the value of the ac count. d. Review subsequent events relating to the account.

Which of the following auditing procedures most likely would assist an auditor in identifying related-party transactions? a. Inspecting correspondence with lawyers for evi dence of unreported contingent liabilities. b. Vouching accounting records for recurring trans ac tions recorded just after the balance sheet date. c. Reviewing confi rmations of loans receivable and pay able for indications of guarantees. d. Performing analytical procedures for indications of pos sible fi nancial diffi culties.

After determining that a related-party transaction has, in fact, occurred, an auditor should a. Add a separate paragraph to the auditor’s standard re port to explain the transaction. b. Perform analytical procedures to verify whether similar transactions occurred, but were not re corded. c. Obtain an understanding of the business purpose of the transaction. d. Substantiate that the transaction was consum mated on terms equivalent to an arm’s-length transaction.

When auditing related-party transactions, an auditor places primary emphasis on a. Ascertaining the rights and obligations of the related par ties. b. Confirming the existence of the related parties. c. Verifying the valuation of the related-party trans actions. d. Evaluating the disclosure of the related-party trans actions.

Which of the following statements is correct concern ing related-party transactions? a. In the absence of evidence to the contrary, related party transactions should be assumed to be outside the ordinary course of business. b. An auditor should determine whether a particular trans action would have occurred if the parties had not been related. c. An auditor should substantiate that related-party transac tions were consummated on terms equiva lent to those that prevail in arm’s-length transac tions. d. The audit procedures directed toward identifying related-party transactions should include consid ering whether transactions are occurring, but are not being given proper accounting recognition.

An auditor most likely would modify an unqualifi ed opin ion if the entity’s fi nancial statements include a footnote on related-party transactions a. Disclosing loans to related parties at interest rates signifi cantly below prevailing market rates. b. Describing an exchange of real estate for similar prop erty in a nonmonetary related-party transac tion. c. Stating that a particular related-party transaction oc curred on terms equivalent to those that would have prevailed in an arm’s-length transaction. d. Presenting the dollar volume of related-party trans ac tions and the effects of any change in the method of es tablishing terms from prior periods.

Which of the following procedures would an auditor most likely perform in obtaining evidence about subsequent events? a. Determine that changes in employee pay rates af ter year-end were properly authorized. b. Recompute depreciation charges for plant assets sold af ter year-end. c. Inquire about payroll checks that were recorded be fore year-end but cashed after year-end. d. Investigate changes in long-term debt occurring af ter year-end.

Which of the following events occurring after the issu ance of an auditor’s report most likely would cause the au ditor to make further inquiries about the previously issued fi nancial statements? a. An uninsured natural disaster occurs that may af fect the entity’s ability to continue as a going con cern. b. A contingency is resolved that had been disclosed in the audited fi nancial statements. c. New information is discovered concerning undis closed lease transactions of the audited period. d. A subsidiary is sold that accounts for 25% of the en tity’s consolidated net income.

Zero Corp. suffered a loss that would have a material effect on its fi nancial statements on an uncollectible trade account re ceivable due to a customer’s bankruptcy. This occurred suddenly due to a natural disaster ten days after Zero’s balance sheet date, but one month before the issuance of the fi nancial statements and the auditor’s report. Under these circumstances, The financial statements should be adjusted/ The event requires financial statement disclosure, but no adjustment/The auditor’s report should be modified for a lack of consistency a. Yes No No b. Yes No Yes c. No Yes Yes d. No Yes No

After an audit report containing an unqualifi ed opinion on a nonissuer (nonpublic) client’s fi nancial statements was issued, the client decided to sell the shares of a subsidiary that accounts for 30% of its revenue and 25% of its net in come. The auditor should a. Determine whether the information is reliable and, if de termined to be reliable, request that re vised fi nancial statements be issued. b. Notify the entity that the auditor’s report may no longer be associated with the fi nancial statements. c. Describe the effects of this subsequently discov ered in formation in a communication with per sons known to be relying on the fi nancial state ments. d . Take no action because the auditor has no obliga tion to make any further inquiries.

A client acquired 25% of its outstanding capital stock after year-end and prior to completion of the auditor’s fi eld work. The auditor should a. Advise management to adjust the balance sheet to re f l ect the acquisition. b. Issue pro forma fi nancial statements giving effect to the acquisition as if it had occurred at year-end. c. Advise management to disclose the acquisition in the notes to the fi nancial statements. d. Disclose the acquisition in the opinion paragraph of the auditor’s report.

Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subse quent events? a. Confi rming a sample of material accounts receiv able es tablished after year-end. b. Comparing the fi nancial statements being re ported on with those of the prior period. c. Investigating personnel changes in the accounting de partment occurring after year-end. d. Inquiring as to whether any unusual adjustments were made after year-end.

Which of the following procedures should an auditor gener ally perform regarding subsequent events? a. Compare the latest available interim fi nancial state ments with the fi nancial statements being au dited. b. Send second requests to the client’s customers who failed to respond to initial accounts receiv able con fi r mation requests. c. Communicate material weaknesses in internal con trol to the client’s audit committee. d. Review the cutoff bank statements for several months af ter the year-end.

On February 25, a CPA issued an auditor’s report ex press ing an unqualifi ed opinion on fi nancial statements for the year ended January 31. On March 2, the CPA learned that on Febru ary 11, the entity incurred a material loss on an uncollectible trade receivable as a result of the deteriorating f i nancial condition of the entity’s principal customer that led to the customer’s bank ruptcy. Management then refused to adjust the fi nancial state ments for this subsequent event. The CPA determined that the information is reliable and that there are creditors currently re lying on the fi nancial state ments. The CPA’s next course of ac tion most likely would be to a. Notify the entity’s creditors that the fi nancial state ments and the related auditor’s report should no longer be relied on. b. Notify each member of the entity’s board of direc tors about management’s refusal to adjust the fi nancial statements. c. Issue revised fi nancial statements and distribute them to each creditor known to be relying on the fi nancial statements. d. Issue a revised auditor’s report and distribute it to each creditor known to be relying on the fi nancial state ments.

An auditor is considering whether the omission of a substan tive procedure considered necessary at the time of an audit may impair the auditor’s present ability to support the pre viously expressed opinion. The auditor need not apply the omit ted procedure if the a. Financial statements and auditor’s report were not dis tributed beyond management and the board of direc tors. b. Auditor’s previously expressed opinion was quali fi ed be cause of a departure from GAAP. c. Results of other procedures that were applied tend to compensate for the procedure omitted. d. Omission is due to unreasonable delays by client person nel in providing data on a timely basis.

On March 15, 20X2, Kent, CPA, issued an unqualifi ed opinion on a client’s audited fi nancial statements for the year ended December 31, 20X1. On May 4, 20X2, Kent’s internal inspection program disclosed that engagement per sonnel failed to observe the client’s physical inventory. Omission of this pro cedure impairs Kent’s present ability to support the unqualifi ed opinion. If the stockholders are cur rently relying on the opinion, Kent should fi rst a. Advise management to disclose to the stockhold ers that Kent’s unqualifi ed opinion should not be re lied on. b. Undertake to apply alternative procedures that would provide a satisfactory basis for the unquali fi ed opinion. c. Reissue the auditor’s report and add an explana tory para graph describing the departure from gen erally ac cepted auditing standards. d. Compensate for the omitted procedure by per form ing tests of controls to reduce audit risk to a suffi ciently low level.

Six months after issuing an unqualifi ed opinion on audited fi nancial statements, an auditor discovered that the engagement personnel failed to confi rm several of the cli ent’s material ac counts receivable balances. The auditor should fi rst a. Request the permission of the client to undertake the confi rmation of accounts receivable. b. Perform alternative procedures to provide a satis fac tory basis for the unqualifi ed opinion. c. Assess the importance of the omitted procedures to the auditor’s ability to support the previously ex pressed opinion. d. Inquire whether there are persons currently rely ing, or likely to rely, on the unqualifi ed opinion.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash fl ows? a. Compare the amounts included in the statement of cash fl ows to similar amounts in the prior year’s statement of cash fl ows. b. Reconcile the cutoff bank statements to verify the accuracy of the year-end bank balances. c. Vouch all bank transfers for the last week of the year and fi rst week of the subsequent year. d. Reconcile the amounts included in the statement of cash fl ows to the other fi nancial statements’ balances and amounts.

Which of the following procedures is least likely to be performed before the balance sheet date? a. Testing of internal control over cash. b. Confi rmation of receivables. c. Search for unrecorded liabilities. d. Observation of inventory.

Which of the following most likely would be detected by an auditor’s review of a client’s sales cutoff? a. Shipments lacking sales invoices and shipping doc u ments. b. Excessive write-offs of accounts receivable. c. Unrecorded sales at year-end. d. Lapping of year-end accounts receivable.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of a. Presentation. b. Completeness. c. Rights. d. Existence

Which of the following procedures would an auditor most likely perform during an audit engagement’s overall review stage in formulating an opinion on an entity’s fi nan cial statements? a. Obtain assurance from the entity’s attorney that all mate rial litigation has been disclosed in the fi nan cial statements. b. Verify the clerical accuracy of the entity’s proof of cash and its bank cutoff statement. c. Determine whether inadequate provisions for the safe guarding of assets have been corrected. d. Consider whether the results of audit procedures af fect the assessment of the risk of material mis statement due to fraud.

Operational auditing is primarily oriented toward a. Future improvements to accomplish the goals of man agement. b. The accuracy of data refl ected in management’s fi nan cial records. c. The verifi cation that a company’s fi nancial state ments are fairly presented. d. Past protection provided by existing internal con trol

A typical objective of an operational audit is to deter mine whether an entity’s a. Internal control is adequately operating as de signed. b. Operational information is in accordance with gener ally accepted governmental auditing stan dards. c. Financial statements present fairly the results of op era tions. d. Specifi c operating units are functioning effi ciently and effectively.

The existence of audit risk is recognized by the state ment in the auditor’s standard report that the auditor a. Obtains reasonable assurance about whether the fi nan cial statements are free of material misstate ment. b. Assesses the accounting principles used and also evalu ates the overall fi nancial statement presenta tion. c. Realizes some matters, either individually or in the ag gregate, are important while other-matters are not im portant. d. Is responsible for expressing an opinion on the fi nan cial statements, which are the responsibility of man agement.

When an accountant performs more than one level of ser vice (for example, a compilation and a review, or a com pilation and an audit) concerning the fi nancial statements of a nonissuer (nonpublic) entity, the accountant generally should issue the report that is appropriate for a. The lowest level of service rendered. b. The highest level of service rendered. c. A compilation engagement. d. A review engagement.

March, CPA, is engaged by Monday Corp., a client, to audit the fi nancial statements of Wall Corp., a company that is not March’s client. Monday expects to present Wall’s audited fi nan cial statements with March’s auditor’s report to 1st Federal Bank to obtain fi nancing in Monday’s attempt to purchase Wall. In these circumstances, March’s auditor’s report would usually be addressed to a. Monday Corp., the client that engaged March. b. Wall Corp., the entity audited by March. c . 1st Federal Bank. d. Both Monday Corp. and 1st Federal Bank.

Which of the following statements is a basic element of the auditor’s standard report on fi nancial statements? a. The disclosures provide reasonable assurance that the f i nancial statements are free of material mis statement. b. The auditor evaluated the overall internal control and provides limited assurance on it. c. An audit includes assessing signifi cant estimates made by management. d. The fi nancial statements are consistent with those of the prior period.

For a nonpublic company, which section (paragraph) of the audit report includes a statement that the auditor believes that the audit evidence obtained is suffi cient? a. Introductory. b. Opinion. c. Auditor’s responsibility. d. Management’s responsibility.

For a nonpublic company audit report, a statement that the auditor has audited the fi nancial statements followed by the titles of the fi nancial statements is included in the a. Management’s responsibility section of the audit re port. b. The opening paragraph of the auditor’s standard re port. c. The auditor’s responsibility section of the audit re port. d. The opinion paragraph of the auditor’s standard re port.

How does an auditor make the following representa tions when issuing the standard public company auditor’s report on compar ative fi nancial statements? Examination of evidence on a test basis/Consistent application of accounting principles a. Explicitly Explicitly b. Implicitly Implicitly c. Implicitly Explicitly d. Explicitly Implicitly

Which of the following best describes the reference to the expression “taken as a whole” in the PCAOB’s audit reporting standards? a. They apply equally to a complete set of fi nancial state ments and to each individual fi nancial state ment. b. They apply only to a complete set of fi nancial state ments. c. They apply equally to each item in each fi nancial state ment. d. They apply equally to each material item in each fi nan cial statement.

A fi nancial statement audit report issued for the audit of an issuer (public) company concludes that the fi nancial statements follow a. Generally accepted accounting principles. b. Public Company Accounting Oversight Board stan d ards. c. Generally accepted auditing standards. d. International accounting standards.

Which of the following is not correct concerning infor mation included in an audit report of fi nancial statements issued under the requirements of the Public Company Ac counting Oversight Board? a. The report should include the title “Report of Inde pend ent Registered Public Accounting Firm.” b. The report should refer to the standards of the PCAOB. c. The report should include a paragraph referring to the auditor’s report on compliance with laws and regula tions. d. The report should contain the city and state or coun try of the offi ce that issued the report.

An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s fi nancial state ments adequately disclose its fi nancial diffi culties, the audi tor’s report is required to include an emphasis-of-matter par agraph that specifi cally uses the phrase(s) “Reasonable period of time, not to exceed 1 year”/“Going concern” a. Yes Yes b. Yes No c. No Yes d. No No

Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited fi nancial statements for the year ended June 30, 20X1. That doubt has been removed in 20X2. What is Mead’s reporting re sponsibility if Tech is presenting its fi nancial statements for the year ended June 30, 20X2, on a comparative basis with those of 20X1? a. The emphasis-of-matter paragraph included in the 20X1 au ditor’s report should not be repeated. b. The emphasis-of-matter paragraph included in the 20X1 au ditor’s report should be repeated in its en tirety. c. A different emphasis-of-matter paragraph describ ing Mead’s reasons for the removal of doubt should be in cluded. d. A different emphasis-of-matter paragraph describ ing Tech’s plans for fi nancial recovery should be in cluded.

When an auditor concludes there is substantial doubt about a continuing audit client’s ability to continue as a go ing concern for a reasonable period of time, the auditor’s responsibility is to a. Issue a qualifi ed or adverse opinion, depending upon ma teriality, due to the possible effects on the fi nancial statements. b. Consider the adequacy of disclosure about the cli ent’s possible inability to continue as a going con cern. c. Report to the client’s audit committee that manage ment’s accounting estimates may need to be ad justed. d. Reissue the prior year’s auditor’s report and add an em phasis-of-matter paragraph that specifi cally re fers to “substantial doubt” and “going concern.”

Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s fi nan cial statements adequately disclose its fi nancial diffi culties, Green’s auditor’s report should Include an emphasis-of matter paragraph following the opinion paragraph/Specifically use the words “going concern”/Specifically use the words “substantial doubt” a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes

In which of the following circumstances would an audi tor most likely add an emphasis-of-matter paragraph to the audit report whilenot affecting the auditor’s unmodifi ed opinion? a. The auditor is asked to report on the balance sheet, but not on the other basic fi nancial statements. b. There is substantial doubt about the entity’s ability to continue as a going concern. c. Management’s estimates of the effects of future events are unreasonable. d. Certain transactions cannot be tested because of man agement’s records retention policy.

After considering an entity’s negative trends and fi nan cial diffi culties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considera tions relating to management’s plans for dealing with the adverse effects of these conditionsmost likely would include manage ment’s plans to a. Increase current dividend distributions. b. Reduce existing lines of credit. c. Increase ownership equity. d. Purchase assets formerly leased.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an en tity’s ability to continue as a going concern? a. Signifi cant related-party transactions are pervasive. b. Usual trade credit from suppliers is denied. c. Arrearages in preferred stock dividends are paid. d. Restrictions on the disposal of principal assets are pre sent.

Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reason able period of time. In evaluating Zero’s plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero’s plans to a. Discuss with lenders the terms of all debt and loan agreements. b. Strengthen controls over cash disbursements. c. Purchase production facilities currently being leased from a related party. d. Postpone expenditures for research and develop ment projects.

Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an en tity’s ability to continue as a going concern? a. Cash fl ows from operating activities are negative. b. Research and development projects are postponed. c. Signifi cant related-party transactions are pervasive. d. Stock dividends replace annual cash dividends.

Which of the following auditing proceduresmost likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to con tinue as a going concern? a. Inspecting title documents to verify whether any as sets are pledged as collateral. b. Confi rming with third parties the details of ar range ments to maintain fi nancial support. c. Reconciling the cash balance per books with the cu t off bank statement and the bank confi rmation. d. Comparing the entity’s depreciation and asset cap i talization policies to other entities in the industry

Which of the following audit procedures wouldmost likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern? a. Review compliance with the terms of debt agree ments. b. Confi rmation of accounts receivable from principal cus tomers. c. Reconciliation of interest expense with debt out stand ing. d. Confi rmation of bank balances.

Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and events, Davismost likely would consider, as a mitigating factor, Hill’s plans to a. Accelerate research and development projects re lated to future products. b. Accumulate treasury stock at prices favorable to Hill’s historic price range. c. Purchase equipment and production facilities cur rently being leased. d. Negotiate reductions in required dividends being paid on preferred stock

The adverse effects of events causing an auditor to be lieve there is substantial doubt about an entity’s ability to continue as a going concern would most likely be mitigated by evidence relat ing to the a. Ability to expand operations into new product lines in the future. b. Feasibility of plans to purchase leased equipment at less than market value. c. Marketability of assets that management plans to sell. d. Committed arrangements to convert preferred stock to long-term debt.

For which of the following events would an auditor issue a report that omits any reference to consistency? a. A change in the method of accounting for invento ries. b. A change from an accounting principle that is not gen erally accepted to one that is generally ac cepted. c. A change in the useful life used to calculate the pro vi sion for depreciation expense. d. Management’s lack of reasonable justifi cation for a change in accounting principle.

An auditor would express an unmodifi ed opinion and add an emphasis-of-matter paragraph for An unjustified accounting change/A material weakness in the internal control a. Yes Yes b. Yes No c. No Yes d. No No

Under which of the following circumstances would a dis claimer of opinionnot be appropriate? a. The auditor is unable to determine the amounts as so ci ated with an employee fraud scheme. b. Management doesnot provide reasonable justifi ca tion for a change in accounting principles. c. The client refuses to permit the auditor to confi rm cer tain accounts receivable or apply alternative proce dures to verify their balances. d. The chief executive offi cer is unwilling to sign the man agement representation letter.

Digit Co. uses the FIFO method of costing for its in terna tional subsidiary’s inventory and LIFO for its domestic inventory. Under these circumstances, the auditor’s report on Digit’s fi nan cial statements should express an a. Unmodifi ed opinion. b. Opinion qualifi ed because of a lack of consistency. c. Opinion qualifi ed because of a departure from GAAP. d. Adverse opinion.

In the fi rst audit of a new client, an auditor was able to ex tend auditing procedures to gather suffi cient evidence about consistency. Under these circumstances, the auditor should a. Not report on the client’s income statement. b. Not refer to consistency in the auditor’s report. c. State that the consistency standard doesnot apply. d. State that the accounting principles have been ap plied consistently.

When management doesnot provide reasonable justifi cation that a change in accounting principle is preferable and it presents comparative fi nancial statements, the auditor should express a qualifi ed opinion a. Only in the year of the accounting principle change. b. Each year that the fi nancial statements initially re fl ect ing the change are presented. c. Each year until management changes back to the ac counting principle formerly used. d. Only if the change is to an accounting principle that is not generally accepted.

When an entity changes its method of accounting for in come taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter para graph added to the auditor’s report. This para graph should iden tify the nature of the change and a. Explain why the change is justifi ed under generally ac cepted accounting principles. b. Describe the cumulative effect of the change on the au dited fi nancial statements. c. State the auditor’s explicit concurrence with or op po si tion to the change. d. Refer to the fi nancial statement note that discusses the change in detail.

An entity changed from the straight-line method to the declining balance method of depreciation for all newly ac quired assets. This change has no material effect on the current year’s fi nancial statements, but is reasonably certain to have a substan tial effect in later years. If the change is disclosed in the notes to the fi nancial statements, the auditor should issue a report with a(n) a. “Except for” qualifi ed opinion. b. Emphasis-of-matter paragraph. c. Unmodifi ed opinion. d. Consistency modifi cation

An uncertainty facing the fi rm relating to the possible future results of litigation fi led against client ismost likely to result in which of the following types of audit report? a. Adverse with a basis for adverse opinion para graph. b. Qualifi ed due to a scope limitation. c. Qualifi ed with a basis for qualifi cation paragraph. d. Unqualifi ed with emphasis-of-matter paragraph.

Wilson, CPA, completed gathering suffi cient appropri ate audit evidence for the audit of Abco’s December 31, 20X8 fi nan cial statements on March 6, 20X9. A subsequent event requiring adjustment to the 20X8 fi nancial statements occurred on April 10, 20X9 and came to Wilson’s attention on April 24, 20X9. If the adjustment is made without dis closure of the event, Wil son’s report ordi narily should be dated a. March 6, 20X9. b. April 10, 20X9. c. April 24, 20X9. d. Using dual dating.

An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fi eldwork but before issuance of the auditor’s report. The audi tor’s responsi bility for events occurring subsequent to the completion of fi eld work was a. Extended to subsequent events occurring through the date of issuance of the report. b. Extended to include all events occurring since the com pletion of fi eldwork. c. Limited to the specifi c event referenced. d. Limited to include only events occurring up to the date of the last subsequent event referenced.

An auditor includes a separate paragraph in an other wise unmodifi ed report to emphasize that the entity being reported on had signifi cant transactions with related parties. The inclusion of this separate paragraph a. Is considered an “except for” qualifi cation of the opin ion. b. Violates generally accepted auditing standards if this in formation is already disclosed in footnotes to the fi nancial statements. c. Necessitates a revision of the opinion paragraph to in clude the phrase “with the foregoing expla-na tion.” d. Is appropriate and would not negate the unmodi fi ed opinion.

Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualifi ed opin ion? When read in conjunction with Note X/With the foregoing explanation a. Yes No b. No Yes c. Yes Yes d. No No

An auditor maynot issue a qualifi ed opinion when a. An accounting principle at variance with GAAP is used. b. The auditor lacks independence with respect to the au dited entity. c. A scope limitation prevents the auditor from com plet ing an important audit procedure. d. The auditor’s report refers to the work of a special ist.

When an auditor expresses an adverse opinion, the opi nion paragraph should include a. The principal effects of the departure from gener ally ac cepted accounting principles. b. A direct reference to a separate paragraph disclos ing the basis for the opinion. c. The substantive reasons for the fi nancial state ments be ing misleading. d. A description of the uncertainty or scope limitation that prevents an unmodifi ed opinion.

An auditor concludes that a client’s illegal act, which has a material effect on the fi nancial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the fi nancial statements, the au ditor should express either a(n) a. Adverse opinion or a disclaimer of opinion. b. Qualifi ed opinion or an adverse opinion. c. Disclaimer of opinion or an unmodifi ed opinion with a separate emphasis-of-matter paragraph. d. Unmodifi ed opinion with a separate emphasis-of matter paragraph or a qualifi ed opinion.

Which of the following phrases would an auditor most likely include in the auditor’s report when expressing a qualifi ed opin ion because of inadequate disclosure? a. Subject to the departure from US generally ac cepted ac counting principles, as described above. b. With the foregoing explanation of these omitted dis clo sures. c. Except for the omission of the information dis cussed in the preceding paragraph. d. Does not present fairly in all material respects.

In which of the following circumstances would an audi tor bemost likely to express an adverse opinion? a. The chief executive offi cer refuses the auditor ac cess to minutes of board of directors’ meetings. b. Tests of controls show that the entity’s internal con trol is so poor that it cannot be relied upon. c. The fi nancial statements arenot in conformity with a t FASB requirement regarding the capitalization of leases. d. Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern.

When an auditor qualifi es an opinion because of inade quate disclosure, the auditor should describe the nature of the omission in a basis for qualifi cation paragraph and mod ify the Introductory paragraph/Auditor responsibility paragraphs/Opinion paragraph a. Yes No No b. Yes Yes No c. No Yes Yes d. No No Yes

If a publicly held company issues fi nancial statements that purport to present its fi nancial position and results of operations but omits the statement of cash fl ows, which of the following types of opinion ismost likely to be appropri ate? a. Disclaimer of opinion. b. Qualifi ed opinion. c. Review report with negative assurance. d. Unmodifi ed opinion with a separate emphasis-of matter paragraph.

In which of the following situations would an auditor ordinar ily choose between expressing an “except for” quali fi ed opinion or an adverse opinion? a. The auditor did not observe the entity’s physical in ven tory and is unable to become satisfi ed as to its balance by other auditing procedures. b. The fi nancial statements fail to disclose in forma tion that is required by generally accepted ac counting prin ciples. c. The auditor is asked to report only on the entity’s bal ance sheet and not on the other basic fi nancial state ments. d. Events disclosed in the fi nancial statements cause the au ditor to have substantial doubt about the en tity’s ability to continue as a going concern.

In which of the following situations would an auditor ordinar ily choose between expressing a qualifi ed opinion or an adverse opinion? a. The auditor did not observe the entity’s physical in ventory and is unable to become satisfi ed about its bal ance by other auditing procedures. b. Conditions that cause the auditor to have substan tial doubt about the entity’s ability to continue as a going concern are inadequately disclosed. c. There has been a change in accounting principles that has a material effect on the comparability of the entity’s fi nancial statements. d. The auditor is unable to apply necessary proce dures con cerning an investor’s share of an inves tee’s earnings recognized on the equity method.

In the fi rst audit of a client, an auditor was not able to gather suffi cient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client’s record re tention policies. If the amounts in question could materially affect current operating results, the auditor would a. Be unable to express an opinion on the current year’s re sults of operations and cash fl ows. b. Express a qualifi ed opinion on the fi nancial state ments because of a client-imposed scope limita tion. c. Withdraw from the engagement and refuse to be as soci ated with the fi nancial statements. d. Specifi cally state that the fi nancial statements are not comparable to the prior year due to an uncer tainty.

In which of the following circumstances would an audi tor not express an unmodifi ed opinion? a. There has been a material change between periods in ac counting principles. b. Quarterly fi nancial data required by the SEC has been omitted. c. The auditor wishes to emphasize an unusually im portant subsequent event. d. The auditor is unable to obtain audited fi nancial state ments of a consolidated investee.

Due to a scope limitation, an auditor disclaimed an opi nion on the fi nancial statements taken as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is a. Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion. b. Not appropriate because the auditor is prohibited from reporting on only one basic fi nancial state ment. c. Appropriate provided the auditor’s scope para graph ad equately describes the scope limitation. d. Appropriate provided the statement is in a separate par agraph preceding the disclaimer of opinion par a graph.

Park, CPA, was engaged to audit the fi nancial state ments of Tech Co., a new client, for the year ended Decem ber 31, 2009. Park obtained suffi cient audit evidence for all of Tech’s fi nancial statement items except Tech’s opening inventory. Due to inade quate fi nancial records, Park could not verify Tech’s January 1, 2009 inventory balances. Park’s opinion on Tech’s 2009 fi nan cial statementsmost likely will be Balance sheet Income statement a. Disclaimer Disclaimer b. Unmodified Disclaimer c. Disclaimer Adverse d. Unmodified Adverse

An auditor who qualifi es an opinion because of an in suffi ciency of audit evidence should describe the limita tions in a basis for modifi cation paragraph. The auditor should also refer to the limitation in the Auditor’s responsibility section/Opinion paragraph /Notes to the financial statements a. Yes No Yes b. No Yes No c. Yes Yes No d. Yes Yes Yes

Harris, CPA, has been asked to audit and report on the bal ance sheet of Fox Co. but not on the statements of in come, re tained earnings, or cash fl ows. Harris will have access to all in formation underlying the basic fi nancial statements. Under these circumstances, Harris may a. Not accept the engagement because it would con sti tute a violation of the profession’s ethical stan d ards. b. Not accept the engagement because it would be tan ta mount to rendering a piecemeal opinion. c. Accept the engagement because such engagements merely involve limited reporting objectives. d. Accept the engagement but should disclaim an opi nion because of an inability to apply the proce dures consid ered necessary.

When disclaiming an opinion due to a client-imposed scope limitation on a nonpublic company’s fi nancial state ments, an auditor should indicate in a separate paragraph why the audit did not comply with generally ac cepted au diting standards. The auditor should also omit which of the two sections (paragraphs) below? Auditor responsibility/Opinion a. No Yes b. Yes Yes c. Yes No d. No No

An auditor decides to issue a qualifi ed opinion on an entity’s fi nancial statements because a major inadequacy in its comput erized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualifi cation pertains to a. A client-imposed scope limitation. b. A departure from generally accepted auditing stan dards. c. The possible effects on the fi nancial statements. d. Inadequate disclosure of necessary information.

A scope limitation suffi cient to preclude an unmodifi ed opinion always will result when management a. Prevents the auditor from reviewing the working pa pers of the predecessor auditor. b. Engages the auditor after the year-end physical in ven tory is completed. c. Requests that certain material accounts receivablenot be confi rmed. d. Refuses to acknowledge its responsibility for the fair presentation of the fi nancial statements in con formity with GAAP.

An auditor concludes that extreme doubt exists about the integrity of management and the representations obtained from management relating to the fairness of the fi nancial statements and the completeness of the record of transac tions. If the auditor retains the client, which audit report ismost likely to be appropriate? a. Unmodifi ed with emphasis-of-matter paragraph. b. Standard unmodifi ed. c. Disclaimer. d. Adverse

In which of the following situations would an auditor ordinar ily issue an unmodifi ed audit opinion without an emphasis-of-matter paragraph? a. The auditor wishes to emphasize that the entity had sig nifi cant related-party transactions. b. The auditor decides to make reference to the report of an auditor who audited a component of group fi nancial statements. c. The entity issues fi nancial statements that present fi nan cial position and results of operations, but omits the statement of cash fl ows. d. The auditor has substantial doubt about the entity’s abil ity to continue as a going concern, but the cir cum stances are fully disclosed in the fi nancial statements

A group engagement partner decides not to refer to the audit of another CPA who audited a component of the over all group fi nancial statements. After making inquiries about the other CPA’s professional reputation and independence, the prin cipal au ditor most likely would a. Add an emphasis-of-matter paragraph to the audi tor’s re port indicating that the subsidiary’s fi nan cial state ments are not material to the consolidated fi nancial statements. b. Document in the engagement letter that the prin ci pal auditor assumes no responsibility for the other CPA’s work and opinion. c. Obtain written permission from the other CPA to omit the reference in the principal auditor’s report. d. Perform additional audit procedures based on the signifi cance of the subsidiary.

The auditor’s responsibility section of a nonpublic com pany’s auditor’s report con tains the following sentences: We did not audit the fi nancial statements of EZ Inc., a wholly owned subsidiary, which statements refl ect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors. These sentences a. Indicate a division of responsibility. b. Assume responsibility for the other auditor. c. Require a departure from an unmodifi ed opinion. d. Are an improper form of reporting.

An auditor may issue the standard audit report when the a. Auditor refers to the fi ndings of a specialist. b. Financial statements are derived and summarized from complete audited fi nancial statements that are fi led with a regulatory agency. c. Financial statements are prepared on the cash re ceipts and disbursements basis of accounting. d. Group engagement partner assumes responsibility for the work of a component auditor.

In the auditor’s report, the group engagement partner de cides not to make reference to a component auditor who audited a client’s subsidiary. The group engagement partner could justify this decision if, among other requirements, he or she a. Issues an unmodifi ed opinion on the consolidated fi nan cial statements b. Learns that the component auditor issued an unmodi fi ed opi nion on the subsidiary’s fi nancial statements. c. Is unable to review the audit plan (programs) and work ing pa pers of the component auditor. d. Is satisfi ed as to the independence and professional repu tation of the other CPA.

When fi nancial statements of a company that follows GASB standards would be misleading due to unusual cir cumstances depart from those standards, the auditor should explain the unu sual circumstances in a separate paragraph and express an opin ion that is a. Unmodifi ed. b. Qualifi ed. c. Adverse. d. Qualifi ed or adverse, depending on materiality

A client follows US GAAP for its domestic operations and foreign GAAP for a foreign subsidiary. The foreign subsidiary is audited by a component auditor, while the group auditor audits the remainder of the corporation and issues an audit report on consolidated operations. Which auditor(s) is (are) responsible for evaluating the appropriateness of the adjustment of the foreign GAAP statements to US GAAP? Group auditor/Component auditor a. Yes Yes b. Yes No c. No Yes d. No No

In May 20X9, an auditor reissues the auditor’s report on the 20X7 fi nancial statements at a continuing client’s re quest. The 20X7 fi nancial statements are not restated and the auditor does not revise the wording of the report. The audi tor should a. Dual date the reissued report. b. Use the release date of the reissued report. c. Use the original report date on the reissued report. d. Use the current period auditor’s report date on the reis sued report.

When reporting on comparative fi nancial statements, an auditor ordinarily should change the previously issued opin ion on the prior year’s fi nancial statements if the a. Prior year’s fi nancial statements are restated to con form with generally accepted accounting prin ciples. b. Auditor is a predecessor auditor who has been re quested by a former client to reissue the previously is sued report. c. Prior year’s opinion was unmodifi ed and the opin ion on the current year’s fi nancial statements is modifi ed due to a lack of consistency. d. Prior year’s fi nancial statements are restated fol low ing a pooling of interests in the current year.

Jewel, CPA, audited Infi nite Co.’s prior year fi nancial state ments. These statements are presented with those of the current year for comparative purposes without Jewel’s au ditor’s report, which expressed a qualifi ed opinion. In drafting the current year’s auditor’s report, Crain, CPA, the successor auditor, should I. Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel’s qualifi ca tion. a. I only. b. I and II only. c. II and III only. d. I, II, and III.

Compiled fi nancial statements for the prior year pre sented in comparative form with audited fi nancial statements for the current year should be clearly marked to indicate their status and I. The report on the prior period should be reissued to accompany the current period report. II. The report on the current period should include as a separate paragraph a description of the responsibility assumed for the prior period’s financial statements. a. I only. b. II only. c. Both I and II. d. Either I or II.

An auditor concludes that there is a material inconsis tency in the other information in an annual report to share holders con taining audited fi nancial statements. If the au ditor concludes that the fi nancial statements donot require revision, but the client refuses to revise or eliminate the ma terial inconsistency, the audi tor may a. Revise the auditor’s report to include a separate empha sis-of-matter paragraph describing the mate rial incon sistency. b. Issue an “except for” qualifi ed opinion after dis cussing the matter with the client’s board of direc tors. c. Consider the matter closed since the other infor ma tion isnot in the audited fi nancial statements. d. Disclaim an opinion on the fi nancial statements af ter ex plaining the material inconsistency in a sepa rate ba sis for disclaimer paragraph.

When audited fi nancial statements are presented in a cli ent’s document containing other information, the auditor should a. Perform inquiry and analytical procedures to ascer tain whether the other information is reasonable. b. Add an emphasis-of-matter paragraph to the audi tor’s re port without changing the opinion on the fi nancial statements. c. Perform the appropriate substantive auditing proce dures to corroborate the other information. d. Read the other information to determine that it is con sistent with the audited fi nancial statements.

An auditor may express an opinion on an entity’s ac counts receivable balance even if the auditor has disclaimed an opinion on the fi nancial statements taken as a whole pro vided the a. Report on the accounts receivable discloses the rea son for the disclaimer of opinion on the fi nan cial state ments. b. Distribution of the report on the accounts receiv able is restricted to internal use only. c. Auditor also reports on the current asset portion of the entity’s balance sheet. d. Report on the accounts receivable is presented sepa rately from the disclaimer of opinion on the fi nancial statements.

In an audit of a nonissuer company, which statement is correct concerning required supplementary information by a designated accounting standards setter? a. The auditor has no responsibility for required sup ple mentary information as long as it is outside the basic f i nancial statements. b. The auditor’s only responsibility for required sup ple mentary information is to determine that such infor mation has not been omitted. c. The auditor should apply certain limited proce dures to the required supplementary information, and report defi ciencies in, or omissions of, such in formation. d. The auditor should apply tests of details of transac tions and balances to the required supplementary infor mation, and report any material misstatements in such information.

If management declines to present supplementary infor mation required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n) a. Adverse opinion. b. Qualifi ed opinion with an other-matter para graph. c. Unmodifi ed opinion. d. Unmodifi ed opinion with an additional other-matter paragraph.

If an auditor is asked to provide an opinion relating to infor mation accompanying the fi nancial statements in a doc ument, the opinion will ordinarily be upon whether the in formation is fairly stated in a. Accordance with US generally accepted auditing stan dards. b. Conformity with US generally accepted accounting prin ciples. c. All material respects in relation to the basic fi nan cial statements taken as a whole. d. Accordance with attestation standards expressing a con clusion about management’s assertions.

Which of the following statements is correct concerning an auditor’s responsibility for controlling the distribution by the client of a restricted-use report? a . An auditor must make clear to the client that it is il legal to distribute such a report beyond to speci fi ed parties. b. When an auditor is aware that a client has distri b uted a restricted-use report to inappropriate third parties, the auditor should immediately inform the client to cease and desist. c. An auditor controls distribution through insisting that the client not duplicate the restricted-use report for any purposes. d. An auditor is not responsible for controlling the dis tribution of such reports.

Which of the following types of reports is most likely to include an alert as to its use being restricted to certain specifi ed parties? a. Audit report. b. Review report. c. Compilation report. d. Agreed-upon procedures report.

Which of the following is least likely to be a restricted use report? a. A report on internal control signifi cant defi ciencies noted in an audit. b. A required communication with the audit commit tee. c. A report on fi nancial statements prepared follow ing a financial reporting framework other than generally ac cepted accounting principles. d. A report on compliance with aspects of contractual agreements.

An auditor expressed a qualifi ed opinion on the prior year’s fi nancial statements because of a lack of adequate disclosure. These fi nancial statements are properly restated in the current year and presented in comparative form with the current year’s fi nancial statements. The auditor’s up dated report on the prior year’s fi nancial statements should a. Be accompanied by the auditor’s original report on the prior year’s fi nancial statements. b. Continue to express a qualifi ed opinion on the prior year’s fi nancial statements. c . Make no reference to the type of opinion expressed on the prior year’s financial statements. d. Express an unmodified opinion on the restated financial statements of the prior year.

Before reporting on the fi nancial statements of a US entity that have been prepared in conformity with another country’s accounting principles, an auditor practicing in the US should a. Understand the accounting principles generally accepted in the other country. b. Be certified by the appropriate auditing or accountancy board of the other country. c. Notify management that the auditor is required to dis claim an opinion on the financial statements. d. Receive a waiver from the auditor’s state board of accountancy to perform the engagement.

The fi nancial statements of KCP America, a US entity, are prepared for inclusion in the consolidated financial statements of its non-US parent. These financial statements are prepared in conformity with the accounting principles generally accepted in the parent’s country and are for use only in that country. How may KCP America’s auditor re port on these financial statements? I. A US-style report (unmodified). II. A US-style report modified to report on the accounting principles of the parent’s country. III. The report form of the parent’s country. I II III a. Yes No No b. No Yes No c. Yes No Yes d. No Yes Yes

An auditor of a nonpublic company should disclose the substantive reasons for ex pressing an adverse opinion in a basis for modifi cation paragraph a. Preceding the auditor’s responsibility section b. Preceding the opinion section. c. Following the opinion section. d. Within the notes to the financial statements.

When an auditor reports on fi nancial statements pre pared on an entity’s income tax basis, the auditor’s report should a. Disclaim an opinion on whether the statements were ex amined in accordance with generally ac cepted au diting standards. b. Not express an opinion on whether the statements are presented in conformity with the fi nancial re porting framework used. c. Include an explanation of how the results of opera tions differ from the cash receipts and disburse ments basis of accounting. d. State that the basis of presentation is a fi nancial re port ing framework other than GAAP.

Helpful Co., a nonprofi t entity, prepared its fi nancial state ments on an accounting basis prescribed by a regulatory agency solely for fi ling with that agency. Green audited the fi nancial statements in accordance with generally accepted auditing stan dards and concluded that the fi nancial state ments were fairly presented on the prescribed basis. Green should issue a report with a(n) a. Qualified opinion. b. Adverse opinion c. Disclaimer of opinion. d. Unmodified opinion.

An auditor’s report on fi nancial statements pre pared in conformity with the cash basis of accounting should include a separate emphasis-of-matter paragraph that a. Justifi es the reasons for departing from generally ac cepted accounting principles. b. States whether the fi nancial statements are fairly pre sented in conformity with GAAP. c. Refers to the note to the fi nancial statements that de scribes the basis of accounting. d. Explains how the results of operations differ from fi nan cial statements prepared in conformity with gener ally accepted accounting principles.

An auditor’s report would refer to a basis of accounting other than GAAP in which of the following situations? a. Interim financial information of a publicly held company that is subject to a limited review. b. Compliance with aspects of regulatory requirements related to audited financial statements. c. Application of accounting principles to specified trans actions. d. Limited use prospective financial statements such as a financial projection.

Delta Life Insurance Co. prepares its fi nancial state ments on an accounting basis insurance companies use pur suant to the rules of a state insurance commission. If Wall, CPA, Delta’s audi tor, discovers that the statements arenot suitably titled, Wall should a. Disclose any reservations in an emphasis-of-matter para graph and qualify the opinion. b. Apply to the state insurance commission for an ad vi sory opinion. c. Issue a special statutory basis report that clearly dis claims any opinion. d. Explain in the notes to the fi nancial statements the ter minology used.

Financial information is presented in a printed form that prescribes the wording of the independent auditor’s report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the au ditor’s responsibility. Under these circumstances, the audi tor most likely would a. Withdraw from the engagement. b. Reword the form or attach a separate report. c. Express a qualifi ed opinion with an explanation. d. Limit distribution of the report to the party who de signed the form.

Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field’s profit participation in Gold’s net income. Hardy may accept this engagement only if a. Hardy also audits Gold’s complete financial statements. b. Gold’s financial statements are prepared in conformity with GAAP. c. Hardy’s report is available for distribution to Gold’s other employees. d. Field owns controlling interest in Gold

A CPA is permitted to accept a separate engagement (not in conjunction with an audit of fi nancial statements) to audit an entity’s Schedule of accounts receivable/Schedule of royalties a. Yes Yes b. Yes No c. No Yes d. No No

In an accountant’s review of interim fi nancial information, the accountant typically performs each of the following,except a. Reading the available minutes of the latest stockhold ers’ meeting. b. Applying fi nancial ratios to the interim fi nancial infor mation. c. Inquiring of the accounting department’s management. d. Confirming major receivable accounts.

When an independent CPA has reviewed the interim fi nan cial statements of a public client, which procedure isleast likely to have been performed? a. Obtaining written representations from manage ment for all interim fi nancial information pre sented. b. Observing the interim count of inventory. c. Reading the fi nancial statements for obvious ma te rial misstatements. d. Performing analytical procedures related to sales.

The objective of a review of interim fi nancial informa tion of a public entity (issuer) is to provide an accountant with a basis for reporting whether a. Material modifi cations should be made to conform with generally accepted accounting principles. b. A reasonable basis exists for expressing an updated opinion regarding the fi nancial statements that were previously audited. c. Summary fi nancial statements or pro forma fi nan cial in formation should be included in a registra tion state ment. d. The fi nancial statements are presented fairly in ac cor dance with generally accepted accounting prin ciples.

An independent accountant’s report is based on a re view of interim fi nancial information. If this report is pre sented in a reg istration statement, a prospectus should in clude a statement clar ifying that the a. Accountant’s review report is not a part of the reg istra tion statement within the meaning of the Se cu rities Act of 1933. b. Accountant assumesno responsibility to update the re port for events and circumstances occurring after the date of the report. c. Accountant’s review was performed in accordance with standards established by the Securities and Exchange Commission. d. Accountant obtained corroborating evidence to de ter mine whether material modifi cations are needed for such information to conform with GAAP.

A modifi cation of the CPA’s report on a review of the in terim fi nancial statements of a publicly held company would be necessitated by which of the following? a. An uncertainty. b. Lack of consistency. c. Reference to another accountant. d. Inadequate disclosure.

Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim fi nancial information of a publicly held entity? a. Verify changes in key account balances. b. Read the minutes of the board of directors’ meet ings. c. Inspect the open purchase order fi le. d. Perform cut-off tests for cash receipts and dis burse ments.

Which of the following isleast likely to be a procedure in cluded in an accountant’s review of interim fi nancial in formation of a public entity? a. Compare disaggregated revenue data by month to that of the previous interim period. b. Read available minutes of meetings of stockhold ers. c. Observe counting of physical inventory. d. Inquire of management concerning signifi cant jour nal entries and other adjustments.

An accountant’s review report on interim fi nancial in for mation of a public entity ismost likely to include a a. Statement that the interim fi nancial information was ex amined in accordance with standards of the Public Company Accounting Oversight Board. b. Statement that the interim fi nancial information is the re sponsibility of the entity’s shareholders. c. Description of the procedures for a review. d. Statement that a review of interim fi nancial in for ma tion is less in scope than a compilation con ducted in accordance with AICPA standards

An auditor may report on summary fi nancial state ments that are derived from complete fi nancial statements if the a. Summary fi nancial statements are distributed to stock holders along with the complete fi nancial statements. b. Auditor described the additional procedures per formed on the summary fi nancial statements. c. Auditor indicates whether the information in the sum mary fi nancial statements is fairly stated in all material respects in relation to the complete fi nan cial state ments from which it has been derived. d. Summary fi nancial statements are presented in com para tive form with the prior year’s summary fi nancial statements

An auditor is engaged to report on selected fi nancial data that are included in a document con taining audited fi nancial statements. Under these circum stances, the report on the se lected data should a. Be limited to data derived from the audited fi nan cial statements. b. Be distributed only to senior management and the board of directors. c. State that the presentation is a fi nancial reporting frame work other than GAAP. d. Indicate that the data are not fairly stated in all ma te rial respects.

A registration statement fi led with the SEC contains the reports of two independent auditors on their audits of fi nancial statements for different periods. The predecessor auditor who audited the prior period fi nancial statements generally should obtain a letter of representation from the a. Successor independent auditor. b. Client’s audit committee. c. Principal underwriter. d. Securities and Exchange Commission

Which of the following statements is correct concern ing letters for underwriters, commonly referred to as comfort letters? a. Letters for underwriters are required by the Securi ties Act of 1933 for the initial public sale of regis tered secu rities. b. Letters for underwriters typically give negative as sur ance on unaudited interim fi nancial information. c. Letters for underwriters usually are included in the regis tration statement accompanying a prospectus. d. Letters for underwriters ordinarily update auditors’ opinions on the prior year’s fi nancial statements.

Comfort letters ordinarily are signed by the client’s a. Independent auditor. b. Underwriter of securities. c. Audit committee. d. Senior management.

Comfort letters ordinarily are addressed to a. Creditor fi nancial institutions. b. The client’s audit committee. c. The Securities and Exchange Commission. d. Underwriters of securities.

When an accountant issues to an underwriter a comfort letter containing comments on data that have not been au dited, the underwriter most likely will receive a. Negative assurance on capsule information. b. Positive assurance on supplementary disclosures. c. A limited opinion on pro forma fi nancial state ments. d. A disclaimer on prospective fi nancial statements.

When an independent audit report is incorporated by refer ence in a SEC registration statement, a prospectus that in cludes a statement about the independent accountant’s involve ment should refer to the independent accountant as a. Auditor of the fi nancial reports. b. Management’s designate before the SEC. c. Certifi ed preparer of the report. d. Expert in auditing and accounting.

Which of the following matters is covered in a typical com fort letter? a. Negative assurance concerning whether the entity’s in ternal control procedures operated as designed during the period being audited. b. An opinion regarding whether the entity complied with laws and regulations under Government Au diting Standards and the Single Audit Act of 1984. c. Positive assurance concerning whether unaudited con densed fi nancial information complied with generally accepted accounting principles. d. An opinion as to whether the audited fi nancial state ments comply in form with the accounting re quire ments of the SEC.

When unaudited fi nancial statements are presented in comparative form with audited fi nancial statements in a docu ment fi led with the Securities and Exchange Commis sion, such statements should be Marked as “unaudited”/Withheld until audited/Referred to in the auditor’s report a. Yes No No b. Yes No Yes c. No Yes Yes d. No Yes No

In connection with a proposal to obtain a new audit client, a CPA in public practice is asked to prepare a report on the appli cation of accounting principles to a specifi c transaction. The CPA’s report should include a statement that a. The engagement was performed in accordance with Statements on Standards for Accounting and Review Services. b. Responsibility for the proper accounting treatment rests with the preparers of the fi nancial statements. c. The evaluation of the application of accounting prin ci ples is hypothetical and maynot be used for opinion-shopping. d. The guidance is provided for management’s use only and may not be communicated to the prior or contin uing auditor.

In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a spe cifi c transac tion. The accountant’s report should include a statement that a. Any difference in the facts, circumstances, or as sump tions presented may change the report. b. The engagement was performed in accordance with Statements on Standards for Consulting Ser vices. c. The guidance provided is for management use only and maynot be communicated to the prior or con tin uing auditors. d. Nothing came to the accountant’s attention that caused the accountant to believe that the account ing principles violated GAAP.

Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specifi c transaction by an entity that is audited by another CPA. Blue, who previously has provided no services to the entity, may ac cept this engagement, but should a. Consult with the continuing CPA to obtain in for mation relevant to the transaction. b. Report the engagement’s fi ndings to the entity’s au dit committee, the continuing CPA, and man agement. c. Disclaim any opinion that the hypothetical applica tion of accounting principles conforms with gener ally ac cepted accounting principles. d. Notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.

Which of the following statements isnot included in an accountant’s report on the application of accounting prin ciples? a. The engagement was performed following stan d ards es tablished by the American Institute of Cer ti fi ed Pub lic Accountants. b. The report is based on a hypothetical transaction not in volving facts or circumstances of this partic ular en tity. c. The report is intended solely for the information and use of specifi ed parties. d. Responsibility for the proper accounting treatment rests with the preparers of the fi nancial statements.

Which of the following services would bemost likely t to be structured as an attest engagement in which assurance is provided? a. Advocating a client’s position in tax matter. b. A consulting engagement to develop a new data base sys tem for the revenue cycle. c. An engagement to issue a report addressing an en tity’s compliance with requirements of specifi ed laws. d. The compilation of a client’s forecast information.

An unmodifi ed attestation report ordinarily may refer to a. Only the assertion. b. Only the subject matter to which the assertion re lates. c. Either the assertion or the subject matter to which the as sertion relates. d. Neither the assertion nor the subject matter to which the assertion relates.

A practitioner is issuing a standard unmodifi ed exami nation report under the attestation standards. The CPA’s con clusion may be on Subject matter/Management’s written assertion a. Yes Yes b. Yes No c. No Yes d. No No

Conditions exist that result in a material deviation from the criteria against which the subject matter was eva luated during an examination. The CPA’s conclusion may be on Subject matter/Written assertion a. Yes Yes b. Yes No c. No Yes d. No No

When performing an attestation engagement, which of the following isleast likely to be present? a. Practitioner’s written assertion. b. Responsible party. c. Subject matter. d. Suitable criteria.

Suitable criteria in an attestation engagement may be avail able Publicly/In CPA’s report a. Yes Yes b. Yes No c. No Yes d. No No

Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report? a. The specifi ed party takes responsibility for the suffi ciency of procedures. b. Use of the report is restricted. c. Limited assurance on the information presented. d. A summary of procedures performed.

A summary of fi ndings rather than assurance is most likely to be included in a. Agreed-upon procedures report. b. Compilation report. c. Examination report. d. Review report.

Which of the following isnot correct concerning “speci fi ed parties” of an agreed-upon procedures report un der either the auditing or attestation standards? a. They must agree on the procedures to be per formed. b. They must take responsibility for the adequacy of the procedures performed. c. They must sign an engagement letter. d. After completion of the engagement, another party may be added as a specifi ed user.

When an accountant examines projected financial statements, the accountant’s report should include a separate para graph that a. Describes the limitations on the usefulness of the presentation. b. Provides an explanation of the differences between an examination and an audit. c. States that the accountant is responsible for events and circumstances up to one year after the report’s date. d. Disclaims an opinion on whether the assumptions pro vide a reasonable basis for the projection.

An accountant may accept an engagement to apply agreed-upon procedures to prospective fi nancial statements provided that a. Use of the report is restricted to the specifi ed par ties. b. The prospective fi nancial statements are also ex am ined. c. Responsibility for the adequacy of the procedures per formed is taken by the accountant. d. Negative assurance is expressed on the prospective fi nancial statements taken as a whole.

An accountant’s compilation report on a fi nancial fore cast should include a statement that a. The forecast should be read only in conjunction with the audited historical fi nancial statements. b. The accountant expresses only limited assurance on the forecasted statements and their assumptions. c. There will usually be differences between the fore casted and actual results. d. The hypothetical assumptions used in the forecast are reasonable in the circumstances.

Accepting an engagement to examine an entity’s fi nancial projectionmost likely would be appropriate if the projection were to be distributed to a. All employees who work for the entity. b. Potential stockholders who request a prospectus or a registration statement. c. A bank with which the entity is negotiating for a loan. d. All stockholders of record as of the report date.

A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation En gagements (SSAE) when Testifying as an expert witness in accounting and auditing matters given stipulated facts/Compiling a client’s financial projection that presents a hypothetical course of action a. Yes Yes b. Yes No c. No Yes d. No No

An accountant’s compilation report on a fi nancial fore cast should include a statement that the a. Compilation does not include evaluation of the sup port of the assumptions underlying the forecast. b. Hypothetical assumptions used in the forecast are rea sonable. c. Range of assumptions selected is one in which one end of the range is less likely to occur than the other. d. Prospective statements are limited to presenting, in the form of a forecast, information that is the ac countant’s representation.

Which of the following is a prospective fi nancial state ment for general use upon which an accountant may appro priately report? a. Financial projection. b. Partial presentation. c. Pro forma financial statement. d. Financial forecast.

Which of the following isnot included in a compila tion report on prospective fi nancial statements? a. A statement that the practitioner assumes no re sponsi bility to update the report for events and cir cumstances occurring after the date of the report. b. A caveat that the prospective results may not be achieved. c. A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the in formation. d. Distribution of the report is restricted to speci fi ed par ties.

When an accountant examines a fi nancial forecast that fails to disclose several signifi cant assumptions used to pre pare the forecast, the accountant should describe the as sumptions in the accountant’s report and issue a(n) a. “Except for” qualifi ed opinion. b. “Subject to” qualifi ed opinion. c. Unmodifi ed opinion with a separate emphasis-of-mat ter paragraph. d. Adverse opinion.

An examination of a fi nancial forecast is a professional service that involves a. Compiling or assembling a fi nancial forecast that is based on management’s assumptions. b. Limiting the distribution of the accountant’s report to management and the board of directors. c. Assuming responsibility to update management on key events for one year after the report’s date. d. Evaluating the preparation of a fi nancial forecast and the support underlying management’s assumptions.

Given one or more hypothetical assumptions, a respon sible party may prepare, to the best of its knowledge and belief, an entity’s expected fi nancial position, results of operations, and changes in fi nancial position. Such prospec tive fi nancial state ments are known as a. Pro forma fi nancial statements. b. Financial projections. c. Partial presentations. d. Financial forecasts.

An accountant’s report on a review of pro forma fi nan cial information should include a a. Statement that the entity’s internal control was not re lied on in the review. b. Disclaimer of opinion on the fi nancial statements from which the pro forma fi nancial information is derived. c. Caveat that it is uncertain whether the transaction or event refl ected in the pro forma fi nancial infor mation will ever occur. d. Reference to the fi nancial statements from which the his torical fi nancial information is derived.

Which of the following isnot an objective of a CPA’s exami nation of a client’s management discussion and analy sis (MD&A) prepared pursuant to Securities and Exchange Com mission rules and regulations? a. The historical amounts have been accurately de rived, in all material respects, from the entity’s fi nancial statements. b. The presentation is in conformity with rules and reg ula tions adopted by the Securities and Ex change Commission. c. The underlying information, determinations, esti mates and assumptions of the entity provide a rea sonable ba sis for the disclosures contained herein. d. The presentation includes the required elements of MD&A.

Which of the following is an assertion embodied in manage ment’s discussion and analysis (MD&A)? a. Valuation. b. Reliability. c. Consistency with the fi nancial statements. d. Rights and obligations.

Which of the following statements is correct relating to an auditor’s review engagements on an entity’s manage ment discus sion and analysis (MD&A)? a. A review consists principally of applying analyti cal pro cedures and search and verifi cation proce dures. b. The review report of a public entity should be re stricted to the use of specifi ed parties. c. No consideration of internal control is necessary. d. The report issued will ordinarily include a sum mary of fi ndings, but no negative assurance.

Trust Service engagements are performed under the provi sions of a. Statements on Assurance Standards. b. Statements on Standards for Attestation Engage ments. c. Statements on Standards for Trust Engagements d. Statements on Auditing Standards.

The WebTrust seal of assurance relates most directly to a. Financial statements maintained on the Internet. b. Health care facilities. c. Risk assurance procedures. d. Websites.

A CPA’s examination report relating to a WebTrust en gagement ismost likely to include a. An opinion on whether the site is “hackproof.” b. An opinion on whether the site meets the Web Trust cri teria. c. Negative assurance on whether the site is electroni cally secure. d. No opinion or other assurance, but a summary of fi nd ings relating to the website.

An engagement in which a CPA considers security, availabil ity, processing integrity, online privacy, and/or con fi den tiality over any type of defi ned electronic system ismost likely t to considered which of the following types of engagements? a. Internal control over fi nancial reporting. b. SysTrust. c. Website Associate. d. WebTrust.

A client’s refusal to provide a written assertion in a Trust Services engagement ismost likely to result in which of the fol lowing types of opinions? a. Adverse. b. Disclaimer. c. Qualifi ed. d. Unmodifi ed with explanatory language.

Dunn, CPA, is auditing the fi nancial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its Module 5: Reporting 377 payroll. Price, CPA, is expressing an opinion on a description of the controls implemented at QSC regarding the processing of its customers’ payroll transactions. Dunn expects to consider the effects of Price’s report on the Taft engagement. Price’s report should contain a(n) a. Description of the scope and nature of Price’s procedures. b. Statement that Dunn may assess control risk based on Price’s report. c. Assertion that Price assumes no responsibility to determine whether QSC’s controls are suitably designed. d. Opinion on the operating effectiveness of QSC’s internal controls.

Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC’s internal controls implemented as of a specifi c date. These controls are relevant to the retailer’s internal control, so Cook’s report may be useful in providing the retailer’s independent auditor with information necessary to plan a fi nancial statement audit. Cook’s report should a. Contain a disclaimer of opinion on the operating effectiveness of PDC’s controls. b. State whether PDC’s controls were suitably designed to achieve the retailer’s objectives. c. Identify PDC’s controls relevant to specifi c fi nancial statement assertions. d. Disclose Cook’s assessed level of control risk for PDC.

The auditor who audits the processing of transactions by a service organization may issue a report on controls Implemented/Operating effectiveness a. Yes Yes b. Yes No c. No Yes d. No No

Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC’s policies and procedures implemented as of a specifi c date. These policies and procedures are relevant to the schools’ internal control, so Drake’s report will be useful in providing the schools’ independent auditors with information necessary to plan their audits. Drake’s report expressing an opinion on CSC’s policies and procedures implemented as of a specifi c date should contain a(n) a. Description of the scope and nature of Drake’s procedures. b. Statement that CSC’s management has disclosed to Drake all design defi ciencies of which it is aware. c. Opinion on the operating effectiveness of CSC’s policies and procedures. d. Paragraph indicating the basis for Drake’s assessment of control risk.

Lake, CPA, is auditing the fi nancial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP’s fi nancial statements are audited by Cope, CPA, who recently issued a report on EDP’s internal control. Lake is considering Cope’s report on EDP’s internal control in assessing control risk on the Gill engagement. What is Lake’s responsibility concerning making reference to Cope as a basis, in part, for Lake’s own opinion? a. Lake may refer to Cope only if Lake is satisfi ed as to Cope’s professional reputation and independence. b. Lake may refer to Cope only if Lake relies on Cope’s report in restricting the extent of substantive tests. c. Lake may refer to Cope only if Lake’s report indicates the division of responsibility. d. Lake maynot refer to Cope under the circumstances above.

Which of the following is correct relating to service orga nization control (SOC) reports referred to as “SOC 2” re ports? a. They are primarily to assist fi nancial statement au di tors when processing services have been out sourced to a service provider. b. They are generally available to anyone. c. They relate most directly to internal control over fi nan cial reporting. d. They are meant for management of service or ganiza tions, user entities and certain other speci fi ed entities.

The type of service organization control (SOC) report that is for general use is a. SOC 1. b. SOC 2. c. SOC 3. d. SOC 4.

The AICPA has outlined auditor reports based on three services that may be provided on service organization controls (SOC). The typemost likely to result in a restricted use report on controls at a service organization related to security, availabil ity, processing integrity, confi dentiality, and/or privacy is a. SOC 2. b. SOC SYS. c. SOC 6. d. SOC OC.

The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States? a. All companies. b. SEC registrants. c. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth. d. All nonissuer companies.

The framework most likely to be used by management in its internal control assessment under requirements of the Sarbanes-Oxley Act of 2002 is the a. COSO internal framework. b. COSO enterprise risk management framework. c. FASB 37 internal control defi nitional framework. d. AICPA internal control analysis manager.

Which of the followingbest describes a CPA’s engagement to report on an entity’s internal control over fi nancial reporting? a. An engagement to form an opinion on the effectiveness of its internal control. b. An audit engagement to provide negative assurance on the entity’s internal control. c. A prospective engagement to project, for a period of timenot to exceed one year, and report on the expected benefi ts of the entity’s internal control. d. A consulting engagement to provide constructive advice to the entity on its internal control.

An engagement to examine internal control will generally a. Require procedures that duplicate those already applied in assessing control risk during a fi nancial statement audit. b. Increase the reliability of the fi nancial statements that have already been audited. c. Be more extensive in scope than the assessment of control risk made during a fi nancial statement audit. d. Be more limited in scope than the assessment of control risk made during a fi nancial statement audit.

Which of the following is correct concerning the level of assistance auditors may provide in assisting management with its assessment of internal control? a. No assistance of any type may be provided. b. No limitations on assistance exist. c. Only very limited assistance may be provided. d. As less risk is assumed by the auditors, a higher level of assistance is appropriate.

Which of the following neednot be included in management’s report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002? a. A statement that the company’s auditor has issued an attestation report on management’s assertion. b. Identifi cation of the framework for evaluating internal control. c. Management’s assessment of the effectiveness of internal control. d. Management’s statement of responsibility to establish and maintain internal control that has no signifi cant defi ciencies.

Which of the following is an accurate statement about internal control weaknesses? a. Material weaknesses are also control defi ciencies. b. Signifi cant defi ciencies are also material weaknesses. c. Control defi ciencies are also material weaknesses. d. All control defi ciencies must be communicated to the audit committee.

In an integrated audit, which of the following is defi ned as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the fi nancial reporting function? a. Control defi ciency. b. Unusual weakness. c. Unusual defi ciency. d. Significant defi ciency.

A material weakness is a signifi cant defi ciency (or combination of signifi cant defi ciencies) that results in a reasonable possibility that a misstatement of at least what amount willnot be prevented or detected? a. An amount greater than zero. b. An amount greater than zero, but at least inconsequential. c. An amount greater than inconsequential. d. A material amount.

The minimum likelihood of loss involved in the consideration of a control defi ciency is a. Remote. b. More than remote. c. Probable. d. Not explicitly considered.

Assume that a company has a control defi ciency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a signifi cant misstatement due to the control defi ciency remote. In this situation, reconciliation may be referred to as what type of control? a. Compensating. b. Preventive. c. Adjustive. d. Nonroutine.

According to Public Company Accounting Oversight Board auditing standards, what type of transaction involves establishing a loan loss reserve? a. Substantive transaction. b. Routine transaction. c. Nonroutine transaction. d. Estimation transaction.

How do the scope, procedures, and purpose of an examination of internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit? Scope/Procedures/Purpose a. Similar Different Similar b. Different Similar Similar c. Different Different Different d. Different Similar Different

A procedure that involves tracing a transaction from its origination through the company’s information systems until it is refl ected in the company’s fi nancial report is referred to as a(n) a. Analytical analysis. b. Substantive procedure. c. Test of a control. d. Walk-through.

For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the “as of date” is ordinarily a. The fi rst day of the year. b. The last day of the fi scal period. c. The last day of the auditor’s fi eldwork. d. The average date for the entire fi scal period.

Consider an issuer (public) company whose purchases are made through the Internet and by telephone. Which of the following is correct? a. These types of purchases represent control objectives for the audit of internal control. b. These purchases are the assertions related to the purchase class of transactions. c. These types of purchases represent two major classes of transactions within the purchases process. d. These two types of transactions represent routine transactions that must always be investigated in extreme detail.

For an issuer (public) company audit of internal control, walkthroughs provide the auditor withprimary evidence to Evaluate the effectiveness of the design of controls/Confirm whether controls have been implemented a. Yes Yes b. Yes No c. No Yes d. No No

Which ismost likely to be a question asked of employee personnel during a walk-through in an audit of the internal control of an issuer (public) company? a. Have you ever been asked to override the process? b. Do you believe that you are underpaid? c. What do you do when you fi nd a fraudulent transaction? d. Who trained you for this job?

How large must the actual loss identifi ed by the auditor be for a control defi ciency to possibly be considered a material weakness? Immaterial/Material a. Yes Yes b. Yes No c. No Yes d. No No

For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is signifi cant if there is more than a a. Reasonably possible likelihood that it could contain immaterial or material misstatements. b. Reasonably possible likelihood that it could contain material misstatements. c. Remote likelihood that it could contain material misstatements. d. Remote likelihood that it could contain more than inconsequential misstatements.

A control defi ciency that is more than a signifi cant defi ciency ismost likely to result in what form of audit opinion relating to internal control? a. Adverse. b. Qualifi ed. c. Unqualifi ed. d. Unqualifi ed with explanatory language.

Which of the following ismost likely to be considered a material weakness in internal control for purposes of an internal control audit of an issuer (public) company? a. An ineffective oversight of fi nancial reporting by the audit committee. b. Restatement of previously issued fi nancial statements due to a change in accounting principles. c. Inadequate segregation of recordkeeping from accounting. d. Weaknesses in control activities.

Inability to evaluate internal control due to a circumstance-caused scope limitation relating to a signifi cant account in a Sarbanes-Oxley 404 internal control audit ismost likely to result in a(n) a. Adverse opinion. b. Qualifi ed opinion. c. Unqualifi ed opinion with explanatory language. d. All of the above are equally likely.

Which of the following ismost likely to indicate a signifi cant defi ciency relating to a client’s antifraud programs? a. A broad scope of internal audit activities. b. A “whistle-blower” program that encourages anonymous submissions. c. Audit committee passivity when conducting oversight functions. d. Lack of performance of criminal background investigations for likely customers.

An auditor identifi ed a material weakness in December. The client was informed and corrected it shortly after the “as of date” (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31. The appropriate report under a PCAOB audit of internal control is a. Adverse. b. Unqualifi ed. c. Unqualifi ed with explanatory language relating to the material weakness. d. Qualifi ed.

In an integrated audit, which of the following lead(s) to an adverse opinion on internal control? Material weaknesses/Significant deficiencies a. Yes Yes b. Yes No c. No Yes d. No No

In an integrated audit, what must the auditor communicate to the audit committee? Known material weaknesses/All control deficiencies a. Yes Yes b. Yes No c. No Yes d. No No

In which manner are signifi cant defi ciencies communicated by the auditors to the audit committee under Public Company Accounting Oversight Board requirements? a. The communication may either be orally or in written form. b. The communication must be oral, and not in written form. c. The communication must be in written form. d. No such communication is required as only material weaknesses must be communicated.

Which is correct concerning the external auditors’ use of the work of others in an audit of internal control performed for a public company? a. It is not allowed. b. The work of internal auditors may be used, but only when those internal auditors report directly to the audit committee. c. Ordinarily the work of internal auditors and others is used primarily in low-risk areas. d. There is no limitation and is likely to reduce auditor liability since the auditors will then share legal respon sibility with those who have performed the service.

In an integrated audit, which must the auditor communicate in writing to management? a. Only material weaknesses. b. Material weaknesses and signifi cant defi ciencies. c. Material weaknesses, signifi cant defi ciencies and other control defi ciencies. d. Material weaknesses, signifi cant defi ciencies, other control defi ciencies, and all suspected and possible employee law violations.

Which of the following is correct when applying a top down approach to identify controls to test in an integrated audit? a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. b. Starting at the top—controls over specifi c assertions— the auditor should link to major accounts and reporting items. c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls. d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the fi nancial statements.

Which of the following isnot included in a standard unqualifi ed opinion on internal control over fi nancial reporting performed under PCAOB requirements? a. Because of inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. b. In our opinion, [company name] maintained, in all material respects, effective internal control over fi nancial reporting. c. Our audit included obtaining an understanding of internal control over fi nancial reporting. d. The [company name] management and audit committee is responsible for maintaining effective internal control over fi nancial reporting.

In reporting on an entity’s internal control over fi nancial reporting, a practitioner should include a paragraph that describes the a. Documentary evidence regarding the control environment factors. b. Changes in internal control since the prior report. c. Potential benefi ts from the practitioner’s suggested improvements. d. Inherent limitations of any internal control.

When an independent auditor reports on internal control based on criteria established by governmental agencies, the report should a. Not include the agency’s name in the report. b. Indicate matters covered by the study and whether the auditor’s study included tests of controls with the procedures covered by the study. c. Not express a conclusion based on the agency’s criteria. d. Assume responsibility for the comprehensiveness of the criteria established by the agency and include recommendations for corrective action.

When an examination has been performed on the effectiveness of entity’s internal control over fi nancial reporting and a material weakness has been noted, the practitioner’s report should express an opinion on a. The assertion. b. The subject matter to which the assertion relates. c. Neither of the above. d. Both of the above.

Which of the following types of engagements isnot per mitted under the professional standards for reporting on an en tity’s compliance? a. Agreed-upon procedures on compliance with the speci fi ed requirements of a law. b. Agreed-upon procedures on the effectiveness of in ter nal control over compliance with a law. c. Review on compliance with specifi ed requirements of a law. d. Examination on compliance with specifi ed require ments of a law.

Mill, CPA, was engaged by a group of royalty reci pients to apply agreed-upon procedures to fi nancial data supplied by Modern Co. regarding Modern’s written asser tion about its compliance with contractual requirements to pay royalties. Mill’s report on these agreed-upon procedures should contain a(n) a. Disclaimer of opinion about the fair presentation of Modern’s fi nancial statements. b. List of the procedures performed (or reference there to) and Mill’s fi ndings. c. Opinion about the effectiveness of Modern’s inter nal control activities concerning royalty payments. d. Acknowledgment that the suffi ciency of the proce dures is solely Mill’s responsibility.

A CPA’s report on agreed-upon procedures related to an entity’s compliance with specifi ed requirements should contain a. A statement of limitations on the use of the report. b. An opinion about whether management’s assertion is fairly stated. c. Negative assurance that control risk has not been as sessed. d. An acknowledgment of responsibility for the suffi ciency of the procedures.

When reporting on an examination of a company’s compli ance with requirements of specifi ed laws, the practi tioner has identifi ed an instance of material noncompliance. Management has agreed to include this instance in its writ ten assertion. The examination report should include a. No modifi cation from the standard form. b. An opinion paragraph that is unmodifi ed, and an empha sis-of-matter paragraph. c. A qualifi ed or adverse opinion. d. A disclaimer of opinion.

In auditing a not-for-profi t entity that receives govern mental fi nancial assistance, the auditor has a responsibility to a. Issue a separate report that describes the expected bene fi ts and related costs of the auditor’s suggested changes to the entity’s internal control. b. Assess whether management has identifi ed laws and reg ulations that have a direct and material ef fect on the entity’s fi nancial statements. c. Notify the governmental agency providing the fi nan cial assistance that the audit isnot designed to provide any assurance of detecting misstatements and fraud. d. Render an opinion concerning the entity’s contin ued eli gibility for the governmental fi nancial as sistance.

Hill, CPA, is auditing the fi nancial statements of Help ing Hand, a not-for-profi t organization that receives fi nan cial assis tance from governmental agencies. To detect mis statements in Helping Hand’s fi nancial statements re sulting from violations of laws and regulations, Hill should focus on violations that a. Could result in criminal prosecution against the or gani zation. b. Involve signifi cant defi ciencies to be communi cated to the organization’s trustees and the funding agencies. c. Have a direct and material effect on the amounts in the organization’s fi nancial statements. d. Demonstrate the existence of material weaknesses.

A governmental audit may extend beyond an examina tion leading to the expression of an opinion on the fairness of fi nancial presentation to include Program results/Compliance/Economy and efficiency a. Yes Yes No b. Yes Yes Yes c. No Yes Yes d. Yes No Yes

When auditing an entity’s fi nancial statements in ac cor dance with Government Auditing Standards (the “Yel low Book”), an auditor is required to report on I. Noteworthy accomplishments of the program. II. The scope of the auditor’s testing of internal controls. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

When auditing an entity’s fi nancial statements in ac cord ance with Government Auditing Standards (the “Yellow Book”), an auditor is required to report on I. Recommendations for actions to improve operations. II. The scope of the auditor’s tests of compliance with laws and regulations. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

Which of the following statements is a standard applica ble to fi nancial statement audits in accordance with Government Auditing Standards (the “Yellow Book”)? a. An auditor should report on the scope of the audi tor’s testing of compliance with laws and regula tions. b. An auditor should assess whether the entity has re portabl e measures of economy and effi ciency that are valid and reliable. c. An auditor should report recommendations for ac tions to correct problems and improve operations. d. An auditor should determine the extent to which the en tity’s programs achieve the desired results.

Which of the following statements is a standard ap plicable to fi nancial statement audits in accordance with Government Auditing Standards (the “Yellow Book”)? a. An auditor should report on the scope of the audi tor’s testing of internal controls. b. All instances of abuse, waste, and mismanagement should be reported to the audit committee. c. An auditor should report the views of responsible of fi cials concerning the auditor’s fi ndings. d. Internal control activities designed to detect or pre vent fraud should be reported to the inspector gen eral.

In reporting under Government Auditing Standards, an auditor most likely would be required to report a falsifi ca tion of accounting records directly to a federal inspector general when the falsifi cation is a. Discovered after the auditor’s report has been made available to the federal inspector general and to the public. b. Reported by the auditor to the audit committee as a sig nifi cant defi ciency in internal control. c. Voluntarily disclosed to the auditor by low-level per son nel as a result of the auditor’s inquiries. d. Communicated by the auditor to the auditee and the au ditee fails to make a required report of the matter

Although the scope of audits of recipients of federal f i nan cial assistance in accordance with federal audit regula tions varies, these audits generally have which of the fol lowing elements in common? a. The auditor is to determine whether the federal fi nan cial assistance has been administered in accor dance with applicable laws and regulations. b. The materiality levels are lower and are determined by the government entities that provided the federal financial assistance to the recipient. c. The auditor should obtain written management re p re sentations that the recipient’s internal auditors will re port their fi ndings objectively without fear of political repercussion. d. The auditor is required to express both positive and neg ative assurance that illegal acts that could have a material effect on the recipient’s fi nancial state ments are disclosed to the inspector general.

An auditor most likely would be responsible for com muni cating signifi cant defi ciencies in the design of internal control a. To the Securities and Exchange Commission when the client is a publicly held entity. b. To specifi c legislative and regulatory bodies when re porting under Government Auditing Standards. c. To a court-appointed creditors’ committee when the cli ent is operating under Chapter 11 of the Fed eral Bankruptcy Code. d. To shareholders with signifi cant infl uence (more than 20% equity ownership) when signifi cant defi ciencies are deemed to be material weaknesses.

Wolf is auditing an entity’s compliance with require ments governing a major federal fi nancial assistance pro gram in accor dance with Government Auditing Standards. Wolf detected noncompliance with requirements that have a material effect on the program. Wolf’s report on compliance should express a. No assurance on the compliance tests. b. Reasonable assurance on the compliance tests. c. A qualifi ed or adverse opinion. d. An adverse or disclaimer of opinion.

Which of the following is a specifi c documentation require ment that an auditor should follow when auditing in accordance with Government Auditing Standards? a. The auditor should obtain written representations from management acknowledging responsibility for correcting instances of fraud, abuse, and waste. b. Before the report is issued, evidence of supervisory re view of the audit. c. The auditor should document the procedures that as sure discovery of all illegal acts and contingent liabili ties resulting from noncompliance. d. The auditor’s working papers should contain a ca veat that all instances of material misstatements and fraud may not be identifi ed.

In performing a fi nancial statement audit in accor dance with Government Auditing Standards, an auditor is required to report on the entity’s compliance with laws and regulations. This report should a. State that compliance with laws and regulations is the re sponsibility of the entity’s management. b. Describe the laws and regulations that the entity must comply with. c. Provide an opinion on overall compliance with laws and regulations. d. Indicate that the auditor does not possess legal skills and cannot make legal judgments.

In reporting under Government Auditing Standards, an auditor most likely would be required to communicate management’s misappropriation of assets directly to a federal inspector general when the fraudulent activities are a. Concealed by management by circumventing specific in ternal controls designed to safeguard those assets. b. Reported to the entity’s governing body and the governing body fails to make a required report to the federal inspector general. c. Accompanied by fraudulent financial reporting that results in material misstatements of asset balances. d. Perpetrated by several levels of management in a scheme that is likely to continue in future years.

n auditing compliance with requirements governing major federal fi nancial assistance programs under the Single Audit Act, the auditor’s consideration of materiality differs from materiality under generally accepted auditing stan d ards. Under the Single Audit Act, materiality is a. Calculated in relation to the financial statements taken as a whole. b. Determined separately for each major federal fi nan cial assistance program. c. Decided in conjunction with the auditor’s risk as sess ment. d. Ignored, because all account balances, regardless of size, are fully tested.

Kent is auditing an entity’s compliance with requirements governing a major federal fi nancial assistance program in accord ance with the Single Audit Act. Kent de tected noncompliance with requirements that have a material effect on that program. Kent’s report on compliance should express a(n) a. Unmodifi ed opinion with a separate emphasis-of matter paragraph. b. Qualifi ed opinion or an adverse opinion. c. Adverse opinion or a disclaimer of opinion. d. Limited assurance on the items tested.

When performing an audit of a city that is subject to the requirements of the Uniform Single Audit Act of 1984, an auditor should adhere to a. Governmental Accounting Standards Board Gen eral Standards. b. Governmental Finance Offi cers Association Gov ernmen tal Accounting, Auditing, and Financial Reporting Principles. c. General Accounting Offi ce Government Auditing Stand ards. d. Securities and Exchange Commission Regulation S-X.

A CPA has performed an examination of the general pur pose fi nancial statements of Big City. The examination scope included the additional requirements of the Single Audit Act. When reporting on Big City’s internal account ing and adminis trative controls used in administering a fed eral f i nancial assis tance program, the CPA should a. Communicate those weaknesses that are material in rela tion to the general-purpose fi nancial state ments. b. Express an opinion on the systems used to ad m inis ter major federal fi nancial assistance pro grams and express negative assurance on the sys tems used to administer nonmajor federal fi nancial assistance programs. c. Communicate those weaknesses that are material in rela tion to the federal fi nancial assistance pro gram. d. Express negative assurance on the systems used to ad m inister major federal fi nancial assistance pro grams and express no opinion on the systems used to admin ister nonmajor federal fi nancial assistance programs.

Statements on Standards for Accounting and Review Services establish standards and procedures for which of the following engagements? a. Assisting in adjusting the books of account for a partnership. b. Reviewing interim financial data required to be filed with the SEC. c. Processing financial data for clients of other accounting firms. d. Compiling an individual’s personal financial statement to be used to obtain a mortgage.

The authoritative body designated to promulgate standards concerning an accountant’s association with unaudited financial statements of an entity that is not required to file financial statements with an agency regulating the issuance of the entity’s securities is the a. Financial Accounting Standards Board. b. General Accounting Office. c. Accounting and Review Services Committee. d. Auditing Standards Board.

Which of the following accounting services may an accountant perform without being required to issue a compilation or review report under the Statements on Standards for Accounting and Review Services? I. Preparing a working trial balance. II. Preparing standard monthly journal entries. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

May an accountant accept an engagement to compile or review the financial statements of a not-for-profit entity if the accountant is unfamiliar with the specialized industry accounting principles, but plans to obtain the required level of knowledge before compiling or reviewing the financial statements? Compilation/Review a. No No b. Yes No c. No Yes d. Yes Yes

Which of the following statements is correct concerning both an engagement to compile and an engagement to review a nonissuer’s financial statements? a. The accountant does not contemplate obtaining an understanding of internal control. b. The accountant must be independent in fact and appearance. c. The accountant expresses no assurance on the financial statements. d. The accountant should obtain a written management representation letter.

The objective of an accountant’s compilation of the financial statements of a nonissuer (nonpublic company) is to provide what type of assurance? a. Absolute assurance. b. Limited assurance. c. No assurance. d. Reasonable assurance.

A company hires a CPA who has invested in its outstanding bonds payable to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue? a. Compilations. b. Reviews. c. Audits. d. Agreed-upon procedures.

Independence is required in which of the following types of financial statement engagements? Review/Compilation/Preparation a. No No No b. No Yes Yes c. Yes No No d. Yes Yes Yes

Ordinarily, an accountant’s report is issued for which of the following engagements? Preparation Compilation a. No No b. No Yes c. Yes No d. Yes Yes

Under the Statements on Standards for Accounting and Review Services (SSARS), an engagement letter or other suitable form of written agreement is required for: Financial Statement Preparation /Financial Statement Compilation a. No No b. No Yes c. Yes No d. Yes Yes

Under the Statements on Standards for Accounting and Review services, a representations letter (“written representations”), signed by management, is required for: Financial Statement Preparation/Financial Statement Compilation a. No No b. No Yes c. Yes No d. Yes Yes

Which of the following is correct relating to an accountant’s engagement to prepare a client’s financial statements? a. A report is issued with only limited assurance that the financial statements follow the applicable financial reporting framework. b. A representation letter, signed by a majority of the board of directors is required. c. An engagement letter signed by both management and the accountant should be obtained. d. Inquiry and analytical procedures are the only required procedures.

Which of the following is not correct relating to an accountant’s engagement to prepare a client’s financial statements? a. The accountant should obtain an understanding of the client’s financial reporting framework. b. The accountant should not assist the client in making significant judgments relating to particular financial statement accounts. c. Ordinarily, prepared financial statements include indication on each page that no CPA provides any assurance on the financial statements. d. Documentation requirements include a written engagement letter

Statements on Standards for Accounting and Review Services (SSARS) apply when an accountant has a. Typed client-prepared financial statements, without modification, as an accommodation to the client. b. Provided a client with a financial statement format that does not include dollar amounts, to be used by the client in preparing financial statements. c. Proposed correcting journal entries to be recorded by the client that change client-prepared financial statements. d. Generated, through the use of computer software, financial statements prepared in accordance with a comprehensive basis of accounting other than GAAP.

For which of the following services do the Statements on Standards for Accounting and Review Services apply? a. Preparation of financial statement with a tax return solely for submission to taxing authorities. b. Entering general ledger transactions or processing payments (general bookkeeping) in an accounting software system. c. Preparing financial statements in conjunction with litigation services that involve ending or potential legal or regulatory proceedings. d. Preparation of personal financial statements for presentation alongside a financial plan.

Documentation of a financial statement preparation engagement performed under SSARS is least likely to include: a. Copy of the financial statements. b. Engagement letter. c. Internal control assessment. d. Significant professional judgments made throughout the engagement.

A client has engaged a CPA to prepare its historical financial statements under the SSARS, but does not wish for those statements to include typical note disclosures. When the CPA believes there is no intention to mislead users of the financial statements, the CPA should: a. Prepare the financial statements as requested, with no disclosure of the omission of the notes. b. Prepare the financial statements and disclose the omission of the notes on the face of the financial statements or in a note to the financial statements. c. Modify the preparation report to describe in detail this departure from GAAP. d. Not accept such an engagement.

Financial statements prepared by an accountant include the statement “no assurance is provided” on each page. Which of the following is correct concerning accountant reporting on such financial statements prepared by an accountant under SSARS? a. An accountant’s report with no assurance should be issued. b. An accountant’s report describing the departure from GAAP should be issued. c. A compilation report is required. d. Ordinarily, no accountant’s report need be issued.

An accountant is required to comply with the provisions of Statements on Standards for Accounting and Review Services when I. Reproducing client-prepared financial statements, without modification, as an accommodation to a client. II. Preparing standard monthly journal entries for depreciation and expiration of prepaid expenses. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

Davis, CPA, accepted an engagement to audit the financial statements of Tech Resources, a nonissuer. Before the completion of the audit, Tech requested Davis to change the engagement to a compilation of financial statements. Before Davis agrees to change the engagement, Davis is required to consider the Additional audit effort necessary to complete the audit/Reason given for Tech’s request a. No No b. Yes Yes c. Yes No d. No Yes

An accountant may compile a nonissuer’s financial statements that omit all of the disclosures required by GAAP only if the omission is I. Clearly indicated in the accountant’s report. II. Not undertaken with the intention of misleading the financial statement users. a. I only. b. II only. c. Both I and II. d. Either I or II.

When engaged to compile the financial statements of a nonissuer (nonpublic) entity, an accountant is required to possess a level of knowledge of the entity’s accounting principles and practices. This requirement most likely will include obtaining a general understanding of the a. Stated qualifications of the entity’s accounting personnel. b. Design of the entity’s internal controls placed in operation. c. Risk factors relating to misstatements arising from illegal acts. d. Internal control awareness of the entity’s senior management

Which of the following procedures is ordinarily performed by an accountant in a compilation engagement of a nonissuer (nonpublic) entity? a. Reading the financial statements to consider whether they are free of obvious mistakes in the application of accounting principles. b. Obtaining written representations from management indicating that the compiled financial statements will not be used to obtain credit. c. Making inquiries of management concerning actions taken at meetings of the stockholders and the board of directors. d. Applying analytical procedures designed to corroborate management’s assertions that are embodied in the financial statement components.

While performing a compilation of financial statements, information indicating that the entity whose information is being compiled may lack the ability to continue as a going concern has come to the accountant’s attention. The client agrees that such a situation does exist, but refuses to add the disclosures required by GAAP in this situation. What effect is this most likely to have on the accountant’s review report? a. No effect; a standard unmodified report is appropriate. b. The report should indicate a departure from generally accepted accounting principles, with addition of an emphasis-of-matter paragraph. c. An adverse opinion should be issued, with modification of the opinion paragraph and addition of an emphasis-of-matter paragraph. d. A qualified opinion should be issued, with modification of the opinion paragraph and addition of an emphasis-of-matter paragraph.

When compiled financial statements are accompanied by an accountant’s report, that report should state that a. A compilation includes assessing the accounting principles used and significant management estimates, as well as evaluating the overall financial statement presentation. b. The accountant compiled the financial statements in accordance with Statements on Standards for Accounting and Review Services. c. A compilation is substantially less in scope than an audit in accordance with GAAS, the objective of which is the expression of an opinion. d. The accountant is not aware of any material modifications that should be made to the financial statements to conform with GAAP.

Miller, CPA, is engaged to compile the financial statements of Web Co., a nonissuer (nonpublic) entity, in conformity with the income tax basis of accounting. If Web’s f inancial statements do not disclose the basis of accounting used, Miller should a. Disclose the basis of accounting in the accountant’s compilation report. b. Clearly label each page “Distribution Restricted— Material Modifications Required.” c. Issue a special report describing the effect of the incomplete presentation. d. Withdraw from the engagement and provide no further services to Web.

When an accountant is engaged to compile a nonissuer’s financial statements that omit substantially all disclosures required by GAAP, the accountant should indicate in the compilation report that the financial statements are a. Not designed for those who are uninformed about the omitted disclosures. b. Prepared in conformity with a comprehensive basis of accounting other than GAAP. c. Not compiled in accordance with Statements on Standards for Accounting and Review Services. d. Special-purpose financial statements that are not comparable to those of prior periods.

Which of the following is least likely to be included in the understanding with management that an accountant obtains when a compilation is to be performed? a. The objective of a compilation is to assist management in presenting financial information in the form of financial statements. b. Management is responsible for preventing and detecting fraud. c. Management is responsible for identifying and ensuring that the company complies with laws and regulations applicable to its activities. d. In a compilation an accountant obtains only limited assurance of detecting misstatements.

Clark, CPA, compiled and properly reported on the financial statements of Green Co., a nonissuer, for the year ended March 31, 20X8. These financial statements omitted substantially all disclosures required by generally accepted accounting principles (GAAP). Green asked Clark to compile the statements for the year ended March 31, 20X9, and to include all GAAP disclosures for the 20X9 statements only, but otherwise present both years’ financial statements in comparative form. What is Clark’s responsibility concerning the proposed engagement? a. Clark may not report on the comparative financial statements because the 20X8 statements are not comparable to the 20X9 statements that include the GAAP disclosures. b. Clark may report on the comparative financial statements provided the 20X9 statements do not contain any obvious material misstatements. c. Clark may report on the comparative financial statements provided an explanatory paragraph is added to Clark’s report on the comparative financial statements. d. Clark may report on the comparative financial statements provided Clark updates the report on the 20X8 statements that do not include the GAAP disclosures.

Which of the following statements should not be included in an accountant’s standard report based on the compilation of an entity’s financial statements? a. A statement that the compilation was performed in accordance with standards established by the American Institute of CPAs. b. A statement that the accountant has not audited or reviewed the financial statements. c. A statement that the accountant does not express an opinion but expresses only limited assurance on the financial statements. d. A statement that a compilation is limited to presenting, in the form of financial statements, information that is the representation of management.

How does an accountant make the following representations when issuing the standard report for the compilation of a nonissuer’s financial statements? The financial statements have not been audited/The accountant has compiled the financial statements a. Implicitly Implicitly b. Explicitly Explicitly c. Implicitly Explicitly d. Explicitly Implicitly

An accountant’s compilation report should be dated as of the date of a. Completion of fieldwork. b. Completion of required compilation procedures. c. Transmittal of the compilation report. d. The latest subsequent event referred to in the notes to the financial statements.

An accountant has compiled the financial statements of a nonissuer in accordance with Statements on Standards for Accounting and Review Services (SSARS). Does SSARS require that the compilation report be printed on the accountant’s letterhead and that the report be manually signed by the accountant? Printed on the accountant’s letterhead/Manually signed by the accountant a. Yes Yes b. Yes No c. No Yes d. No No

Which of the following is correct relating to compiled financial statements? a. A compilation report is issued. b. Omission of note disclosures is unacceptable. c. A written or oral engagement letter is required. d. Each page of the financial statements should have a restriction such as “Restricted for Management’s Use Only.”

A compilation report is not required when compiled financial statements are expected to be used by a. Management only. b. Management and third parties. c. Third parties only. d. A compilation report is required whenever financial statements are compiled.

If requested to perform a review engagement for a nonissuer in which an accountant has an immaterial direct financial interest, the accountant is a. Not independent and, therefore, may not be associated with the financial statements. b. Not independent and, therefore, may not issue a review report. c. Not independent and, therefore, may issue a review report, but may not issue an auditor’s opinion. d. Independent because the financial interest is immaterial and, therefore, may issue a review report

Moore, CPA, has been asked to issue a review report on the balance sheet of Dover Co., a nonissuer. Moore will not be reporting on Dover’s statements of income, retained earnings, and cash flows. Moore may issue the review report provided the a. Balance sheet is presented in a prescribed form of an industry trade association. b. Scope of the inquiry and analytical procedures has not been restricted. c. Balance sheet is not to be used to obtain credit or distributed to creditors. d. Specialized accounting principles and practices of Dover’s industry are disclosed.

Baker, CPA, was engaged to review the financial statements of Hall Co., a nonissuer. During the engagement Baker uncovered a complex scheme involving client illegal acts that materially affect Hall’s financial statements. If Baker believes that modification of the standard review report is not adequate to indicate the deficiencies in the financial statements, Baker should a. Disclaim an opinion. b. Issue an adverse opinion. c. Withdraw from the engagement. d. Issue a qualified opinion.

Which of the following is not generally considered a procedure followed by an accountant in obtaining a reasonable basis for the expression of limited assurance for a review of financial statements? a. Apply analytical procedures. b. Assess fraud risk. c. Make inquiries of management. d. Obtain written representations from management.

Which of the following procedures would an accountant least likely perform during an engagement to review the financial statements of a nonissuer? a. Observing the safeguards over access to and use of assets and records. b. Comparing the financial statements with anticipated results in budgets and forecasts. c. Inquiring of management about actions taken at the board of directors’ meetings. d. Studying the relationships of financial statement elements expected to conform to predictable patterns.

Which of the following procedures should an accountant perform during an engagement to review the financial statements of a nonissuer? a. Communicating significant deficiencies discovered during the assessment of control risk. b. Obtaining a client representation letter from members of management. c. Sending bank confirmation letters to the entity’s financial institutions. d. Examining cash disbursements in the subsequent period for unrecorded liabilities.

An accountant should perform analytical procedures during an engagement to Compile a nonissuer’s financial statements/Review a nonissuer’s financial statements a. No No b. Yes Yes c. Yes No d. No Yes

Which of the following inquiry or analytical procedures ordinarily is performed in an engagement to review a nonissuer’s financial statements? a. Analytical procedures designed to test the accounting records by obtaining corroborating audit evidence. b. Inquiries concerning the entity’s procedures for recording and summarizing transactions. c. Analytical procedures designed to test management’s assertions regarding continued existence. d. Inquiries of the entity’s attorney concerning contingent liabilities.

Which of the following procedures would most likely be included in a review engagement of a nonissuer? a. Preparing a bank transfer schedule. b. Inquiring about related-party transactions. c. Assessing internal control. d. Performing cutoff tests on sales and purchases transactions.

Which of the following would the accountant most likely investigate during the review of financial statements of a nonissuer if accounts receivable did not conform to a predictable pattern during the year? a. Sales returns and allowances. b. Credit sales. c. Sales of consigned goods. d. Cash sales.

When performing an engagement to review a nonissuer’s financial statements, an accountant most likely would a. Confirm a sample of significant accounts receivable balances. b. Ask about actions taken at board of directors’ meetings. c. Obtain an understanding of internal control. d. Limit the distribution of the accountant’s report.

A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and compiled those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to the review report to describe the responsibility assumed for the prior year’s audited financial statements. This separate paragraph should indicate a. The type of opinion expressed previously. b. That the CPA did not update the assessment of control risk. c. The reasons for the change from an audit to a review. d. That the audit report should no longer be relied on.

An accountant has been engaged to review a nonissuer’s financial statements that contain several departures from GAAP. If the financial statements are not revised and modification of the standard review report is not adequate to indicate the deficiencies, the accountant should a. Withdraw from the engagement and provide no further services concerning these financial statements. b. Inform management that the engagement can proceed only if distribution of the accountant’s report is restricted to internal use. c. Determine the effects of the departures from GAAP and issue a special report on the financial statements. d. Issue a modified review report provided the entity agrees that the financial statements will not be used to obtain credit.

When providing limited assurance that the financial statements of a nonissuer (nonpublic entity) require no material modifications to be in accordance with generally accepted accounting principles, the accountant should a. Assess the risk that a material misstatement could occur in a financial statement assertion. b. Confirm with the entity’s lawyer that material loss contingencies are disclosed. c. Understand the accounting principles of the industry in which the entity operates. d. Develop audit plans to determine whether the entity’s financial statements are fairly presented.

Smith, CPA, has been asked to issue a review report on the balance sheet of Cone Company, a nonissuer, and not on the other related financial statements. Smith may do so only if a. Smith compiles and reports on the related statements of income, retained earnings, and cash flows. b. Smith is not aware of any material modifications needed for the balance sheet to conform with GAAP. c. The scope of Smith’s inquiry and analytical procedures is not restricted. d. Cone is a new client and Smith accepts the engagement after the end of Cone’s fiscal year.

In reviewing the financial statements of a nonissuer, an accountant is required to modify the standard report for which of the following matters? Inability to assess the risk of material misstatement due to fraud/Discovery of significant deficiencies in the design of the entity’s internal control a. Yes Yes b. Yes No c. No Yes d. No No

Each page of a nonissuer’s financial statements reviewed by an accountant should include the following reference: a. See Accompanying Accountant’s Footnotes. b. Reviewed, No Material Modifications Required. c. See Accountant’s Review Report. d. No such reference to the report is required.

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a review a. Provides only limited assurance that the financial statements are fairly presented. b. Includes examining, on a test basis, information that is the representation of management. c. Consists principally of inquiries of company personnel and analytical procedures applied to financial data. d. Does not contemplate obtaining corroborating evidential matter or applying certain other procedures ordinarily performed during an audit.

An accountant who had begun an audit of the financial statements of a nonissuer was asked to change the engagement to a review because of a restriction on the scope of the audit. If there is reasonable justification for the change, the accountant’s review report should include reference to the Scope limitation that caused the changed engagement/Original engagement that was agreed to a. Yes No b. No Yes c. No No d. Yes Yes

Gole, CPA, is engaged to review the 20X8 financial statements of North Co., a nonissuer. Previously, Gole audited North’s 20X7 financial statements and expressed an unqualified opinion. Gole decides to include a separate paragraph in the 20X8 review report because North plans to present comparative financial statements for 20X8 and 20X7. This separate paragraph should indicate that a. The 20X8 review report is intended solely for the information of management and the board of directors. b. The 20X7 auditor’s report may no longer be relied on. c. No auditing procedures were performed after the date of the 20X7 auditor’s report. d. There are justifiable reasons for changing the level of service from an audit to a review.

An accountant’s standard report on a review of the f inancial statements of a nonissuer should state that the accountant a. Does not express an opinion or any form of limited assurance on the financial statements. b. Is not aware of any material modifications that should be made to the financial statements for them to conform with GAAP. c. Obtained reasonable assurance about whether the financial statements are free of material misstatement. d. Examined evidence, on a test basis, supporting the amounts and disclosures in the financial statements.

Financial statements of a nonissuer that have been reviewed by an accountant should be accompanied by a report stating that a. The scope of the inquiry and analytical procedures performed by the accountant has not been restricted. b. All information included in the financial statements is the representation of the management of the entity. c. A review includes examining, on a test basis, evidence supporting the amounts and disclosures in the f inancial statements. d. A review is greater in scope than a compilation, the objective of which is to present financial statements that are free of material misstatements.

During a review of the financial statements of a nonissuer, an accountant becomes aware of a lack of adequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should a. Issue an adverse opinion. b. Issue an “except for” qualified opinion. c. Disclose this departure from generally accepted accounting principles in a separate paragraph of the report. d. Express only limited assurance on the financial statement presentations.

An accountant who reviews the financial statements of a nonissuer should issue a report stating that a review a. Is substantially less in scope than an audit. b. Provides negative assurance that internal control is functioning as designed. c. Provides only limited assurance that the financial statements are fairly presented. d. Is substantially more in scope than a compilation.

An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods a. Can more easily convert the sample into a dual purpose test useful for substantive testing. b. Eliminate the need to use judgment in determining appropriate sample sizes. c. Afford greater assurance than a nonstatistical sample of equal size. d. Provide an objective basis for quantitatively evaluating sample risk.

An advantage of statistical sampling over nonstatistical sampling is that statistical sampling helps an auditor to a. Eliminate the risk of nonsampling errors. b. Reduce the level of audit risk and materiality to a relatively low amount. c. Measure the suffi ciency of the evidential matter obtained. d. Minimize the failure to detect errors and fraud.

The likelihood of assessing control risk too high is the risk that the sample selected to test controls a. Doesnot support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control structure justifi es such an assessment. b. Contains misstatements that could be material to the fi nancial statements when aggregated with misstatements in other account balances or transactions classes. c. Contains proportionately fewer monetary errors or deviations from prescribed controls than exist in the balance or class as a whole. d. Does not support the tolerable error for some or all of management’s assertions.

The risk of incorrect acceptance and the likelihood of assessing control risk too low relate to the a. Allowable risk of tolerable misstatement. b. Preliminary estimates of materiality levels. c. Effi ciency of the audit. d. Effectiveness of the audit

Which of the followingbest illustrates the concept of sampling risk? a. A randomly chosen sample maynot be representative of the population as a whole on the characteristic of interest. b. An auditor may select audit procedures that arenot appropriate to achieve the specifi c objective. c. An auditor may fail to recognize errors in the documents examined for the chosen sample. d. The documents related to the chosen sample maynot be available for inspection.

In assessing sampling risk, the risk of incorrect rejection and the risk of assessing control risk too high relate to the a. Effi ciency of the audit. b. Effectiveness of the audit. c. Selection of the sample. d. Audit quality controls.

(refer to illustration on page 152) In which of the situations would the auditor have properly concluded that control risk is at or below the planned assessed level? a. I. b. II. c. III. d. IV.

(refer to illustration on page 152) As a result of tests of controls, the auditor assesses control risk too high and thereby increases substantive testing. This is illustrated by situation a. I. b. II. c. III. d. IV.

While performing a test of details during an audit, an auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. This situation illustrates the risk of a. Assessing control risk too high. b. Assessing control risk too low. c. Incorrect rejection. d. Incorrect acceptance.

The size of a sample designed for dual-purpose testing should be a. The larger of the samples that would otherwise have been designed for the two separate purposes. b. The smaller of the samples that would otherwise have been designed for the two separate purposes. c. The combined total of the samples that would otherwise have been designed for the two separate purposes. d. More than the larger of the samples that would otherwise have been designated for the two separate purposes, but less than the combined total of the samples that would otherwise have been designed for the two separate purposes.

The expected population deviation rate of client billing errors is 3%. The auditor has established a tolerable rate of 5%. In the review of client invoices the auditor should use a. Stratifi ed sampling. b. Variable sampling. c. Discovery sampling. d. Attribute sampling.

Which of the following sampling methods would be used to estimate a numerical measurement of a population, such as a dollar value? a. Attribute sampling. b. Stop-or-go sampling. c. Variables sampling. d. Random-number sampling.

For which of the following audit tests would an auditor most likely use attribute sampling? a. Making an independent estimate of the amount of a LIFO inventory. b. Examining invoices in support of the valuation of fi xed asset additions. c. Selecting accounts receivable for confi rmation of account balances. d. Inspecting employee time cards for proper approval by supervisors.

An underlying feature of random-based selection of items is that each a. Stratum of the accounting population be given equal representation in the sample. b. Item in the accounting population be randomly ordered. c. Item in the accounting population should have an opportunity to be selected. d. Item must be systematically selected using replacement

Which of the following statistical selection techniques is least desirable for use by an auditor? a. Systematic selection. b. Stratifi ed selection. c. Block selection. d. Sequential selection.

Which of the following statistical sampling plans doesnot use a fi xed sample size for tests of controls? a. Dollar-unit sampling. b. Sequential sampling. c. PPS sampling. d. Variables sampling.

If certain forms arenot consecutively numbered a. Selection of a random sample probably is not possible. b. Systematic sampling may be appropriate. c. Stratifi ed sampling should be used. d. Random number tables cannot be used.

When performing a test of a control with respect to control over cash receipts, an auditor may use a systematic sampling technique with a start at any randomly selected item. The biggest disadvantage of this type of sampling is that the items in the population a. Must be systematically replaced in the population after sampling. b. May systematically occur more than once in the sample. c. Must be recorded in a systematic pattern before the sample can be drawn. d. May occur in a systematic pattern, thus destroying the sample randomness.

What is theprimary objective of using stratifi cation as a sampling method in auditing? a. To increase the confi dence level at which a decision will be reached from the results of the sample selected. b. To determine the occurrence rate for a given characteristic in the population being studied. c. To decrease the effect of variance in the total population. d. To determine the precision range of the sample selected.

As a result of tests of controls, an auditor assessed control risk too low and decreased substantive testing. This assessment occurred because the true deviation rate in the population was a. Less than the risk of assessing control risk too low, based on the auditor’s sample. b. Less than the deviation rate in the auditor’s sample. c. More than the risk of assessing control risk too low, based on the auditor’s sample. d. More than the deviation rate in the auditor’s sample.

Which of the following factors is (are) considered in determining the sample size for a test of controls? Expected deviation rate/Tolerable deviation rate a. Yes Yes b. No No c. No Yes d. Yes No

Which of the following statements is correct concerning statistical sampling in tests of controls? a. Deviations from control procedures at a given rate usually result in misstatements at a higher rate. b. As the population size doubles, the sample size should also double. c. The qualitative aspects of deviations are not considered by the auditor. d. There is an inverse relationship between the sample size and the tolerable rate.

In determining the sample size for a test of controls, an auditor should consider the likely rate of deviations, the allowable risk of assessing control risk too low, and the a. Tolerable deviation rate. b. Risk of incorrect acceptance. c. Nature and cause of deviations. d. Population size.

Which of the following combinations results in a decrease in sample size in a sample for attributes? Risk of assessing control risk too low /Tolerable rate/Expected population deviation rate a. Increase Decrease Increase b. Decrease Increase Decrease c. Increase Increase Decrease d. Increase Increase Increase

An auditor is testing internal control procedures that are evidenced on an entity’s vouchers by matching random numbers with voucher numbers. If a random number matches the number of a voided voucher, that voucher ordinarily should be replaced by another voucher in the random sample if the voucher a. Constitutes a deviation. b. Has been properly voided. c. Cannot be located. d. Represents an immaterial dollar amount.

An auditor plans to examine a sample of twenty purchase orders for proper approvals as prescribed by the client’s control procedures. One of the purchase orders in the chosen sample of twenty cannot be found, and the auditor is unable to use alternative procedures to test whether that purchase order was properly approved. The auditor should a. Choose another purchase order to replace the missing purchase order in the sample. b. Consider this test of control invalid and proceed with substantive tests since internal control cannot be relied upon. c. Treat the missing purchase order as a deviation for the purpose of evaluating the sample. d. Select a completely new set of twenty purchase orders.

When assessing the tolerable rate, the auditor should consider that, while deviations from control procedures increase the risk of material misstatements, such deviations do not necessarily result in errors. This explains why a. A recorded disbursement that does not show evidence of required approval may nevertheless be a transaction that is properly authorized and recorded. b. Deviations would result in errors in the accounting records only if the deviations and the errors occurred on different transactions. c. Deviations from pertinent control procedures at a given rate ordinarily would be expected to result in errors at a higher rate. d. A recorded disbursement that is properly authorized may nevertheless be a transaction that contains a material error.

The objective of the tolerable rate in sampling for tests of controls of internal control is to a. Determine the probability of the auditor’s conclusion based upon reliance factors. b. Determine that fi nancial statements taken as a whole are not materially in error. c. Estimate the reliability of substantive tests. d. Estimate the range of procedural deviations in the population.

The tolerable rate of deviations for a test of a control is generally a. Lower than the expected rate of errors in the related accounting records. b. Higher than the expected rate of errors in the related accounting records. c. Identical to the expected rate of errors in related accounting records. d. Unrelated to the expected rate of errors in the related accounting records.

If the auditor is concerned that a population may contain exceptions, the determination of a sample size suffi cient to include at least one such exception is a characteristic of a. Discovery sampling. b. Variables sampling. c. Random sampling. d. Dollar-unit sampling.

In determining the number of documents to select for a test to obtain assurance that all sales have been properly authorized, an auditor should consider the tolerable rate of deviation from the control activity. The auditor should also consider the I. Likely rate of deviations. II. Allowable risk of assessing control risk too high. a. I only. b. II only. c. Both I and II. d. Either I or II.

An auditor should consider the tolerable rate of deviation when determining the number of check requests to select for a test to obtain assurance that all check requests have been properly authorized. The auditor should also consider The average dollar value of the check requests/The allowable risk of assessing control risk too low a. Yes Yes b. Yes No c. No Yes d. No No

Which of the following statements is correct concerning statistical sampling in tests of controls? a. As the population size increases, the sample size should increase proportionately. b. Deviations from specifi c internal control procedures at a given rate ordinarily result in misstatements at a lower rate. c. There is an inverse relationship between the expected population deviation rate and the sample size. d. In determining tolerable rate, an auditor considers detection risk and the sample size.

What is an auditor’s evaluation of a statistical sample for attributes when a test of fi fty documents results in three deviations if tolerable rate is 7%, the expected population deviation rate is 5%, and the allowance for sampling risk is 2%? a. Modify the planned assessed level of control risk because the tolerable rate plus the allowance for sampling risk exceeds the expected population deviation rate. b. Accept the sample results as support for the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. c. Accept the sample results as support for the planned assessed level of control risk because the tolerable rate less the allowance for sampling risk equals the expected population deviation rate. d. Modify the planned assessed level of control risk because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate.

An auditor desired to test credit approval on 10,000 sales invoices processed during the year. The auditor designed a statistical sample that would provide 1% risk of assessing control risk too low (99% confi dence) that not more than 7% of the sales invoices lacked approval. The auditor estimated from previous experience that about 2 1/2% of the sales invoices lacked approval. A sample of 200 invoices was examined and 7 of them were lacking approval. The auditor then determined the achieved upper precision limit to be 8%. In the evaluation of this sample, the auditor decided to increase the level of the preliminary assessment of control risk because the a. Tolerable rate (7%) was less than the achieved upper precision limit (8%). b. Expected deviation rate (7%) was more than the percentage of errors in the sample (3 1/2%). c. Achieved upper precision limit (8%) was more than the percentage of errors in the sample (3 1/2%). d. Expected deviation rate (2 1/2%) was less than the tolerable rate (7%)

Which of the following statements is correct concerning statistical sampling in tests of controls? a. The population size has little or no effect on determining sample size except for very small populations. b. The expected population deviation rate has little or no effect on determining sample size except for very small populations. c. As the population size doubles, the sample size also should double. d. For a given tolerable rate, a larger sample size should be selected as the expected population deviation rate decreases

When an auditor has chosen a random sample and is using nonstatistical attributes sampling, that auditor a. Need not consider the risk of assessing control risk too low. b. Has committed a nonsampling error. c. Will have to use discovery sampling to evaluate the results. d. Should compare the deviation rate of the sample to the tolerable deviation rate.

How would increases in tolerable misstatement and assessed level of control risk affect the sample size in a substantive test of details? Increase in tolerable misstatement/ Increase in assessed level of control risk a. Increase sample size Increase sample size b. Increase sample size Decrease sample size c. Decrease sample size Increase sample size d. Decrease sample size Decrease sample size

Which of the following courses of action would an auditor most likely follow in planning a sample of cash disbursements if the auditor is aware of several unusually large cash disbursements? a. Set the tolerable rate of deviation at a lower level than originally planned. b. Stratify the cash disbursements population so that the unusually large disbursements are selected. c. Increase the sample size to reduce the effect of the unusually large disbursements. d. Continue to draw new samples until all the unusually large disbursements appear in the sample.

Which of the following sample planning factors would infl uence the sample size for a substantive test of details for a specifi c account? Expected amount of misstatements/ Measure of tolerablemisstatement a. No No b. Yes Yes c. No Yes d. Yes No

When planning a sample for a substantive test of details, an auditor should consider tolerable misstatement for the sample. This consideration should a. Be related to the auditor’s business risk. b. Not be adjusted for qualitative factors. c. Be related to preliminary judgments about materiality levels. d. Not be changed during the audit process.

A number of factors infl uences the sample size for a substantive test of details of an account balance. All other factors being equal, which of the following would lead to a larger sample size? a. Greater reliance on internal control. b. Greater reliance on analytical procedures. c. Smaller expected frequency of errors. d. Smaller measure of tolerable misstatement.

In estimation sampling for variables, which of the following must be known in order to estimate the appropriate sample size required to meet the auditor’s needs in a given situation? a. The qualitative aspects of errors. b. The total dollar amount of the population. c. The acceptable level of risk. d. The estimated rate of misstatements in the population.

An auditor established a $60,000 tolerable misstatement for an asset with an account balance of $1,000,000. The auditor selected a sample of every twentieth item from the population that represented the asset account balance and discovered overstatements of $3,700 and understatements of $200. Under these circumstances, the auditor most likely would conclude that a. There is an unacceptably high risk that the actual misstatements in the population exceed the tolerable misstatement because the total projected misstatement is more than the tolerable misstatement. b. There is an unacceptably high risk that the tolerable misstatement exceeds the sum of actual overstatements and understatements. c. The asset account is fairly stated because the total projected misstatement is less than the tolerable misstatement. d. The asset account is fairly stated because the tolerable misstatement exceeds the net of projected actual overstatements and understatements.

Which of the following statements is correct concerning probability-proportional-to-size (PPS) sampling, also known as dollar unit sampling? a. The sampling distribution should approximate the normal distribution. b. Overstated units have a lower probability of sample selection than units that are understated. c. The auditor controls the risk of incorrect acceptance by specifying that risk level for the sampling plan. d. The sampling interval is calculated by dividing the number of physical units in the population by the sample size.

(refer to illustration on page 157) What sample size should Hill use? a. 120 b. 108 c. 60 d. 30

In a probability-proportional-to-size sample with a sampling interval of $5,000, an auditor discovered that a selected account receivable with a recorded amount of $10,000 had an audit amount of $8,000. If this were the only error discovered by the auditor, the projected error of this sample would be a. $1,000 b. $2,000 c. $4,000 d. $5,000

An auditor is determining the sample size for an inventory observation using mean-per-unit estimation, which is a variables sampling plan. To calculate the required sample size, the auditor usually determines the Variability in the dollar amounts of inventory items/ Risk of incorrect acceptance a. Yes Yes b. Yes No c. No Yes d. No No

In statistical sampling methods used in substantive testing, an auditor most likely would stratify a population into meaningful groups if a. Probability-proportional-to-size (PPS) sampling is used. b. The population has highly variable recorded amounts. c. The auditor’s estimated tolerable misstatement is extremely small. d. The standard deviation of recorded amounts is relatively small.

The use of the ratio estimation sampling technique is most effective when a. The calculated audit amounts are approximately proportional to the client’s book amounts. b. A relatively small number of differences exist in the population. c. Estimating populations whose records consist of quantities, but not book values. d. Large overstatement differences and large understatement differences exist in the population.

In the application of statistical techniques to the estimation of dollar amounts, a preliminary sample is usually taken primarily for the purpose of estimating the population a. Variability. b. Mode. c. Range. d. Median.

(refer to table in page 157) Using the ratio estimation technique, the auditor’s estimate of year-end accounts payable balance would be a. $6,150,000 b. $6,000,000 c. $5,125,000 d. $5,050,000

Use of the ratio estimation sampling technique to estimated dollar amounts is inappropriate when a. The total book value is known and corresponds to the sum of all the individual book values. b. A book value for each sample item is unknown. c. There are some observed differences between audited values and book values. d. The audited values are nearly proportional to the book values.

An auditor is performing substantive tests of pricing and extensions of perpetual inventory balances consisting of a large number of items. Past experience indicates numerous pricing and extension errors. Which of the following statistical sampling approaches is most appropriate? a. Unstratifi ed mean-per-unit. b. Probability-proportional-to-size. c. Stop or go. d. Ratio estimation.

D ## Footnote Answer (d) is correct because ratio estimation is appropriate when testing a population for which a large number of errors of this nature is expected

The major reason that the difference and ratio estimation methods would be expected to produce audit effi ciency is that the a. Number of members of the populations of differences or ratios is smaller than the number of members of the population of book values. b. Beta risk may be completely ignored. c. Calculations required in using difference or ratio estimation are less arduous and fewer than those required when using direct estimation. d. Variability of the populations of differences or ratios is less than that of the populations of book values or audited values.

Which of the following statements is correct concerning the auditor’s use of statistical sampling? a. An auditor needs to estimate the dollar amount of the standard deviation of the population to use classical variables sampling. b. An assumption of PPS sampling is that the underlying accounting population is normally distributed. c. A classical variables sample needs to be designed with special considerations to include negative balances in the sample. d. The selection of zero balances usually does not require special sample design considerations when using PPS sampling.

Which of the following most likely would be an advantage in using classical variables sampling rather than probability-proportional-to-size (PPS) sampling? a. An estimate of the standard deviation of the population’s recorded amounts is not required. b. The auditor rarely needs the assistance of a computer program to design an effi cient sample. c. Inclusion of zero and negative balances generally does not require special design considerations. d. Any amount that is individually signifi cant is automatically identifi ed and selected

An advantage of using systems flowcharts to document information about internal control instead of using internal con trol questionnaires is that systems flowcharts a. Identify internal control weaknesses more prominently. b. Provide a visual depiction of clients’ activities. c. Indicate whether control procedures are operating effectively. d. Reduce the need to observe clients’ employees per forming routine tasks.

A flowchart is most frequently used by an auditor in connec tion with the a. Preparation of generalized computer audit plans. b. Review of the client’s internal control. c. Use of statistical sampling in performing an audit. d. Performance of analytical procedures of account balances.

Matthews Corp. has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards. The computer system automatically updates all payroll records. Because of this change a. A generalized computer audit program must be used. b. Part of the audit trail is altered. c. The potential for payroll related fraud is diminished. d. Transactions must be processed in batches

Which of the following is correct concerning batch pro cessing of transactions? a. Transactions are processed in the order they occur, re gardless of type. b. It has largely been replaced by online real time pro cessing in all but legacy systems. c. It is more likely to result in an easytofollow audit trail than is online transaction processing. d. It is used only in nondatabase applications

An auditor would be most likely to assess control risk at the maximum level in an electronic environment with automated systemgenerated information when a. Sales orders are initiated using predetermined, auto mated decision rules. b. Payables are based on many transactions and large in dollar amount. c. Fixed asset transactions are few in number, but large in dollar amount. d. Accounts receivable records are based on many trans actions and are large in dollar amount.

In a highly automated information processing system tests of control a. Must be performed in all circumstances. b. May be required in some circumstances. c. Are never required. d. Are required in first year audits.

Which of the following is least likely to be considered by an auditor considering engagement of an information technology (IT) specialist on an audit? a. Complexity of client’s systems and IT controls. b. Requirements to assess going concern status. c. Client’s use of emerging technologies. d. Extent of entity’s participation in electronic commerce.

Which of the following strategies would a CPA most likely consider in auditing an entity that processes most of its financial data only in electronic form, such as a paperless system? a. Continuous monitoring and analysis of transaction processing with an embedded audit module. b. Increased reliance on internal control activities that emphasize the segregation of duties. c. Verification of encrypted digital certificates used to monitor the authorization of transactions. d. Extensive testing of firewall boundaries that restrict the recording of outside network traffic.

Which of the following is not a major reason for maintain ing an audit trail for a computer system? a. Deterrent to fraud. b. Monitoring purposes. c. Analytical procedures. d. Query answering.

Computer systems are typically supported by a variety of utility software packages that are important to an auditor because they a. May enable unauthorized changes to data files if not properly controlled. b. Are very versatile programs that can be used on hard ware of many manufacturers. c. May be significant components of a client’s application programs. d. Are written specifically to enable auditors to extract and sort data.

An auditor would most likely be concerned with which of the following controls in a distributed data processing system? a. Hardware controls. b. Systems documentation controls. c. Access controls. d. Disaster recovery controls.

Which of the following types of evidence would an auditor most likely examine to determine whether internal control is operating as designed? a. Gross margin information regarding the client’s industry. b. Confirmations of receivables verifying account balances. c. Client records documenting the use of computer programs. d. Anticipated results documented in budgets or forecasts.

An auditor anticipates assessing control risk at a low level in a computerized environment. Under these circumstances, on which of the following activities would the auditor initially focus? a. Programmed control activities. b. Application control activities. c. Output control activities. d. General control activities.

After the preliminary phase of the review of a client’s com puter controls, an auditor may decide not to perform tests of controls related to the controls within the computer portion of the client’s internal control. Which of the following would not be a valid reason for choosing to omit such tests? a. The controls duplicate operative controls existing else where in the structure. b. There appear to be major weaknesses that would pre clude reliance on the stated procedure. c. The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the tests of controls show the controls to be operative. d. The controls appear adequate.

Auditing by testing the input and output of a computer system instead of the computer program itself will a. Not detect program errors which do not show up in the output sampled. b. Detect all program errors, regardless of the nature of the output. c. Provide the auditor with the same type of evidence as tests of application controls. d. Not provide the auditor with confidence in the results of the auditing procedures.

Which of the following client information technology (IT) systems generally can be audited without examining or directly testing the IT computer programs of the system? a. A system that performs relatively uncomplicated pro cesses and produces detailed output. b. A system that affects a number of essential master files and produces a limited output. c. A system that updates a few essential master files and produces no printed output other than final balances. d. A system that performs relatively complicated pro cessing and produces very little detailed output.

An auditor who wishes to capture an entity’s data as transac tions are processed and continuously test the entity’s computer ized information system most likely would use which of the fol lowing techniques? a. Snapshot application. b. Embedded audit module. c. Integrated data check. d. Test data generator.

Which of the following computerassisted auditing tech niques processes client input data on a controlled program under the auditor’s control to test controls in the computer system? a. Test data. b. Review of program logic. c. Integrated test facility. d. Parallel simulation.

To obtain evidence that online access controls are properly functioning, an auditor most likely would a. Create checkpoints at periodic intervals after live data processing to test for unauthorized use of the system. b. Examine the transaction log to discover whether any transactions were lost or entered twice due to a system malfunction. c. Enter invalid identification numbers or passwords to ascertain whether the system rejects them. d. Vouch a random sample of processed transactions to assure proper authorization.

An auditor most likely would introduce test data into a com puterized payroll system to test controls related to the a. Existence of unclaimed payroll checks held by supervisors. b. Early cashing of payroll checks by employees. c. Discovery of invalid employee I.D. numbers. d. Proper approval of overtime by supervisors.

When an auditor tests a computerized accounting system, which of the following is true of the test data approach? a. Several transactions of each type must be tested. b. Test data are processed by the client’s computer pro grams under the auditor’s control. c. Test data must consist of all possible valid and invalid conditions. d. The program tested is different from the program used throughout the year by the client

Which of the following is not among the errors that an audi tor might include in the test data when auditing a client’s computer system? a. Numeric characters in alphanumeric fields. b. Authorized code. c. Differences in description of units of measure. d. Illogical entries in fields whose logic is tested by pro grammed consistency checks.

Which of the following computerassisted auditing tech niques allows fictitious and real transactions to be processed together without client operating personnel being aware of the testing process? a. Integrated test facility. b. Input controls matrix. c. Parallel simulation. d. Data entry monitor.

Which of the following methods of testing application con trols utilizes a generalized audit software package prepared by the auditors? a. Parallel simulation. b. Integrated testing facility approach. c. Test data approach. d. Exception report tests.

In creating lead schedules for an audit engagement, a CPA often uses automated workpaper software. What client infor mation is needed to begin this process? a. Interim financial information such as third quarter sales, net income, and inventory and receivables balances. b. Specialized journal information such as the invoice and purchase order numbers of the last few sales and pur chases of the year. c. General ledger information such as account numbers, prior year account balances, and current year unad justed information. d. Adjusting entry information such as deferrals and accruals, and reclassification journal entries.

Using laptop computers in auditing may affect the methods used to review the work of staff assistants because a. The generally accepted auditing standards may differ. b. Documenting the supervisory review may require assis tance of consulting services personnel. c. Supervisory personnel may not have an understanding of the capabilities and limitations of laptops. d. Working paper documentation may not contain readily observable details of calculations.

An auditor would least likely use computer software to a. Access client data files. b. Prepare spreadsheets. c. Assess computer control risk. d. Construct parallel simulations.

A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses a computer system is that the auditor may a. Access information stored on computer files while hav ing a limited understanding of the client’s hardware and software features. b. Consider increasing the use of substantive tests of transactions in place of analytical procedures. c. Substantiate the accuracy of data through self checking digits and hash totals. d. Reduce the level of required tests of controls to a rela tively small amount.

Auditors often make use of computer programs that per form routine processing functions such as sorting and merging. These programs are made available by electronic data processing companies and others and are specifically referred to as a. Compiler programs. b. Supervisory programs. c. Utility programs. d. User programs.

Smith Corporation has numerous customers. A customer file is kept on disk storage. Each customer file contains name, address, credit limit, and account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to a. Develop test data that would cause some account bal ances to exceed the credit limit and determine if the system properly detects such situations. b. Develop a program to compare credit limits with ac count balances and print out the details of any account with a balance exceeding its credit limit. c. Request a printout of all account balances so they can be manually checked against the credit limits. d. Request a printout of a sample of account balances so they can be individually checked against the credit lim its.

An auditor most likely would test for the presence of unau thorized computer program changes by running a a. Program with test data. b. Check digit verification program. c. Source code comparison program. d. Program that computes control totals.

(refer to table on page 168) Which of the following numbers represents the record count? a. 1 b. 4 c. 810 d. 900