FINAL EXAM Flashcards
Generally accepted auditing standards are
a. Required procedures to be used to gather evidence to
support financial statements.
b. Policies and procedures designed to provide reasonable
assurance that the CPA firm and its personnel comply
with professional standards.
c. Pronouncements issued by the Auditing Standards Board.
d. Rules acknowledged by the accounting profession
because of their universal application.
C
Which of the following is a conceptual difference between
the attestation standards and generally accepted auditing
standards?
a. The attestation standards do not apply to audits of
historical financial statements, while the generally
accepted auditing standards do.
b. The requirement that the practitioner be independent in
mental attitude is omitted from the attestation standards.
c. The attestation standards do not permit an attest
engagement to be part of a business acquisition study
or a feasibility study.
d. The attestation standards include reviews, while
generally accepted auditing standards do not.
A
Which of the following is not an attestation standard?
a. Sufficient evidence shall be obtained to provide a
reasonable basis for the conclusion that is expressed in
the report.
b. The report shall identify the subject matter on the
assertion being reported on and state the character of
the engagement.
c. The work shall be adequately planned and assistants,
if any, shall be properly supervised.
d. A sufficient understanding of internal control shall be
obtained to plan the engagement.
D
Which of the following is most likely to be unique to
the audit work of CPAs as compared to work performed by
practitioners of other professions?
a. Due professional care.
b. Competence.
c. Independence.
d. Complex body of knowledge.
C
The Public Company Accounting Oversight Board’s
standards require that due care is to be exercised in the
performance of an audit. This standard is ordinarily interpreted
to require
a. Thorough review of the existing safeguards over
access to assets and records.
b. Limited review of the indications of employee fraud
and illegal acts.
c. Objective review of the adequacy of the technical
training and proficiency of firm personnel.
d. Critical review of the judgment exercised at every
level of supervision
D
For which of the following can a member of the AICPA
receive an automatic expulsion from the AICPA?
I. Member is convicted of a crime punishable by imprisonment
for more than one year..
II. Member files his own fraudulent tax return.
III. Member files fraudulent tax return for a client knowing that it
is fraudulent.
a. I only.
b. I and II only.
c. I and III only.
d. I, II, and III.
D
Which of the following is an example of a safeguard
imple mented by the client that might mitigate a threat to
independence?
a. Required continuing education for all attest engage
ment team members.
b. An effective corporate governance structure.
c. Required second partner review of an attest engagement.
d. Management selection of the CPA firm.
B
Which of the following is a “self review” threat to
member independence?
a. An engagement team member has a spouse that serves
as CFO of the attest client.
b. A second partner review is required on all attest en
gagements.
c. An engagement team member prepares invoices for
the attest client.
d. An engagement team member has a direct financial
interest in the attest client.
C
According to the standards of the profession, which of the
following circumstances will prevent a CPA performing audit
engagements from being independent?
a. Obtaining a collateralized automobile loan from a fi
nan cial institution client.
b. Litigation with a client relating to billing for con
sulting services for which the amount is imma terial.
c. Employment of the CPA’s spouse as a client’s di rector
of internal audit.
d. Acting as an honorary trustee for a not for profit organization client.
C
The profession’s ethical standards most likely would
be considered to have been violated when a CPA represents
that specific consulting services will be performed for a
stated fee and it is apparent at the time of the representation
that the
a. Actual fee would be substantially higher.
b. Actual fee would be substantially lower than
the fees charged by other CPAs for comparable
services.
c. CPA would not be independent.
d. Fee was a competitive bid.
A
According to the ethical standards of the profession,
which of the following acts is generally prohibited?
a. Issuing a modified report explaining a failure
to fol low a governmental regulatory agency’s
stan dards when conducting an attest service for a
client.
b. Revealing confidential client information during a
qual ity review of a professional practice by a team
from the state CPA society.
c. Accepting a contingent fee for representing a client in
an examination of the client’s federal tax return by an
IRS agent.
d. Retaining client records after an engagement is terminated prior to completion and the client has demanded
their return.
D
Answer (d) is correct because when
an engagement is terminated prior to completion, the Acts Discreditable Rule states that a member is required to return only client records.
According to the profession’s ethical standards, which of
the following events may justify a departure from a Statement
of the Governmental Accounting Standards Board?
New
legislation
Evolution of a new form
of business transaction
a. No Yes
b. Yes No
c. Yes Yes
d. No No
C
May a CPA hire for the CPA’s public accounting firm
a non-CPA systems analyst who specializes in developing
computer systems?
a. Yes, provided the CPA is qualified to perform each of
the specialist’s tasks.
b. Yes, provided the CPA is able to supervise the specialist and evaluate the specialist’s end product.
c. No, because non CPA professionals are not permitted
to be associated with CPA firms in public practice.
d. No, because developing computer systems is
not recognized as a service performed by public
accountants.
B
During an audit Bill Adams believes that his
supervisor’s position on an accounting matter, although
consistent with the client’s desires, materially departs
from GAAP—the basis followed for the client’s financial
statements. Bill discussed his concerns with his supervisor and
the matter is still not resolved. Following the AICPA Code of
Professional Conduct, which of the following is least likely to
be appropriate?
a. Bill should consider consulting with legal counsel.
b. Bill should determine whether there are
responsibilities to communicate the matter to third
parties.
c. Bill should document his understanding of the
situation in the working papers.
d. Bill should use the discreditable acts framework to
determine whether his supervisor is involved in an act
discreditable to the profession.
D
According to the standards of the profession, which of
the following activities would most likely not impair a CPA’s
independence?
a. Providing advisory services for a client.
b. Contracting with a client to supervise the client’s of
fice personnel.
c. Signing a client’s checks in emergency situations.
d. Accepting a luxurious gift from a client.
A
Which of the following reports may be issued only by an
accountant who is independent of a client?
a. Standard report on an examination of a financial fore cast.
b. Report on consulting services.
c. Compilation report on historical financial state ments.
d. Compilation report on a financial projection.
A
According to the requirements of the public accounting
profession, which of the following activities may be required
in exercising due care?
Consulting
with experts
Obtaining
specialty accreditation
a. Yes Yes
b. Yes No
c. No Yes
d. No No
B
Larry Sampson is a CPA and is serving as an expert
witness in a trial concerning a corporation’s financial state
ments. Which of the following is(are) true?
I. Sampson’s status as an expert witness is based upon his
specialized knowledge, experience, and training.
II. Sampson is required by AICPA ruling to present his posi tion
objectively.
III. Sampson may regard himself as acting as an advocate.
a. I only.
b. I and II only.
c. I and III only.
d. III only
B
According to the ethical standards of the profession,
which of the following acts is generally prohibited?
a. Purchasing a product from a third party and resell ing
it to a client.
b. Writing a financial management newsletter pro moted
and sold by a publishing company.
c. Accepting a commission for recommending a prod uct
to an audit client.
d. Accepting engagements obtained through the ef forts
of third parties.
C
To exercise due professional care an auditor should
a. Critically review the judgment exercised by those as
sist ing in the audit.
b. Examine all available corroborating evidence sup port
ing managements assertions.
c. Design the audit to detect all instances of illegal acts.
d. Attain the proper balance of professional expe rience
and formal education.
A
Kar, CPA, is a staff auditor participating in the audit
engage ment of Fort, Inc. Which of the following circum
stances impairs Kar’s independence?
a. During the period of the professional engagement,
Fort gives Kar tickets to a football game worth $75.
b. Kar owns stock in a corporation that Fort’s 401(k)
plan also invests in.
c. Kar’s friend, an employee of another local account ing
firm, prepares Fort’s tax returns.
d. Kar’s sibling is director of internal audit at Fort.
D
On June 1, 20X8, a CPA obtained a $100,000 personal
loan from a financial institution client for whom the CPA
provided compilation services. The loan was fully secured
and considered material to the CPA’s net worth. The CPA paid
the loan in full on December 31, 20X9. On April 3, 20X9, the
client asked the CPA to audit the client’s financial statements
for the year ended December 31, 20X9. Is the CPA considered
independent with respect to the audit of the client’s December
31, 20X9 financial statements?
a. Yes, because the loan was fully secured.
b. Yes, because the CPA was not required to be inde
pend ent at the time the loan was granted.
c. No, because the CPA had a loan with the client dur ing
the period of a professional engagement.
d. No, because the CPA had a loan with the client dur ing
the period covered by the financial state ments.
B
Which of the following statements is(are) correct regard ing
a CPA employee of a CPA firm taking copies of information
con tained in client files when the CPA leaves the firm?
I. A CPA leaving a firm may take copies of information con
tained in client files to assist another firm in serving that cli ent.
II. A CPA leaving a firm may take copies of information
con tained in client files as a method of gaining tech nical
expertise.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II.
D
Which of the following statements is correct regarding an
accountant’s working papers?
a. The accountant owns the working papers and gener
ally may disclose them as the accountant sees fit.
b. The client owns the working papers but the accoun tant
has custody of them until the accoun tant’s bill is paid
in full.
c. The accountant owns the working papers but gener ally
may not disclose them without the client’s consent or
a court order.
d. The client owns the working papers but, in the ab
sence of the accountant’s consent, may not disclose
them without a court order.
C
Which of the following is an authoritative body desig
nated to promulgate attestation standards?
a. Auditing Standards Board.
b. Governmental Accounting Standards Board.
c. Financial Accounting Standards Board.
d. General Accounting Office.
A
The auditor with final responsibility for an
engagement and one of the assistants have a difference of
opinion about the results of an auditing procedure. If the
assistant believes it is necessary to be disassociated from the
matter’s resolution, the CPA firm’s procedures should enable
the assistant to
a. Refer the disagreement to the AICPA’s Quality
Review Committee.
b. Document that member’s disagreement with
the conclusions reached after appropriate
consultation.
c. Discuss the disagreement with the entity’s
management or its audit committee.
d. Report the disagreement to an impartial peer review
monitoring team
B
The nature and extent of a CPA firm’s quality control
policies and procedures depend on
The CPA
firm’s size
The nature of
the CPA firm’s
practice
Cost-benefit
considerations
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes Yes
A
A CPA firm may communicate its quality control policies
and procedures to its personnel in which manner(s):
Orally Written
a. No No
b. No Yes
c. Yes No
d. Yes Yes
D
Which of the following is not an element of quality
control?
a. Acceptance and continuance of client relationships
and specific engagements.
b. Human resources.
c. Internal control.
d. Monitoring.
C
Quality control for a CPA firm, as referred to in
Statements on Quality Control Standards, applies to
a. Auditing services only.
b. Auditing and management advisory services.
c. Auditing and tax services.
d. Auditing and accounting and review services.
D
One of a CPA firm’s basic objectives is to provide
professional services that conform with professional standards.
Reasonable assurance of achieving this basic objective is
provided through
a. A system of quality control.
b. A system of peer review.
c. Continuing professional education.
d. Compliance with generally accepted accounting
principles.
A
Which of the following is correct concerning PCAOB
guidance that uses the term “should”?
a. The auditor must fulfill the responsibilities.
b. The auditor must comply with requirements unless
s/he demonstrates that alternative actions were
sufficient to achieve the objectives of the standard.
c. The auditor should consider performing the procedure;
whether the auditor performs depends on the exercise
of professional judgment in the circumstances.
d. The auditor has complete discretion as to whether to
perform the procedure
B
Under the SarbanesOxley Act, most audit working papers
must be saved
a. 5 years.
b. 7 years.
c. 10 years.
d. Indefinitely as there is no time limitation provided.
B
Passage of the SarbanesOxley Act led to the establish
ment of the
a. Auditing Standards Board.
b. Accounting Enforcement Releases Board.
c. Public Company Accounting Oversight Board.
d. Securities and Exchange Commission.
C
Under Title II of the SarbanesOxley Act, the auditor of an
issuer cannot legally perform which type of service for that issuer?
a. Tax services.
b. Review of interim information.
c. Internal audit outsourcing services.
d. Audit of internal control over financial reporting.
C
The audit partner in charge of an audit of a public com
pany may only
a. Be in charge of the audit of that one company.
b. Perform the role as long as he or she also performs the
“second partner review” for that audit.
c. Perform that role for five consecutive years.
d. Perform the role if he or she has proper AICPA is suer
accreditation.
C
Which of the following is correct concerning member ship
on the Public Company Accounting Oversight Board?
a. Only two of its members may be CPAs.
b. It is composed of nine members.
c. All members must also currently be active in pub lic
accounting.
d. A majority of members must be or have been ac count
ing educators.
A
The Public Company Accounting Oversight Board
(PCAOB) is not responsible for standards related to
a. Accounting.
b. Attestation.
c. Auditing.
d. Quality control
A
A PCAOB engagement that focuses on the sufficiency
of a CPA firm’s quality control system is most likely to be
referred to as a(n)
a. Financial statement audit.
b. Inspection.
c. Peer review.
d. Quality control
B
Which statement below is correct concerning communi
cating the results of a PCAOB inspection?
a. The entire report issued by the PCAOB is publicly
available.
b. The portion of the report issued on a CPA firm’s qual
ity control is not ordinarily publicly available.
c. The report issued is only available to Congress.
d. The report is available only to PCAOB members.
B
Which of the following sets of standards does the Public
Company Accounting Oversight Board not have the authority
to establish for audits of public companies?
a. Auditing standards.
b. Quality control standards.
c. Accounting standards.
d. Independence standards
C
In relation to the AICPA Code of Professional Conduct,
the IFAC Code of Ethics for Professional Accountants
a. Has more outright prohibitions.
b. Has fewer outright prohibitions.
c. Has no outright prohibitions.
d. Applies only to professional accountants in busi ness
B
Based on the IFAC Code of Ethics for Professional
Accountants, threats to independence arise from all of the
following except:
a. Self interest.
b. Advocacy.
c. The audit relationship.
d. Intimidation
C
If an audit firm discovers threats to independence with
re spect to an audit engagement, the IFAC Code of Ethics for
Professional Accountants indicates that the firm should
a. Immediately resign from the engagement.
b. Notify the appropriate regulatory body.
c. Document the issue.
d. Evaluate the significance of the threats and apply appro
priate safeguards to reduce them to an acceptable level.
D
With respect to the acceptance of contingent fees for
profes sional services, the IFAC Code of Ethics for Profes
sional Accountants indicates that the accounting firm
a. Should not accept contingent fees.
b. Should establish appropriate safeguards around ac
ceptance of a contingent fee.
c. Should accept contingent fees only for assurance ser
vices other than audits of financial statements.
d. Should accept contingent fees if it is customary in the
country.
B
With regard to marketing professional services, the IFAC
Code of Ethics for Professional Accountants indicates that
a. Direct marketing is prohibited.
b. Marketing is allowed if lawful.
c. Marketing should be honest and truthful.
d. Marketing of audit services is prohibited.
C
What body establishes international auditing standards?
a. The Public Company Accounting Oversight Board.
b. The International Federation of Accountants.
c. The World Bank.
d. The International Assurance Body
B
Which of the following is not true about international
auditing standards?
a. International auditing standards do not require an au
dit of internal control.
b. International auditing standards do not allow refer ence
to division of responsibilities in the audit re port.
c. International auditing standards require obtaining an
attorney’s letter.
d. International auditing standards are based on a risk as
sessment approach.
C
Which of the following is most likely to be required in an audit performed in conformity with international auditing stan
dards?
a. Confirmation of accounts receivable.
b. Audit report modification for a change in account ing
principles.
c. An opinion on internal control.
d. Audit report inclusion of the location in which the
auditor practices.
D
Independence standards of the GAO for audits in accor
dance with generally accepted government auditing stan dards
describe three types of impairments of independence. Which
of the following is not one of these types of impair ments?
a. Personal.
b. Organizational.
c. External.
d. Unusual.
D
In accordance with the independence standards of the GAO
for performing audits in accordance with generally accepted
gov ernment auditing standards, which of the fol lowing is not an
ex ample of an external impairment of inde pendence?
a. Reducing the extent of audit work due to pressure
from management to reduce audit fees.
b. Selecting audit items based on the wishes of an em
ployee of the organization being audited.
c. Bias in the items the auditors decide to select for
testing.
d. Influence by management on the personnel as signed
to the audit
C
Under the independence standards of the GAO for
perform ing audits in accordance with generally accepted
govern ment auditing standards, which of the following are
over reaching principles for determining whether a nonaudit
service impairs independence?
I. Auditors must not perform nonaudit services that in volve
performing management functions or making management
decisions.
II. Auditors must not audit their own work or provide
non audit services in situations in which the nonaudit
ser vices are sig nificant or material to the subject matter
of the audit.
III. Auditors must not perform nonaudit services which require
independence.
a. I only.
b. I and II only.
c. I, II and III.
d. II and III only
B
Which of the following bodies enforce the audit require
ments of the Employee Retirement Security Act of 1974
(ERISA) with respect to employee benefit plans?
a. The Department of Labor.
b. The Department of Pension Management.
c. The Securities and Exchange Commission.
d. The Public Company Accounting Oversight Board.
A
The requirement for independence by the auditor regard ing
audits of employee benefit plans apply to the plan as well as
a. Investment companies doing business with the plan.
b. Members of the plan.
c. The plan sponsor.
d. The actuary firm doing services for the plan
C
Financial statement assertions are established for account
balances,
Classes of transactions/Disclosures
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
Which of the following isnot a fi nancial statement
assertion relating to account balances?
a. Completeness.
b. Existence.
c. Rights and obligations.
d. Valuation and competence.
D
As the acceptable level of detection risk decreases, an
auditor may
a. Reduce substantive testing by relying on the
assessments of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from
interim dates to the year-end.
c. Eliminate the assessed level of inherent risk from
consideration as a planning factor.
d. Lower the assessed level of control risk from the
maximum level to below the maximum.
B
The risk that an auditor will conclude, based on substantive
tests, that a material misstatement doesnot exist in an account
balance when, in fact, such misstatement does exist is
referred to as
a. Sampling risk.
b. Detection risk.
c. Nonsampling risk.
d. Inherent risk.
B
As the acceptable level of detection risk decreases, the
assurance directly provided from
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.
A
Which of the following audit risk components may be
assessed in nonquantitative terms?
Control risk/Detection risk/Inherent risk
a. Yes Yes No
b. Yes No Yes
c. Yes Yes Yes
d. No Yes Yes
C
Inherent risk and control risk differ from detection risk in
that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or
nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.
C
On the basis of the audit evidence gathered and evaluated,
an auditor decides to increase the assessed level of control risk
from that originally planned. To achieve an overall audit risk
level that is substantially the same as the planned audit risk
level, the auditor would
a. Decrease substantive testing.
b. Decrease detection risk.
c. Increase inherent risk.
d. Increase materiality levels
B
Relationship between control risk and detection risk is
ordinarily
a. Parallel.
b. Inverse.
c. Direct.
d. Equal.
B
Which of the following would an auditor most likely
use in determining the auditor’s preliminary judgment about
materiality?
a. The anticipated sample size of the planned substantive
tests.
b. The entity’s annualized interim fi nancial statements.
c. The results of the internal control questionnaire.
d. The contents of the management representation letter
B
Which of the following statements isnot correct about
materiality?
a. The concept of materiality recognizes that some
matters are important for fair presentation of fi nancial
statements in conformity with GAAP, while other
matters are not important.
b. An auditor considers materiality for planning
purposes in terms of the largest aggregate level of
misstatements that could be material to any one of the
fi nancial statements.
c. Materiality judgments are made in light of
surrounding circumstances and necessarily involve
both quantitative and qualitative judgments.
d. An auditor’s consideration of materiality is infl uenced
by the auditor’s perception of the needs of a reasonable
person who will rely on the fi nancial statements.
B
Which of the following is a function of the risks of
material misstatement and detection risk?
a. Internal control.
b. Corroborating evidence.
c. Quality control.
d. Audit risk.
D
Which of the following is correct concerning performance
materiality on an audit?
a. It will ordinarily be less than fi nancial statement
materiality.
b. It should be established at beginning of an audit and
not be revised thereafter.
c. It should be established at separate amounts for the
various fi nancial statements.
d. It need not be documented in the working papers.
A
Which of the following would an auditor most likely
use in determining the auditor’s preliminary judgment about
materiality?
a. The results of the initial assessment of control risk.
b. The anticipated sample size for planned substantive tests.
c. The entity’s fi nancial statements of the prior year.
d. The assertions that are embodied in the fi nancial
statements.
C
Holding other planning considerations equal, a decrease
in the amount of misstatement in a class of transactions that an
auditor could toleratemost likely would cause the auditor to
a. Apply the planned substantive tests prior to the
balance sheet date.
b. Perform the planned auditing procedures closer to the
balance sheet date.
c. Increase the assessed level of control risk for relevant
fi nancial statement assertions.
d. Decrease the extent of auditing procedures to be
applied to the class of transactions.
B
When issuing an unmodifi ed opinion, the auditor who
evaluates the audit fi ndings should be satisfi ed that the
a. Amount of known misstatement is documented in the
management representation letter.
b. Estimate of the total likely misstatement is less than a
material amount.
c. Amount of known misstatement is acknowledged and
recorded by the client.
d. Estimate of the total likely misstatement includes the
adjusting entries already recorded by the client.
B
Which of the following is an example of fraudulent
fi nancial reporting?
a. Company management changes inventory count tags
and overstates ending inventory, while understating
cost of goods sold.
b. The treasurer diverts customer payments to his
personal due, concealing his actions by debiting an
expense account, thus overstating expenses.
c. An employee steals inventory and the “shrinkage” is
recorded in cost of goods sold.
d. An employee steals small tools from the company
and neglects to return them; the cost is reported as a
miscellaneous operating expense.
A
Which of the followingbest describes what is meant by
the term “fraud risk factor?”
a. Factors whose presence indicates that the risk of fraud
is high.
b. Factors whose presence often have been observed in
circumstances where frauds have occurred.
c. Factors whose presence requires modifi cation of
planned audit procedures.
d. Material weaknesses identifi ed during an audit
B
Which of the following is correct concerning
requirements about auditor communications about fraud?
a. Fraud that involves senior management should be
reported directly to the audit committee regardless of
the amount involved.
b. Fraud with a material effect on the fi nancial
statements should be reported directly by the auditor
to the Securities and Exchange Commission.
c. Fraud with a material effect on the fi nancial
statements should ordinarily be disclosed by the
auditor through use of an “emphasis of a matter”
paragraph added to the audit report.
d. The auditor has no responsibility to disclose fraud
outside the entity under any circumstances.
A
When performing a fi nancial statement audit, auditors are
required to explicitly assess the risk of material misstatement
due to
a. Errors.
b. Fraud.
c. Illegal acts.
d. Business risk.
B
Audits of financial statements are designed to obtain
assurance of detecting misstatement due to
Errors/Fraudulent
financial reporting/Misappropriation
of assets
a. Yes Yes Yes
b. Yes Yes No
c. Yes No Yes
d. No Yes No
A
An auditor is unable to obtain absolute assurance that
misstatements due to fraud will be detected for all of the
followingexcept
a. Employee collusion.
b. Falsifi ed documentation.
c. Need to apply professional judgment in evaluating
fraud risk factors.
d. Professional skepticism.
D
An attitude that includes a questioning mind and a critical
assessment of audit evidence is referred to as
a. Due professional care.
b. Professional skepticism.
c. Reasonable assurance.
d. Supervision.
B
Professional skepticism requires that an auditor assume
that management is
a. Honest, in the absence of fraud risk factors.
b. Dishonest until completion of audit tests.
c. Neither honest nor dishonest.
d. Offering reasonable assurance of honesty.
C
The most diffi cult type of misstatement to detect is fraud
based on
a. The overrecording of transactions.
b. The nonrecording of transactions.
c. Recorded transactions in subsidiaries.
d. Related-party receivables.
B
When considering fraud risk factors relating to
management’s characteristics, which of the following isleast
likely to indicate a risk of possible misstatement due to fraud?
a. Failure to correct known signifi cant defi ciency on a
timely basis.
b. Nonfi nancial management’s preoccupation with the
selection of accounting principles.
c. Signifi cant portion of management’s compensation
represented by bonuses based upon achieving unduly
aggressive operating results.
d. Use of unusually conservative accounting practices.
D
Which of the following conditions identifi ed during
fi eldwork of an audit is most likely to affect the auditor’s
assessment of the risk of misstatement due to fraud?
a. Checks for signifi cant amounts outstanding at year
end.
b. Computer generated documents.
c. Missing documents.
d. Year-end adjusting journal entries.
C
Which of the following ismostlikely to be a response to
the auditor’s assessment that the risk of material misstatement
due to fraud for the existence of inventory is high?
a. Observe test counts of inventory at certain locations
on an unannounced basis.
b. Perform analytical procedures rather than taking test
counts.
c. Request that inventories be counted prior to year-end.
d. Request that inventory counts at the various locations
be counted on different dates so as to allow the same
auditor to be present at every count.
A
Which of the following ismostlikely to be an example of
fraud?
a. Defalcations occurring due to invalid electronic
approvals.
b. Mistakes in the application of accounting principles.
c. Mistakes in processing data.
d. Unreasonable accounting estimates arising from
oversight.
A
Which of the following characteristicsmost likely
would heighten an auditor’s concern about the risk of
intentional manipulation of fi nancial statements?
a. Turnover of senior accounting personnel is low.
b. Insiders recently purchased additional shares of the
entity’s stock.
c. Management places substantial emphasis on meeting
earnings projections.
d. The rate of change in the entity’s industry is slow.
C
Which of the following statements refl ects an auditor’s
responsibility for detecting misstatements due to errors and
fraud?
a. An auditor is responsible for detecting employee
errors and simple fraud, but not for discovering
fraud involving employee collusion or management
override.
b. An auditor should plan the audit to detect
misstatements due to errors and fraud that are caused
by departures from GAAP.
c. An auditor is not responsible for detecting
misstatements due to errors and fraud unless
the application of GAAS would result in such
detection.
d. An auditor should design the audit to provide
reasonable assurance of detecting misstatements due
to errors and fraud that are material to the fi nancial
statements
D
Disclosure of fraud to parties other than a client’s senior
management and its audit committee or board of directors
ordinarily is not part of an auditor’s responsibility. However,
to which of the following outside parties may a duty to
disclose fraud exist?
To the SEC when the client reports an auditor change/To a successor
auditor when the successor makes appropriate inquiries/To a
government funding agency from which the client receives financial assistance
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes
D
Under Statements on Auditing Standards, which of the
following would be classifi ed as an error?
a. Misappropriation of assets for the benefi t of
management.
b. Misinterpretation by management of facts that existed
when the financial statements were prepared.
c. Preparation of records by employees to cover a
fraudulent scheme.
d. Intentional omission of the recording of a transaction
to benefit a third party.
B
What assurance does the auditor provide that misstatements
due to errors, fraud, and direct effect illegal acts that are material
to the financial statements will be detected?
Errors/Fraud/Direct effect
of illegal acts
a. Limited Negative Limited
b. Limited Limited Reasonable
c. Reasonable Limited Limited
d. Reasonable Reasonable Reasonable
D
Because of the risk of material misstatement, an audit of
fi nancial statements in accordance with generally accepted
auditing standards should be planned and performed with an
attitude of
a. Objective judgment.
b. Independent integrity.
c. Professional skepticism.
d. Impartial conservatism.
C
Which of the following most accurately summarizes what
is meant by the term “material misstatement?”
a. Fraud and direct-effect illegal acts.
b. Fraud involving senior management and material
fraud.
c. Material error, material fraud, and certain illegal
acts.
d. Material error and material illegal acts.
C
Which of the following statementsbest describes
the auditor’s responsibility to detect conditions relating to
fi nancial stress of employees or adverse relationships between
a company and its employees?
a. The auditor is required to plan the audit to detect these
conditions on all audits.
b. These conditions relate to fraudulent fi nancial
reporting, and an auditor is required to plan the audit
to detect these conditions when the client is exposed
to a risk of misappropriation of assets.
c. The auditor is required to plan the audit to detect
these conditions whenever they may result in
misstatements.
d. The auditor is not required to plan the audit to
discover these conditions, but should consider them if
he or she becomes aware of them during the audit.
D
When the auditor believes a misstatement is or may be
the result of fraud but that the effect of the misstatement is not
material to the fi nancial statements, which of the following
steps is required?
a. Consider the implications for other aspects of the
audit.
b. Resign from the audit.
c. Commence a fraud examination.
d. Contact regulatory authorities.
A
Which of the following statements is correct relating to
the auditor’s consideration of fraud?
a. The auditor’s interest in fraud consideration relates to
fraudulent acts that cause a material misstatement of
fi nancial statements.
b. A primary factor that distinguishes fraud from error
is that fraud is always intentional, while errors are
generally, but not always, intentional.
c. Fraud always involves a pressure or incentive to
commit fraud, and a misappropriation of assets.
d. While an auditor should be aware of the possibility of
fraud, management, and not the auditor, is responsible
for detecting fraud.
A
Which of the following factors or conditions is an auditor
least likely to plan an audit to discover?
a. Financial pressures affecting employees.
b. High turnover of senior management.
c. Inadequate monitoring of signifi cant controls.
d. Inability to generate positive cash fl ows from operations
A
Which of the following ismost likely to be an overall
response to fraud risks identifi ed in an audit?
a. Supervise members of the audit team less closely and
rely more upon judgment.
b. Use less predictable audit procedures.
c. Only use certifi ed public accountants on the
engagement.
d. Place increased emphasis on the audit of objective
transactions rather than subjective transactions.
B
At which stage(s) of the audit may fraud risk factors be
identified?
Planning/Obtaining
understanding/Conducting
fieldwork
a. Yes Yes Yes
b. Yes Yes No
c. Yes No No
d. No Yes Yes
A
Which of the following isleast likely to be required on an
audit?
a. Test appropriateness of journal entries and adjustment.
b. Review accounting estimates for biases.
c. Evaluate the business rationale for signifi cant unusual
transactions.
d. Make a legal determination of whether fraud has
occurred.
D
Management’s attitude toward aggressive fi nancial
reporting and its emphasis on meeting projected profi t goals
most likely would signifi cantly infl uence an entity’s control
environment when
a. External policies established by parties outside the
entity affect its accounting practices.
b. Management is dominated by one individual who is
also a shareholder.
c. Internal auditors have direct access to the board of
directors and the entity’s management.
d. The audit committee is active in overseeing the
entity’s financial reporting policies.
B
Which of the following isleast likely to be included in an
auditor’s inquiry of management while obtaining information
to identify the risks of material misstatement due to fraud?
a. Are fi nancial reporting operations controlled by and
limited to one location?
b. Does it have knowledge of fraud or suspect fraud?
c. Does it have programs to mitigate fraud risks?
d. Has it reported to the audit committee the nature of
the company’s internal control?
A
Individuals who commit fraud are ordinarily able to
rationalize the act and also have an
Incentive/Opportunity
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
What is an auditor’s responsibility who discovers
management involved in what is fi nancially immaterial fraud?
a. Report the fraud to the audit committee.
b. Report the fraud to the Public Company Oversight
Board.
c. Report the fraud to a level of management at least one
below those involved in the fraud.
d. Determine that the amounts involved are immaterial,
and if so, there is no reporting responsibility.
A
Which of the following ismostlikely to be considered a
risk factor relating to fraudulent fi nancial reporting?
a. Domination of management by top executives.
b. Large amounts of cash processed.
c. Negative cash fl ows from operations.
d. Small high-dollar inventory items.
C
Which of the following ismostlikely to be presumed to
represent fraud risk on an audit?
a. Capitalization of repairs and maintenance into the
property, plant, and equipment asset account.
b. Improper revenue recognition.
c. Improper interest expense accrual.
d. Introduction of significant new products.
B
An auditor who discovers that a client’s employees paid
small bribes to municipal offi cialsmost likely would withdraw
from the engagement if
a. The payments violated the client’s policies regarding
the prevention of illegal acts.
b. The client receives fi nancial assistance from a federal
government agency.
c. Documentation that is necessary to prove that the
bribes were paid does not exist.
d. Management fails to take the appropriate remedial
action.
D
Which of the following factorsmost likely would cause a
CPA tonot accept a new audit engagement?
a. The prospective client has already completed its
physical inventory count.
b. The CPA lacks an understanding of the prospective
client’s operation and industry.
c. The CPA is unable to review the predecessor auditor’s
working papers.
d. The prospective client is unwilling to make all
fi nancial records available to the CPA.
D
Which of the following factors wouldmost likely
heighten an auditor’s concern about the risk of fraudulent
fi nancial reporting?
a. Large amounts of liquid assets that are easily
convertible into cash.
b. Low growth and profi tability as compared to other
entities in the same industry.
c. Financial management’s participation in the initial
selection of accounting principles.
d. An overly complex organizational structure involving
unusual lines of authority.
D
An auditor who discovers that a client’s employees
have paid small bribes to public offi cialsmost likely would
withdraw from the engagement if the
a. Client receives fi nancial assistance from a federal
government agency.
b. Evidence that is necessary to prove that the illegal acts
were committed does not exist.
c. Employees’ actions affect the auditor’s ability to rely
on management’s representations.
d. Notes to the fi nancial statements fail to disclose the
employees’ actions.
C
Which of the following illegal acts should an audit be
designed to obtain reasonable assurance of detecting?
a. Securities purchased by relatives of management
based on knowledge of inside information.
b. Accrual and billing of an improper amount of revenue
under government contracts.
c. Violations of antitrust laws.
d. Price fixing.
B
Which of the following relatively small misstatements
most likely could have a material effect on an entity’s fi nancial
statements?
a. An illegal payment to a foreign offi cial that was not
recorded.
b. A piece of obsolete offi ce equipment that was not
retired.
c. A petty cash fund disbursement that was not properly
authorized.
d. An uncollectible account receivable that was not
written off
A
The most likely explanation why the auditor’s
examination cannot reasonably be expected to bring
noncompliance with all laws by the client to the auditor’s
attention is that
a.
Illegal acts are perpetrated by management override of
internal control.
b. Illegal acts by clients often relate to operating aspects
rather than accounting aspects.
c.
The client’s internal control may be so strong that the
auditor performs only minimal substantive testing.
d. Illegal acts may be perpetrated by the only person in
the client’s organization with access to both assets and
the accounting records.
B
During the annual audit of Ajax Corp., a publicly held
company, Jones, CPA, a continuing auditor, determined that
illegal political contributions had been made during each of the
past seven years, including the year under audit. Jones notifi ed
the board of directors about the illegal contributions, but they
refused to take any action because the amounts involved were
immaterial to the fi nancial statements. Jones should reconsider
the intended degree of reliance to be placed on the
a.
Letter of audit inquiry to the client’s attorney.
b. Prior years’ audit plan.
c.
Management representation letter.
d. Preliminary judgment about materiality levels.
C
If specifi c information comes to an auditor’s attention
that implies noncompliance with laws that could result in a
material, but indirect effect on the fi nancial statements, the
auditor should next
a.
Apply audit procedures specifi cally directed to
ascertaining whether noncompliance has occurred.
b. Seek the advice of an informed expert qualifi ed to
practice law as to possible contingent liabilities.
c.
Report the matter to an appropriate level of
management at least one level above those involved.
d. Discuss the evidence with the client’s audit committee,
or others with equivalent authority and responsibility.
A
Under the Private Securities Litigation Reform Act
of 1995, Baker, CPA, reported certain uncorrected illegal
acts to Supermart’s board of directors. Baker believed that
failure to take remedial action would warrant a qualifi ed
audit opinion because the illegal acts had a material effect
on Supermart’s fi nancial statements. Supermart failed to
take appropriate remedial action and the board of directors
refused to inform the SEC that it had received such notifi cation from Baker. Under these circumstances, Baker is
required to
a. Resign from the audit engagement within ten business
days.
b. Deliver a report concerning the illegal acts to the SEC
within one business day.
c.
Notify the stockholders that the fi nancial statements
are materially misstated.
d. Withhold an audit opinion until Supermart takes
appropriate remedial action.
B
An auditor who discovers that client employees have
committed an illegal act that has a material effect on the
client’s fi nancial statements most likely would withdraw from
the engagement if
a.
The illegal act is a violation of generally accepted
accounting principles.
b
. The client does not take the remedial action that the
auditor considers necessary.
c.
The illegal act was committed during a prior year that
was not audited.
d. The auditor has already assessed control risk at the
maximum level.
B
Which of the following factors would most likely cause a
CPA to decide not to accept a new audit engagement?
a.
The CPA’s lack of understanding of the prospective
client’s internal auditor’s computer-assisted audit
techniques.
b. Management’s disregard of its responsibility to
maintain an adequate internal control environment.
c.
The CPA’s inability to determine whether related-party
transactions were consummated on terms equivalent to
arm’s-length transactions.
d. Management’s refusal to permit the CPA to perform
substantive tests before the year-end
B
Which of the following would be least likely to be
considered an audit planning procedure?
a. Use an engagement letter.
b. Develop the overall audit strategy.
c.
Perform risk assessment.
d. Develop the audit plan.
C
Before accepting an engagement to audit a new client, a
CPA is required to obtain
a.
An understanding of the prospective client’s industry
and business.
b. The prospective client’s signature to the engagement
letter.
c. A preliminary understanding of the prospective
client’s control environment.
d. The prospective client’s consent to make inquiries of
the predecessor auditor, if any
D
Before accepting an audit engagement, a successor
auditor should make specifi c inquiries of the predecessor
auditor regarding
a.
Disagreements the predecessor had with the client
concerning auditing procedures and accounting
principles.
b. The predecessor’s evaluation of matters of continuing
accounting significance.
c. The degree of cooperation the predecessor received
concerning the inquiry of the client’s lawyer.
d. The predecessor’s assessments of inherent risk and
judgments about materiality.
A
An auditor is required to establish an understanding
with a client regarding the services to be performed for each
engagement. This understanding generally includes
a. Management’s responsibility for errors and the illegal
activities of employees that may cause material
misstatement.
b. The auditor’s responsibility for ensuring that the audit
committee is aware of any signifi cant defi ciencies in
internal control that come to the auditor’s attention.
c. Management’s responsibility for providing the
auditor with an assessment of the risk of material
misstatement due to fraud.
d. The auditor’s responsibility for determining preliminary
judgments about materiality and audit risk factors.
B
Before accepting an audit engagement, a successor
auditor should make specifi c inquiries of the predecessor
auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the
predecessor’s audit report was issued.
b. Understanding as to the reasons for the change of
auditors.
c. Awareness of the consistency in the application of
GAAP between periods.
d. Evaluation of all matters of continuing accounting
signifi cance
B
Which of the following matters is generally included in an
auditor’s engagement letter?
a. Management’s responsibility for the entity’s
compliance with laws and regulations.
b. The factors to be considered in setting preliminary
judgments about materiality.
c. Management’s vicarious liability for illegal acts
committed by its employees.
d. The auditor’s responsibility to search for signifi cant
internal control defi ciencies.
A
During the initial planning phase of an audit, a CPA most
likely would
a. Identify specifi c internal control activities that are
likely to prevent fraud.
b. Evaluate the reasonableness of the client’s accounting
estimates.
c. Discuss the timing of the audit procedures with the
client’s management.
d. Inquire of the client’s attorney as to whether any
unrecorded claims are probable of assertion.
C
Which of the following documentation is not required for an t
audit in accordance with generally accepted auditing standards?
a. A written audit plan setting forth the procedures
necessary to accomplish the audit’s objectives.
b. An indication that the accounting records agree or
reconcile with the fi nancial statements.
c. A client engagement letter that summarizes the timing
and details of the auditor’s planned fi eldwork.
d. The assessment of the risks of material misstatement
C
Which of the following statements wouldleast likely
appear in an auditor’s engagement letter?
a. Fees for our services are based on our regular per diem
rates, plus travel and other out-of-pocket expenses.
b. During the course of our audit we may observe
opportunities for economy in, or improved controls
over, your operations.
c. Our engagement is subject to the risk that material
misstatements or fraud, if they exist, will not be
detected.
d. After performing our preliminary analytical procedures
we will discuss with you the other procedures we
consider necessary to complete the engagement.
D
An engagement letter should ordinarily include
information on the objectives of the engagement and
CPA responsibilities/Client
responsibilities/Limitation of
engagement
a. Yes Yes Yes
b. Yes No Yes
c. Yes No No
d. No No No
A
Arrangements concerning which of the following areleast
likely to be included in engagement letter?
a. A predecessor auditor.
b. Fees and billing.
c. CPA investment in client securities.
d. Other services to be provided in addition to the audit.
C
Which of the following factorsmost likely would
infl uence an auditor’s determination of the auditability of an
entity’s fi nancial statements?
a. The complexity of the accounting system.
b. The existence of related-party transactions.
c. The adequacy of the accounting records.
d. The operating effectiveness of control
|procedures.
C
The auditor should document the understanding
established with a client through a(n)
a. Oral communication with the client.
b. Written communication with the client.
c. Written or oral communication with the client.
d. Completely detailed audit plan.
B
Which of the following ismost likely to require special
planning considerations related to asset valuation?
a. Inventory is comprised of diamond rings.
b. The client has recently purchased an expensive copy
machine
c. Assets costing less than $250 are expensed even when
the expected life exceeds one year.
d. Accelerated depreciation methods are used for
amortizing the costs of factory equipment.
A
A CPA wishes to determine how various publicly held
companies have complied with the disclosure requirements of
a new fi nancial accounting standard. Which of the following
information sources would the CPA most likely consult for
information?
a.
AICPA Codifi cation of Statements on Auditing
Standards.
b. AICPA Accounting Trends and Techniques.
c.
SEC Quality Control Review.
d. SEC Statement 10-K Guide.
B
An auditor should design the audit plan so that
a.
All material transactions will be selected for
substantive testing.
b. Substantive tests prior to the balance sheet date will be
minimized.
c.
The audit procedures selected will achieve specifi c
audit objectives.
d. Each account balance will be tested under either tests
of controls or tests of transactions.
C
The audit plan generally is modifi ed when
a.
Results of tests of control differ from expectations.
b. An engagement letter has been signed by the auditor
and the client.
c.
A signifi cant defi ciency has been communicated
to the audit committee of the board of directors.
d. The search for unrecorded liabilities has been
performed and obtained results as had been expected
during the planning of the audit.
A
Audit plans should be designed so that
a.
Most of the required procedures can be performed
as interim work.
b. Inherent risk is assessed at a suffi ciently low
level.
c. The auditor can make constructive suggestions to
management.
d. The audit evidence gathered supports the auditor’s
conclusions.
D
In designing written audit plans, an auditor should
establish specifi c audit objectives that relate primarily
to the
a. Timing of audit procedures.
b. Cost-benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
D
With respect to planning an audit, which of the following
statements is always true?
a.
It is acceptable to perform a portion of the audit of a
continuing audit client at interim dates.
b. An engagement should not be accepted after the
client’s year-end.
c. An inventory count must be observed at year-end.
d. Final staffi ng decisions must be made prior to
completion of the planning stage.
A
The element of the audit planning process most likely to
be agreed upon with the client before implementation of the
audit strategy is the determination of the
a.
Evidence to be gathered to provide a suffi cient basis
for the auditor’s opinion.
b. Procedures to be undertaken to discover litigation,
claims, and assessments.
c. Pending legal matters to be included in the inquiry of
the client’s attorney.
d. Timing of inventory observation procedures to be
performed.
D
To obtain an understanding of a continuing client’s
business, an auditor most likely would
a. Perform tests of details of transactions and balances.
b. Review prior year working papers and the permanent
file for the client.
c. Read current issues of specialized industry journals.
d. Reevaluate the client’s internal control environment.
B
On an audit engagement performed by a CPA firm with one
offi ce, at the minimum, knowledge of the relevant professional
accounting and auditing standards should be held by
a.
The auditor with fi nal responsibility for the audit.
b. All professionals working upon the audit.
c.
All professionals working upon the audit and the
partner in charge of the CPA fi rm.
d. All professionals working in the office.
A
An auditor obtains knowledge about a new client’s
business and its industry to
a.
Make constructive suggestions concerning
improvements to the client’s internal control.
b. Develop an attitude of professional skepticism
concerning management’s fi nancial statement
assertions.
c.
Evaluate whether the aggregation of known
misstatements causes the fi nancial statements taken as
a whole to be materially misstated.
d. Understand the events and transactions that may have
an effect on the client’s fi nancial statements.
D
Which of the following procedures would an auditor least
likely perform while obtaining an understanding of a client in
a fi nancial statement audit?
a. Coordinating the assistance of entity personnel in data
preparation.
b. Discussing matters that may affect the audit with fi rm
personnel responsible for nonaudit services to the
entity.
c. Selecting a sample of vendors’ invoices for
comparison to receiving reports.
d. Reading the current year’s interim fi nancial
statements.
C
Ordinarily, the predecessor auditor permits the successor
auditor to review the predecessor’s working paper analyses
relating to
Contingencies/Balance sheet accounts
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
In auditing the fi nancial statements of Star Corp., Land
discovered information leading Land to believe that Star’s
prior year’s fi nancial statements, which were audited by Tell,
require substantial revisions. Under these circumstances,
Land should
a. Notify Star’s audit committee and stockholders that
the prior year’s fi nancial statements cannot be relied
on.
b. Request Star to reissue the prior year’s fi nancial
statements with the appropriate revisions.
c. Notify Tell about the information and make inquiries
about the integrity of Star’s management.
d. Request Star to arrange a meeting among the three
parties to resolve the matter.
D
A successor auditor should request the new client to
authorize the predecessor auditor to allow a review of the
predecessor’s
Engagement letter/Working papers
a. Yes Yes
b. Yes No
c. No Yes
d. No No
C
Which of the following procedures would an auditor most
likely perform in planning a fi nancial statement audit?
a. Inquiring of the client’s legal counsel concerning
pending litigation.
b. Comparing the fi nancial statements to anticipated
results.
c. Examining computer generated exception reports to
verify the effectiveness of internal control.
d. Searching for unauthorized transactions that may aid
in detecting unrecorded liabilities.
B
The in-charge auditor most likely would have a
supervisory responsibility to explain to the staff assistants
a. That immaterial fraud is not to be reported to the
client’s audit committee.
b. How the results of various auditing procedures
performed by the assistants should be evaluated.
c. What benefi ts may be attained by the assistants’
adherence to established time budgets.
d. Why certain documents are being transferred from the
current fi le to the permanent fi le.
B
The audit work performed by each assistant should be
reviewed to determine whether it was adequately performed
and to evaluate whether the
a. Auditor’s system of quality control has been
maintained at a high level.
b. Results are consistent with the conclusions to be
presented in the auditor’s report.
c. Audit procedures performed are approved in the
professional standards.
d. Audit has been performed by persons having adequate
technical training and profi ciency as auditors
B
Analytical procedures used during risk assessment in an
audit should focus on
a. Reducing the scope of tests of controls and substantive
tests.
b. Providing assurance that potential material
misstatements will be identifi ed.
c. Enhancing the auditor’s understanding of the client’s
business.
d. Assessing the adequacy of the available evidence.
C
A primary purpose of performing analytical procedures
as risk assessment procedures is to identify the existence of
a. Unusual transactions and events.
b. Illegal acts that went undetected because of internal
control weaknesses.
c. Related-party transactions.
d. Recorded transactions that were not properly
authorized.
A
Which of the following nonfi nancial information would
an auditor most likely consider in performing analytical
procedures during risk assessment?
a. Turnover of personnel in the accounting
department.
b. Objectivity of audit committee members.
c. Square footage of selling space.
d. Management’s plans to repurchase stock
C
The accounts receivable turnover ratio increased during
20X2. This is consistent with:
a. Items shipped on consignment during December were
recorded as credit sales; no cash receipts have yet
been received on these consignments.
b. The company increased credit sales by 10% by
allowing more lenient credit terms—30 days are
now allowed whereas previously only 20 days were
allowed.
c. A major credit sale on which title passed as of
December 31, 20X2 was recorded in January of 20X3.
d. Sales for each month are approximately 25% higher
than those of the preceding year.
C
A company’s gross margin percentage increased in 20X2.
This is consistent with which of the following occurring in 20X2?
a. An increase in the tax rate on income.
b. An increase in units sold.
c. A decrease in the rate of sales commissions paid to
sales personnel.
d. Outsourcing of a part of the manufacturing process
which resulted in no additional costs
B
The following summarizes your client’s inventory
turnover for Years 1 and 2.
Year 1/Year 2
Inventory turnover 7.00/6.00
This change is most consistent with
a. A number of expense items were erroneously
included in cost of goods sold (but not in ending
inventory).
b. While inventory levels remained the same in Year
2, total sales increased and a higher percentage of
customers are paying their accounts.
c. Although sales for Year 2 were the same as for Year 1,
inventory is a bit higher than normal because the last
month of year 2’s sales were lower than anticipated.
d. The year-end physical inventory count omitted a
number of signifi cant items. A periodic accounting
inventory system is in use.
C
While assessing the risks of material misstatement
auditors identify risks, relate risk to what could go wrong,
consider the magnitude of risks and
a. Assess the risk of misstatements due to illegal acts.
b. Consider the complexity of the transactions involved.
c. Consider the likelihood that the risks could result in
material misstatements.
d. Determine materiality levels
C
Which of the following are considered further audit
procedures that may be designed after assessing the risks of
material misstatement?
Substantive tests of details/Risk assessment
procedures
a. Yes Yes
b. Yes No
c. No Yes
d. No No
B
Which of the following isleast likely to be considered a
risk assessment procedure?
a. Analytical procedures.
b. Confi rmation of ending accounts receivable.
c. Inspection of documents.
d. Observation of the performance of certain accounting
procedures.
B
In an audit of a nonissuer (nonpublic) company, the
auditors identify signifi cant risks. These risks often
a. Involve routine, high-volume transactions.
b. Do not require special audit attention.
c. Involve items with lower levels of inherent risk.
d. Involve judgmental matters.
D
After fi eldwork audit procedures are completed, a
partner of the CPA fi rm who has not been involved in the audit
performs a second or wrap-up working paper review. This
second review usually focuses on
a. The fair presentation of the fi nancial statements in
conformity with GAAP.
b. Fraud involving the client’s management and its
employees.
c. The materiality of the adjusting entries proposed by
the audit staff.
d. The communication of internal control weaknesses to
the client’s audit committee.
A
Which of the following statements is correct concerning
an auditor’s use of the work of a specialist?
a. The work of a specialist who is related to the client
may be acceptable under certain circumstances.
b. If an auditor believes that the determinations made by
a specialist are unreasonable, only a qualifi ed opinion
may be issued.
c. If there is a material difference between a specialist’s
fi ndings and the assertions in the fi nancial statements,
only an adverse opinion may be issued.
d. An auditor may not use a specialist in the
determination of physical characteristics relating to
inventories
A
In using the work of a specialist, an auditor may refer
to the specialist in the auditor’s report if, as a result of the
specialist’s fi ndings, the auditor
a. Becomes aware of conditions causing substantial
doubt about the entity’s ability to continue as a going
concern.
b. Desires to disclose the specialist’s fi ndings, which
imply that a more thorough audit was performed.
c. Is able to corroborate another specialist’s earlier
findings that were consistent with management’s representations.
d. Discovers significant deficiencies in the design of the
entity’s internal control that management does not
correct.
A
Which of the following statements is correct about the
auditor’s use of the work of a specialist?
a. The specialist should not have an understanding of the auditor’s corroborative use of the specialist’s
findings.
b. The auditor is required to perform substantive
procedures to verify the specialist’s assumptions and findings.
c. The client should not have an understanding
of the nature of the work to be performed by the
specialist.
d. The auditor should obtain an understanding of the
methods and assumptions used by the specialist.
D
In using the work of a specialist, an auditor referred to
the specialist’s fi ndings in the auditor’s report. This would be
an appropriate reporting practice if the
a. Client is not familiar with the professional
certifi cation, personal reputation, or particular
competence of the specialist.
b. Auditor, as a result of the specialist’s fi ndings, adds an
explanatory paragraph emphasizing a matter regarding
the fi nancial statements.
c. Client understands the auditor’s corroborative
use of the specialist’s fi ndings in relation to the
representations in the fi nancial statements.
d. Auditor, as a result of the specialist’s fi ndings, decides
to indicate a division of responsibility with the
specialist
B
In using the work of a specialist, an understanding
should exist among the auditor, the client, and the specialist
as to the nature of the specialist’s work. The documentation of
this understanding should cover
a. A statement that the specialist assumes no
responsibility to update the specialist’s report for
future events or circumstances.
b. The conditions under which a division of responsibility may be necessary.
c. The specialist’s understanding of the auditor’s
corroborative use of the specialist’s findings.
d. The auditor’s disclaimer as to whether the specialist’s
findings corroborate the representations in the
financial statements.
C
Which of the following is not a specialist upon whose
work an auditor may rely?
a. Actuary.
b. Appraiser.
c. Internal auditor.
d. Engineer.
C
In identifying matters for communication with those
charged with governance of an audit client, an auditor most
likely would ask management whether
a. The turnover in the accounting department was
unusually high.
b. It consulted with another CPA fi rm about accounting
matters.
c. There were any subsequent events of which the
auditor was unaware.
d. It agreed with the auditor’s assessed level of control risk.
B
Which of the following statements is correct concerning
an auditor’s required communication with those charged with
governance of an audit client?
a. This communication is required to occur before the
auditor’s report on the financial statements is issued.
b. This communication should include discussion of
any significant disagreements with management
concerning the financial statements.
c. Any significant matter communicated to the audit
committee also should be communicated to management.
d. Signifi cant audit adjustments proposed by the
auditor and recorded by management need not be
communicated to those charged with governance.
B
An auditor would least likely initiate a discussion with
those charged with governance of an audit client concerning
a. The methods used to account for significant unusual
transactions.
b. The maximum dollar amount of misstatements that
could exist without causing the financial statements to
be materially misstated.
c. Indications of fraud and illegal acts committed by a
corporate officer that were discovered by the auditor.
d. Disagreements with management as to accounting
principles that were resolved during the current year’s
audit.
B
Which of the following statements is correct about an
auditor’s required communication with those charged with
governance of an audit client?
a.
Any matters communicated to the entity’s audit
committee also are required to be communicated to
the entity’s management.
b. The auditor is required to inform those charged
with governance about signifi cant misstatements
discovered by the auditor and subsequently corrected
by management.
c. Disagreements with management about the
application of accounting principles are required to
be communicated in writing to those charged with
governance.
d. Weaknesses in internal control previously reported
to those charged with governance need not be
recommunicated.
B
Which of the following matters is an auditor required to
communicate to an entity’s audit committee?
I. Disagreements with management about matters
significant to the entity’s financial statements that have
been satisfactorily resolved.
II. Initial selection of significant accounting policies in
emerging areas that lack authoritative guidance.
a. I only.
b. II only.
c. Both I and II.
d. Neither I nor II
A
Should an auditor communicate the following matters to
those charged with governance of an audit client?
Significant audit adjustments
recorded by the entity/ Management’s consultation with other accountants about significant accounting matters
a. Yes Yes
b. Yes No
c. No Yes
d. No No
A
Which of the following most likely would not be
considered an inherent limitation of the potential
effectiveness of an entity’s internal control?
a. Incompatible duties.
b. Management override.
c. Mistakes in judgment.
d. Collusion among employees.
A
When considering internal control, an auditor should
be aware of the concept of reasonable assurance, which
recognizes that
a. Internal control may be ineffective due to mistakes in
judgment and personal carelessness.
b. Adequate safeguards over access to assets and
records should permit an entity to maintain proper
accountability.
c. Establishing and maintaining internal control is an
important responsibility of management.
d. The cost of an entity’s internal control should not
exceed the benefi ts expected to be derived.
D
Proper segregation of functional responsibilities calls
for separation of the functions of
a. Authorization, execution, and payment.
b. Authorization, recording, and custody.
c. Custody, execution, and reporting.
d. Authorization, payment, and recording.
B
An entity’s ongoing monitoring activities often include
a. Periodic audits by the audit committee.
b. Reviewing the purchasing function.
c. The audit of the annual fi nancial statements.
d. Control risk assessment in conjunction with quarterly
reviews.
B
The overall attitude and awareness of an entity’s board of
directors concerning the importance of internal control usually
is refl ected in its
a. Computer-based controls.
b. System of segregation of duties.
c. Control environment.
d. Safeguards over access to assets
C
Management philosophy and operating stylemost likely
would have a signifi cant infl uence on an entity’s control
environment when
a. The internal auditor reports directly to management.
b. Management is dominated by one individual.
c. Accurate management job descriptions delineate
specifi c duties
d. The audit committee actively oversees the fi nancial
reporting process.
B
Which of the following factors are included in an entity’s
control environment?
Audit committee/Integrity and
ethical values/Organizational
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. Yes Yes Yes
D
Which of the following isnot a component of an entity’s
internal control?
a. Control risk.
b. Control activities.
c. Monitoring.
d. Control environment.
A
Which of the following is a provision of the Foreign
Corrupt Practices Act?
a. It is a criminal offense for an auditor to fail to detect and
report a bribe paid by an American business entity to a
foreign offi cial for the purpose of obtaining business.
b. The auditor’s detection of illegal acts committed
by offi cials of the auditor’s publicly held client in
conjunction with foreign offi cials should be reported
to the Enforcement Division of the Securities and
Exchange Commission.
c. If the auditor of a publicly held company concludes
that the effects on the fi nancial statements of a bribe
given to a foreign offi cial are not susceptible to
reasonable estimation, the auditor’s report should be
modifi ed.
d. Every publicly held company must devise, document,
and maintain internal control suffi cient to provide
reasonable assurances that internal control objectives
are met.
D
An auditor suspects that certain client employees are
ordering merchandise for themselves over the Internet without
recording the purchase or receipt of the merchandise. When
vendors’ invoices arrive, one of the employees approves the
invoices for payment. After the invoices are paid, the employee
destroys the invoices and the related vouchers. In gathering
evidence regarding the fraud, the auditor mostlikely would
select items for testing from the fi le of all
a. Cash disbursements.
b. Approved vouchers.
c. Receiving reports.
d. Vendors’ invoices
A
Which of the following proceduresmost likely would
provide an auditor with evidence about whether an entity’s
internal control activities are suitably designed to prevent or
detect material misstatements?
a. Reperforming the activities for a sample of
transactions.
b. Performing analytical procedures using data
aggregated at a high level.
c. Vouching a sample of transactions directly related to
the activities.
d. Observing the entity’s personnel applying the activities.
D
Which statement is correct concerning the relevance of
various types of controls to a fi nancial audit?
a. An auditor may ordinarily ignore a consideration of
controls when a substantive audit approach is taken.
b. Controls over the reliability of fi nancial reporting are
ordinarily most directly relevant to an audit, but other
controls may also be relevant.
c. Controls over safeguarding of assets and liabilities
are of primary importance, while controls over the
reliability of fi nancial reporting may also be relevant.
d. All controls are ordinarily relevant to an audit.
B
In an audit of fi nancial statements in accordance with
generally accepted auditing standards, an auditor is required to
a. Document the auditor’s understanding of the entity’s
internal control.
b. Search for signifi cant defi ciencies in the operation of
internal control.
c. Perform tests of controls to evaluate the effectiveness
of the entity’s internal control.
d. Determine whether controls are suitably designed to
prevent or detect material misstatements
A
In obtaining an understanding of an entity’s internal
control relevant to audit planning, an auditor is required to
obtain knowledge about the
a. Design of the controls pertaining to internal control
components.
b. Effectiveness of controls that have been implemented.
c. Consistency with which controls are currently being
applied.
d. Controls related to each principal transaction class and
account balance.
A
An auditor should obtain suffi cient knowledge of an
entity’s information system to understand the
a. Safeguards used to limit access to computer facilities.
b. Process used to prepare signifi cant accounting
estimates.
c. Controls used to assure proper authorization of
transactions.
d. Controls used to detect the concealment of fraud.
B
When obtaining an understanding of an entity’s internal
control, an auditor should concentrate on the substance of
controls rather than their form because
a. The controls may be operating effectively but may not
be documented.
b. Management may establish appropriate controls but
not enforce compliance with them.
c. The controls may be so inappropriate that no reliance
is contemplated by the auditor.
d. Management may implement controls whose costs
exceed their benefi ts.
B
Decision tables differ from program fl owcharts in that
decision tables emphasize
a. Ease of manageability for complex programs.
b. Logical relationships among conditions and actions.
c. Cost benefi t factors justifying the program.
d. The sequence in which operations are performed.
B
During the consideration of internal control in a fi nancial
statement audit, an auditor isnot obligated to
a. Search for signifi cant defi ciencies in the operation of
the internal control.
b. Understand the internal control and the information
system.
c. Determine whether the control activities relevant to
audit planning have been implemented.
d. Perform procedures to understand the design of
internal control.
A
A primary objective of procedures performed to
obtain an understanding of internal control is to provide an
auditor with
a. Knowledge necessary to assess the risks of material
misstatements.
b. Evidence to use in assessing inherent risk.
c. A basis for modifying tests of controls.
d. An evaluation of the consistency of application of
management’s policies.
A
Which of the following statements regarding auditor
documentation of the client’s internal control is correct?
a. Documentation must include fl owcharts.
b. Documentation must include procedural write-ups.
c. No documentation is necessary although it is
desirable.
d. No one particular form of documentation is necessary,
and the extent of documentation may vary.
D
In obtaining an understanding of an entity’s internal
control, an auditor is required to obtain knowledge about the
Operating effectiveness of controls/Design of
controls
a. Yes Yes
b. No Yes
c. Yes No
d. No No
B
Which of the following may not be required on a
particular audit of a nonissuer (nonpublic) company?
a. Risk assessment procedures.
b. Tests of controls.
c. Substantive procedures.
d. Analytical procedures.
B
Control risk should be assessed in terms of
a. Specific controls.
b. Types of potential fraud.
c. Financial statement assertions.
d. Control environment factors.
C
After assessing control risk, an auditor desires to seek a
further reduction in the assessed level of control risk. At this
time, the auditor would consider whether
a. It would be efficient to obtain an understanding of the
entity’s information system.
b. The entity’s controls have been implemented.
c. The entity’s controls pertain to any financial statement
assertions.
d. Additional audit evidence sufficient to support a
further reduction is likely to be available.
D
Assessing control risk at a low level most likely would
involve
a.
Performing more extensive substantive tests with
larger sample sizes than originally planned.
b. Reducing inherent risk for most of the assertions
relevant to signifi cant account balances.
c. Changing the timing of substantive tests by omitting
interim-date testing and performing the tests at year-end.
d. Identifying specifi c controls relevant to specifi c
assertions.
D
An auditor assesses control risk because it
a. Is relevant to the auditor’s understanding of the
control environment.
b. Provides assurance that the auditor’s materiality levels
are appropriate.
c.
Indicates to the auditor where inherent risk may be the
greatest.
d. Affects the level of detection risk that the auditor may
accept.
D
When an auditor increases the assessed level of control
risk because certain control activities were determined to be
ineffective, the auditor would most likely increase the
a. Extent of tests of controls.
b. Level of detection risk.
c. Extent of tests of details.
d. Level of inherent risk.
C
An auditor uses the knowledge provided by the
understanding of internal control and the assessed level of the
risk of material misstatement primarily to
a.
Determine whether procedures and records concerning
the safeguarding of assets are reliable.
b. Ascertain whether the opportunities to allow any
person to both perpetrate and conceal fraud are
minimized.
c.
Modify the initial assessments of inherent risk and
preliminary judgments about materiality levels.
d. Determine the nature, timing, and extent of
substantive tests for financial statement assertions.
D
An auditor may compensate for a weakness in internal
control by increasing the
a.
Level of detection risk.
b. Extent of tests of controls.
c.
Preliminary judgment about audit risk.
d. Extent of analytical procedures.
D
Which of the following statements is correct concerning
an auditor’s assessment of control risk?
a.
Assessing control risk may be performed concurrently
during an audit with obtaining an understanding of the
entity’s internal control.
b. Evidence about the operation of internal control in
prior audits may not be considered during the current
year’s assessment of control risk.
c
. The basis for an auditor’s conclusions about the
assessed level of control risk need not be documented
unless control risk is assessed at the maximum level.
d. The lower the assessed level of control risk, the less
assurance the evidence must provide that the control
procedures are operating effectively.
A
Regardless of the assessed level of control risk, an auditor
would perform some
a.
Tests of controls to determine the effectiveness of
internal control policies.
b. Analytical procedures to verify the design of internal
control.
c.
Substantive tests to restrict detection risk for
signifi cant transaction classes.
d. Dual-purpose tests to evaluate both the risk of
monetary misstatement and preliminary control risk
C
How frequently must an auditor test operating
effectiveness of controls that appear to function as they have
in past years and on which the auditor wishes to rely in the
current year?
a.
Monthly.
b. Each audit.
c.
At least every second audit.
d. At least every third audit.
D
Before assessing control risk at a level lower than the
maximum, the auditor obtains reasonable assurance that
controls are in use and operating effectively. This assurance is
most likely obtained in part by
a. Preparing flowcharts.
b. Performing substantive tests.
c. Analyzing tests of trends and ratios.
d. Inspection of documents.
D
An auditor generally tests the segregation of duties related
to inventory by
a.
Personal inquiry and observation.
b. Test counts and cutoff procedures.
c.
Analytical procedures and invoice recomputation.
d. Document inspection and reconciliation.
A
The objective of tests of details of transactions performed
as tests of controls is to
a.
Monitor the design and use of entity documents such
as prenumbered shipping forms.
b. Determine whether controls have been implemented.
c.
Detect material misstatements in the account balances
of the fi nancial statements.
d. Evaluate whether controls operated effectively.
D
After obtaining an understanding of internal control and
assessing the risk of material misstatement, an auditor decided
to perform tests of controls. The auditor most likely decided
that
a.
It would be effi cient to perform tests of controls that
would result in a reduction in planned substantive
tests.
b. Additional evidence to support a further reduction in
the risk of material misstatement is not available.
c.
An increase in the assessed level of the risk of
material misstatement is justifi ed for certain fi nancial
statement assertions.
d. There were many internal control weaknesses that
could allow misstatements to enter the accounting
system.
A
In assessing control risk, an auditor ordinarily selects
from a variety of techniques, including
a.
Inquiry and analytical procedures.
b. Reperformance and observation.
c.
Comparison and confirmation.
d. Inspection and verification.
B
Which of the following types of evidence would an
auditor most likely examine to determine whether controls are
operating as designed?
a.
Confi rmations of receivables verifying account
balances.
b. Letters of representations corroborating inventory
pricing.
c. Attorneys’ responses to the auditor’s inquiries.
d. Client records documenting the use of computer
programs
D
Which of the following is not a step in an auditor’s
assessment of control risk?
a.
Evaluate the effectiveness of internal control with tests
of controls.
b. Obtain an understanding of the entity’s information
system and control environment.
c.
Perform tests of details of transactions to detect
material misstatements in the fi nancial statements.
d. Consider whether controls can have a pervasive effect
on fi nancial statement assertions.
C
To obtain audit evidence about control risk, an auditor
selects tests from a variety of techniques including
a.
Inquiry.
b. Analytical procedures.
c.
Calculation.
d. Confirmation.
A
Which of the following is least likely to be evidence the
auditor examines to determine whether controls are operating
effectively?
a.
Records documenting usage of computer programs.
b. Canceled supporting documents.
c.
Confirmations of accounts receivable.
d. Signatures on authorization forms.
C
Which of the following procedures concerning accounts
receivable would an auditor most likely perform to obtain
evidence in support of an assessed level of control risk below
the maximum?
a. Observing an entity’s employee prepare the schedule
of past due accounts receivable.
b.
Sending confi rmation requests to an entity’s principal
customers to verify the existence of accounts
receivable.
c. Inspecting an entity’s analysis of accounts receivable
for unusual balances.
d. Comparing an entity’s uncollectible accounts expense
to actual uncollectible accounts receivable.
A
Which of the following procedures would an auditor
most likely perform to test controls relating to management’s
assertion about the completeness of cash receipts for cash sales
at a retail outlet?
a.
Observe the consistency of the employees’ use of cash
registers and tapes.
b. Inquire about employees’ access to recorded but
undeposited cash.
c.
Trace deposits in the cash receipts journal to the cash
balance in the general ledger.
d. Compare the cash balance in the general ledger with
the bank confi rmation request.
A
Sound internal control dictates that immediately upon
receiving checks from customers by mail, a responsible
employee should
a.
Add the checks to the daily cash summary.
b. Verify that each check is supported by a prenumbered
sales invoice.
c.
Prepare a duplicate listing of checks received.
d. Record the checks in the cash receipts journal.
C
Tracing shipping documents to prenumbered sales
invoices provides evidence that
a.
No duplicate shipments or billings occurred.
b. Shipments to customers were properly invoiced.
c.
All goods ordered by customers were shipped.
d. All prenumbered sales invoices were accounted for.
B
Which of the following controls most likely would
t
reduce the risk of diversion of customer receipts by an entity’s
employees?
a.
A bank lockbox system.
b. Prenumbered remittance advices.
c.
Monthly bank reconciliations.
d. Daily deposit of cash receipts.
A
An auditor suspects that a client’s cashier is misappropriating
cash receipts for personal use by lapping customer checks
received in the mail. In attempting to uncover this embezzlement
scheme, the auditor most likely would compare the
t
a.
Dates checks are deposited per bank statements with
the dates remittance credits are recorded.
b. Daily cash summaries with the sums of the cash
receipts journal entries.
c.
Individual bank deposit slips with the details of the
monthly bank statements.
d. Dates uncollectible accounts are authorized to be
written off with the dates the write-offs are actually
recorded.
A
Upon receipt of customers’ checks in the mailroom, a
responsible employee should prepare a remittance listing that is
forwarded to the cashier. A copy of the listing should be sent to the
a.
Internal auditor to investigate the listing for unusual
transactions.
b. Treasurer to compare the listing with the monthly
bank statement.
c.
Accounts receivable bookkeeper to update the
subsidiary accounts receivable records.
d. Entity’s bank to compare the listing with the cashier’s
deposit slip.
C
Which of the following procedures most likely would not
be a control designed to reduce the risk of misstatements in the
billing process?
a. Comparing control totals for shipping documents with
corresponding totals for sales invoices.
b. Using computer programmed controls on the pricing
and mathematical accuracy of sales invoices.
c. Matching shipping documents with approved sales
orders before invoice preparation.
d. Reconciling the control totals for sales invoices with
the accounts receivable subsidiary ledger.
D
Which of the following audit procedures would an auditor
most likely perform to test controls relating to management’s
assertion concerning the completeness of sales transactions?
a.
Verify that extensions and footings on the entity’s
sales invoices and monthly customer statements have
been recomputed.
b. Inspect the entity’s reports of prenumbered shipping
documents that have not been recorded in the sales
journal.
c.
Compare the invoiced prices on prenumbered sales
invoices to the entity’s authorized price list.
d. Inquire about the entity’s credit granting policies and
the consistent application of credit checks.
B
Which of the following controls most likely would
assure that all billed sales are correctly posted to the accounts
receivable ledger?
a.
Daily sales summaries are compared to daily postings
to the accounts receivable ledger.
b. Each sales invoice is supported by a prenumbered
shipping document.
c.
The accounts receivable ledger is reconciled daily to
the control account in the general ledger.
d. Each shipment on credit is supported by a
prenumbered sales invoice.
A
An auditor tests an entity’s policy of obtaining credit
approval before shipping goods to customers in support of
management’s fi nancial statement assertion of
a.
Valuation or allocation.
b. Completeness.
c.
Existence or occurrence.
d. Rights and obligations.
A
Which of the following controls most likely would
help ensure that all credit sales transactions of an entity are
recorded?
a.
The billing department supervisor sends copies of
approved sales orders to the credit department for
comparison to authorized credit limits and current
customer account balances.
b. The accounting department supervisor independently
reconciles the accounts receivable subsidiary ledger to
the accounts receivable control account monthly.
c.
The accounting department supervisor controls the
mailing of monthly statements to customers and
investigates any differences reported by customers.
d.
The billing department supervisor matches
prenumbered shipping documents with entries in the
sales journal.
D
Which of the following controls most likely would be
effective in offsetting the tendency of sales personnel to
maximize sales volume at the expense of high bad debt
write-offs?
a. Employees responsible for authorizing sales and bad
debt write-offs are denied access to cash.
b. Shipping documents and sales invoices are matched
by an employee who does not have authority to write
off bad debts.
c. Employees involved in the credit-granting function are
separated from the sales function.
d. Subsidiary accounts receivable records are reconciled
to the control account by an employee independent of
the authorization of credit
C
Proper authorization of write-offs of uncollectible
accounts should be approved in which of the following
departments?
a.
Accounts receivable.
b. Credit.
c.
Accounts payable.
d. Treasurer.
D
Employers bond employees who handle cash receipts
because fi delity bonds reduce the possibility of employing
dishonest individuals and
a.
Protect employees who make unintentional
misstatements from possible monetary damages
resulting from their misstatements.
b. Deter dishonesty by making employees aware that
insurance companies may investigate and prosecute
dishonest acts.
c.
Facilitate an independent monitoring of the receiving
and depositing of cash receipts.
d. Force employees in positions of trust to take periodic
vacations and rotate their assigned duties.
B
During the consideration of a small business client’s
internal control, the auditor discovered that the accounts
receivable clerk approves credit memos and has access to cash.
Which of the following controls would be most effective in
offsetting this weakness?
a.
The owner reviews errors in billings to customers and
postings to the subsidiary ledger.
b. The controller receives the monthly bank statement
directly and reconciles the checking accounts.
c.
The owner reviews credit memos after they are
recorded.
d. The controller reconciles the total of the detail
accounts receivable accounts to the amount shown in
the ledger.
C
When a customer fails to include a remittance advice
with a payment, it is common practice for the person
opening the mail to prepare one. Consequently, mail
should be opened by which of the following four company
employees?
a. Credit manager.
b. Receptionist.
c. Sales manager.
d. Accounts receivable clerk.
B
Remittances should be opened by
an individual such as a receptionist who is independent of
the sales function
To provide assurance that each voucher is submitted
and paid only once, an auditor most likely would examine
a sample of paid vouchers and determine whether each
voucher is
a. Supported by a vendor’s invoice.
b. Stamped “paid” by the check signer.
c. Prenumbered and accounted for.
d. Approved for authorized purchases.
B
In testing controls over cash disbursements, an auditor most
likely would determine that the person who signs checks also
a.
Reviews the monthly bank reconciliation.
b. Returns the checks to accounts payable.
c.
Is denied access to the supporting documents.
d. Is responsible for mailing the checks.
D
In assessing control risk for purchases, an auditor vouches
a sample of entries in the voucher register to the supporting
documents. Which assertion would this test of controls most
likely support?
a.
Completeness.
b. Existence or occurrence.
c.
Valuation or allocation.
d. Rights and obligations.
B
Which of the following controls is not usually performed
in the vouchers payable department?
a.
Matching the vendor’s invoice with the related
receiving report.
b. Approving vouchers for payment by having an
authorized employee sign the vouchers.
c.
Indicating the asset and expense accounts to be debited.
d. Accounting for unused prenumbered purchase orders
and receiving reports.
D
With properly designed internal control, the same
employee most likely would match vendors’ invoices with
receiving reports and also
a.
Post the detailed accounts payable records.
b. Recompute the calculations on vendors’ invoices.
c.
Reconcile the accounts payable ledger.
d. Cancel vendors’ invoices after payment.
B
An entity’s internal control requires for every check
request that there be an approved voucher, supported by a
prenumbered purchase order and a prenumbered receiving
report. To determine whether checks are being issued for
unauthorized expenditures, an auditor most likely would select
items for testing from the population of all
a.
Purchase orders.
b. Canceled checks.
c.
Receiving reports.
d. Approved vouchers.
B
Which of the following questions would most likely be
included in an internal control questionnaire concerning the
completeness assertion for purchases?
a. Is an authorized purchase order required before the
receiving department can accept a shipment or the
vouchers payable department can record a voucher?
b. Are purchase requisitions prenumbered and
independently matched with vendor invoices?
c.
Is the unpaid voucher fi le periodically reconciled with
inventory records by an employee who does not have
access to purchase requisitions?
d. Are purchase orders, receiving reports, and vouchers
prenumbered and periodically accounted for?
D
For effective internal control, the accounts payable
department generally should
a.
Stamp, perforate, or otherwise cancel supporting
documentation after payment is mailed.
b. Ascertain that each requisition is approved as to price,
quantity, and quality by an authorized employee.
c.
Obliterate the quantity ordered on the receiving
department copy of the purchase order.
d. Establish the agreement of the vendor’s invoice with
the receiving report and purchase order.
D
Internal control is strengthened when the quantity of
merchandise ordered is omitted from the copy of the purchase
order sent to the
a. Department that initiated the requisition.
b. Receiving department.
c. Purchasing agent.
d. Accounts payable department.
B
A client erroneously recorded a large purchase twice.
Which of the following internal control measures would
be most likely to detect this error in a timely and efficient
manner?
a. Footing the purchases journal.
b. Reconciling vendors’ monthly statements with
subsidiary payable ledger accounts.
c. Tracing totals from the purchases journal to the ledger
accounts.
d. Sending written quarterly confirmations to all vendors.
B
With well-designed internal control, employees in the same
department most likely would approve purchase orders, and also
a. Reconcile the open invoice fi le.
b. Inspect goods upon receipt.
c. Authorize requisitions of goods.
d. Negotiate terms with vendors.
D
In obtaining an understanding of a manufacturing entity’s
internal control over inventory balances, an auditor most likely
would
a. Analyze the liquidity and turnover ratios of the
inventory.
b. Perform analytical procedures designed to identify
cost variances.
c. Review the entity’s descriptions of inventory policies
and procedures.
d. Perform test counts of inventory during the entity’s
physical count.
C
Which of the following controls most likely would be
used to maintain accurate inventory records?
a. Perpetual inventory records are periodically com
pared with the current cost of individual inventory
items.
b. A just-in-time inventory ordering system keeps
inventory levels to a desired minimum.
c. Requisitions, receiving reports, and purchase orders
are independently matched before payment is
approved.
d. Periodic inventory counts are used to adjust the
perpetual inventory records.
D
A client maintains perpetual inventory records in both
quantities and dollars. If the assessed level of control risk is
high, an auditor would probably
a.
Insist that the client perform physical counts of
inventory items several times during the year.
b. Apply gross profi t tests to ascertain the reasonableness
of the physical counts.
c.
Increase the extent of tests of controls of the inventory
cycle.
d. Request the client to schedule the physical inventory
count at the end of the year.
D
Which of the following controls most likely addresses the
completeness assertion for inventory?
a.
Work in process account is periodically reconciled
with subsidiary records.
b. Employees responsible for custody of fi nished goods
do not perform the receiving function.
c.
Receiving reports are prenumbered and periodically
reconciled.
d. There is a separation of duties between payroll
department and inventory accounting personnel
C
Sound internal control dictates that defective
merchandise returned by customers should be presented
initially to the
a.
Salesclerk.
b. Purchasing clerk.
c.
Receiving clerk.
d. Inventory control clerk.
C
Alpha Company uses its sales invoices for posting
perpetual inventory records. Inadequate controls over the
invoicing function allow goods to be shipped that are not
invoiced. The inadequate controls could cause an
a.
Understatement of revenues, receivables, and
inventory.
b. Overstatement of revenues and receivables, and an
understatement of inventory.
c.
Understatement of revenues and receivables, and an
overstatement of inventory.
d. Overstatement of revenues, receivables, and inventory
C
Which of the following is a question that the auditor
would expect to fi nd on the production cycle section of an
internal control questionnaire?
a.
Are vendors’ invoices for raw materials approved for
payment by an employee who is independent of the
cash disbursements function?
b. Are signed checks for the purchase of raw materials
mailed directly after signing without being
returned to the person who authorized the invoice
processing?
c.
Are all releases by storekeepers of raw materials
from storage based on approved requisition
documents?
d. Are details of individual disbursements for raw
materials balanced with the total to be posted to the
appropriate general ledger account?
C
The objectives of internal control for a production
cycle are to provide assurance that transactions are properly
executed and recorded, and that
a.
Production orders are prenumbered and signed by a
supervisor.
b. Custody of work in process and of fi nished goods is
properly maintained.
c.
Independent internal verifi cation of activity reports is
established.
d. Transfers to fi nished goods are documented by a
completed production report and a quality control
report.
B
An auditor vouched data for a sample of employees
in a payroll register to approved clock card data to provide
assurance that
a. Payments to employees are computed at authorized
rates.
b. Employees work the number of hours for which they
are paid.
c.
Segregation of duties exist between the preparation
and distribution of the payroll.
d. Controls relating to unclaimed payroll checks are
operating effectively.
B
Which of the following is a control that most likely could
help prevent employee payroll fraud?
a.
The personnel department promptly sends employee
termination notices to the payroll supervisor.
b. Employees who distribute payroll checks forward
unclaimed payroll checks to the absent employees’
supervisors.
c.
Salary rates resulting from new hires are approved by
the payroll supervisor.
d. Total hours used for determination of gross pay are
calculated by the payroll supervisor.
A
In determining the effectiveness of an entity’s controls
relating to the existence or occurrence assertion for payroll
transactions, an auditor most likely would inquire about
and
a. Observe the segregation of duties concerning
personnel responsibilities and payroll disbursement.
b. Inspect evidence of accounting for prenumbered
payroll checks.
c. Recompute the payroll deductions for employee fringe
benefi ts.
d.
Verify the preparation of the monthly payroll account
bank reconciliation.
A
An auditor most likely would assess control risk at a high
level if the payroll department supervisor is responsible for
a.
Examining authorization forms for new employees.
b. Comparing payroll registers with original batch
transmittal data.
c.
Authorizing payroll rate changes for all employees.
d. Hiring all subordinate payroll department employees.
C
Which of the following controls most likely
would prevent direct labor hours from being charged to
manufacturing overhead?
a.
Periodic independent counts of work in process for
comparison to recorded amounts.
b. Comparison of daily journal entries with approved
production orders.
c.
Use of time tickets to record actual labor worked on
production orders.
d. Reconciliation of work-in-process inventory with
periodic cost budgets.
C
In meeting the control objective of safeguarding of assets,
which department should be responsible for
Distribution of paychecks/ Custody of
unclaimed paychecks
a. Treasurer Treasurer
b. Payroll Treasurer
c. Treasurer Payroll
d. Payroll Payroll
A
Proper internal control over the cash payroll function
would mandate which of the following?
a.
The payroll clerk should fi ll the envelopes with cash
and a computation of the net wages.
b. Unclaimed pay envelopes should be retained by the
paymaster.
c.
Each employee should be asked to sign a receipt.
d. A separate checking account for payroll be
maintained.
C
The purpose of segregating the duties of hiring personnel
and distributing payroll checks is to separate the
a.
Authorization of transactions from the custody of
related assets.
b. Operational responsibility from the recordkeeping
responsibility.
c.
Human resources function from the controllership
function.
d. Administrative controls from the internal accounting
controls.
A
To minimize the opportunities for fraud, unclaimed cash
payroll should be
a.
Deposited in a safe-deposit box.
b. Held by the payroll custodian.
c.
Deposited in a special bank account.
d. Held by the controller
C
Which of the following departments most likely would
approve changes in pay rates and deductions from employee
salaries?
a.
Personnel.
b. Treasurer.
c.
Controller.
d.
Payroll
A
Which of the following questions would an auditor most
likely include on an internal control questionnaire for notes
payable?
a. Are assets that collateralize notes payable critically
needed for the entity’s continued existence?
b. Are two or more authorized signatures required on
checks that repay notes payable?
c. Are the proceeds from notes payable used for the
purchase of noncurrent assets?
d. Are direct borrowings on notes payable authorized by
the board of directors?
D
Theprimary responsibility of a bank acting as registrar
of capital stock is to
a. Ascertain that dividends declared do not exceed
the statutory amount allowable in the state of
incorporation.
b. Account for stock certifi cates by comparing the total
shares outstanding to the total in the shareholders
subsidiary ledger.
c. Act as an independent third party between the board
of directors and outside investors concerning mergers,
acquisitions, and the sale of treasury stock.
d.
Verify that stock is issued in accordance with the
authorization of the board of directors and the articles
of incorporation.
D
Where no independent stock transfer agents are
employed and the corporation issues its own stocks and
maintains stock records, canceled stock certifi cates should
a. Be defaced to prevent reissuance and attached to their
corresponding stubs.
b. Not be defaced but segregated from other stock
certifi cates and retained in a canceled certifi cates fi le.
c.
Be destroyed to prevent fraudulent reissuance.
d. Be defaced and sent to the secretary of state.
A
Which of the following is not a control that is designed
to protect investment securities?
a.
Custody over securities should be limited to
individuals who have recordkeeping responsibility
over the securities.
b. Securities should be properly controlled physically in
order to prevent unauthorized usage.
c. Access to securities should be vested in more than one
individual.
d. Securities should be registered in the name of the
owner.
A
Which of the following controls would a company
most likely use to safeguard marketable securities when an
independent trust agent is not employed?
a. The investment committee of the board of directors
periodically reviews the investment decisions
delegated to the treasurer.
b. Two company offi cials have joint control of
marketable securities, which are kept in a bank safe
deposit box.
c. The internal auditor and the controller independently
trace all purchases and sales of marketable securities
from the subsidiary ledgers to the general ledger.
d. The chairman of the board verifi es the marketable
securities, which are kept in a bank safe-deposit box,
each year on the balance sheet date.
B
A weakness in internal control over recording
retirements of equipment may cause an auditor to
a.
Inspect certain items of equipment in the plant and
trace those items to the accounting records.
b. Review the subsidiary ledger to ascertain whether
depreciation was taken on each item of equipment
during the year.
c
. Trace additions to the “other assets” account to search for
equipment that is still on hand but no longer being used.
d. Select certain items of equipment from the accounting
records and locate them in the plant
D
Which of the following questions would an auditor least
likely include on an internal control questionnaire concerning
the initiation and execution of equipment transactions?
a. Are requests for major repairs approved at a higher
level than the department initiating the request?
b. Are prenumbered purchase orders used for equipment
and periodically accounted for?
c.
Are requests for purchases of equipment reviewed for
consideration of soliciting competitive bids?
d. Are procedures in place to monitor and properly
restrict access to equipment?
D
Which of the following controls would be most effective
in assuring that the proper custody of assets in the investing
cycle is maintained?
a.
Direct access to securities in the safe-deposit box is
limited to only one corporate offi cer
b. Personnel who post investment transactions to
the general ledger are not permitted to update the
investment subsidiary ledger.
c.
The purchase and sale of investments are executed on
the specifi c authorization of the board of directors.
d. The recorded balances in the investment subsidiary
ledger are periodically compared with the contents of
the safe-deposit box by independent personnel.
D
A company holds bearer bonds as a short-term
investment. Responsibility for custody of these bonds and
submission of coupons for periodic interest collections
probably should be delegated to the
a.
Chief Accountant.
b. Internal Auditor.
c.
Cashier.
d. Treasurer.
D
Which of the following controls would an entity most
likely use to assist in satisfying the completeness assertion
related to long-term investments?
a.
Senior management verifi es that securities in the
bank safe-deposit box are registered in the entity’s
name.
b. The internal auditor compares the securities in the
bank safe-deposit box with recorded investments.
c.
The treasurer vouches the acquisition of securities by
comparing brokers’ advices with canceled checks.
d. The controller compares the current market prices
of recorded investments with the brokers’ advices
on fi le.
B
Which of the following controls would an entity most
likely use in safeguarding against the loss of marketable
securities?
a.
An independent trust company that has no direct
contact with the employees who have recordkeeping
responsibilities has possession of the securities.
b. The internal auditor verifi es the marketable securities
in the entity’s safe each year on the balance sheet
date.
c.
The independent auditor traces all purchases and sales
of marketable securities through the subsidiary ledgers
to the general ledger.
d. A designated member of the board of directors
controls the securities in a bank safe-deposit box.
A
When there are numerous property and equipment
transactions during the year, an auditor who plans to assess
control risk at a low level usually performs
a.
Tests of controls and extensive tests of property and
equipment balances at the end of the year.
b. Analytical procedures for current year property and
equipment transactions.
c.
Tests of controls and limited tests of current year
property and equipment transactions.
d. Analytical procedures for property and equipment
balances at the end of the year.
C
In general, material fraud perpetrated by which of the
following are most difficult to detect?
a. Cashier.
b. Keypunch operator.
c. Internal auditor.
d. Controller.
D
Which of the following is not an accurate statement
about communication of internal control related matters to
management on a nonissuer (nonpublic) company?
a.
The auditor must communicate both material
weaknesses and signifi cant defi ciencies.
b. The auditor must communicate in writing.
c.
Previously communicated weaknesses that have not
been corrected need not be recommunicated.
d. A communication indicating that no signifi cant
defi ciencies were identifi ed should not be issued.
C
Which of the following matters would an auditor
most likely consider to be a material weakness to be
communicated to those charged with governance of an
audit client?
a,Management’s failure to renegotiate unfavorable long
term purchase commitments.
b. Recurring operating losses that may indicate going
concern problems.
c. Ineffective oversight of financial reporting by those
charged with governance.
d. Management’s current plans to reduce its ownership
equity in the entity.
C
Which of the following statements is correct concerning
signifi cant defi ciencies in an audit?
a. An auditor is required to search for signifi cant
defi ciencies during an audit.
b.
All signifi cant defi ciencies are also considered to be
material weaknesses.
c. An auditor may communicate signifi cant defi ciencies
during an audit or after the audit’s completion.
d. An auditor may report that no signifi cant defi ciencies
were noted during an audit
C
An auditor’s letter issued on signifi cant defi ciencies
relating to an entity’s internal control observed during a
f
i nancial statement audit should
a. Include a brief description of the tests of controls
performed in searching for signifi cant defi ciencies and
material weaknesses.
b. Indicate that the signifi cant defi ciencies should
be disclosed in the annual report to the entity’s
shareholders.
c. Include a paragraph describing management’s assertion
concerning the effectiveness of internal control.
d. Indicate that the audit’s purpose was to report on the
financial statements and not to express an opinion on
internal control.
D
Which of the following statements is correct concerning
an auditor’s required communication of signifi cant
defi ciencies?
a.
A signifi cant defi ciency previously communicated
during the prior year’s audit that remains uncorrected
causes a scope limitation.
b. An auditor should perform tests of controls on
signifi cant defi ciencies before communicating them to
the client.
c.
An auditor’s report on signifi cant defi ciencies should
include a restriction on the distribution of the report.
d. An auditor should communicate signifi cant
defi ciencies after tests of controls, but before
commencing substantive tests.
C
Which of the following statements is correct concerning
signifi cant defi ciencies noted in an audit?
a.
Signifi cant defi ciencies are material weaknesses in
the design or operation of specifi c internal control
components.
b. The auditor is obligated to search for signifi cant
defi ciencies that could adversely affect the entity’s
ability to record and report fi nancial data.
c.
Signifi cant defi ciencies need not be recommunicated
each year if management has acknowledged its
understanding of such defi ciencies.
d. The auditor should separately communicate those
signifi cant defi ciencies considered to be material
weaknesses.
D
Which of the following representations should not be
included in a report on internal control related matters noted in
an audit?
a.
Signifi cant defi ciencies related to internal control exist.
b. There are no signifi cant defi ciencies in the design or
operation of internal control.
c.
Corrective follow-up action is recommended due
to the relative signifi cance of material weaknesses
discovered during the audit.
d. The auditor’s consideration of internal control would not
necessarily disclose all signifi cant defi ciencies that exist.
B
Which of the following statements concerning material
weaknesses and signifi cant defi ciencies is correct?
a.
An auditor should not identify and communicate
material weaknesses separately from signifi cant
defi ciencies.
b. Compensating controls may limit the severity of a
material weakness or signifi cant defi ciency.
c.
Upon discovery an auditor should immediately report
all material weaknesses and signifi cant defi ciencies
identifi ed during an audit.
d. All signifi cant defi ciencies are material weaknesses.
B
During the audit the independent auditor identifi ed the
existence of a weakness in the client’s internal control and
communicated this fi nding in writing to the client’s senior
management and those charged with governance. The auditor
should
a.
Consider the weakness a scope limitation and
therefore disclaim an opinion.
b. Consider the effects of the condition on the audit.
c.
Suspend all audit activities pending directions from
the client’s audit committee.
d. Withdraw from the engagement.
B
In assessing the competence of an internal auditor, an
independent CPA most likely would obtain information about
t
the
a.
Quality of the internal auditor’s working paper
documentation.
b. Organization’s commitment to integrity and ethical
values.
c.
Infl uence of management on the scope of the internal
auditor’s duties.
d. Organizational level to which the internal auditor
reports.
A
For which of the following judgments may an
independent auditor share responsibility with an entity’s
internal auditor who is assessed to be both competent and
objective?
Assessment of
inherent risk/Assessment of
control risk
a. Yes Yes
b. Yes No
c. No Yes
d. No No
D
The work of internal auditors may affect the independent
auditor’s
I. Procedures performed in obtaining an understanding of
internal control.
II. Procedures performed in assessing the risk of material
misstatement.
III. Substantive procedures performed in gathering direct
evidence.
a. I and II only.
b. I and III only.
c. II and III only.
d. I, II, and III.
D
An internal auditor’s work would most likely affect the
nature, timing, and extent of an independent CPA’s auditing
procedures when the internal auditor’s work relates to
assertions about the
a.
Existence of contingencies.
b. Valuation of intangible assets.
c.
Existence of fixed asset additions.
d. Valuation of related-party transactions.
C
During an audit an internal auditor may provide direct
assistance to an independent CPA in
Obtaining an understanding of internal control/Performing
tests of controls/Performing
substantive
tests
a. No No No
b. Yes No No
c. Yes Yes No
d. Yes Yes Yes
D
When assessing the internal auditor’s competence, the
independent CPA should obtain information about the
a.
Organizational level to which the internal auditors report.
b. Educational background and professional certifi cation
of the internal auditors.
c.
Policies prohibiting the internal auditors from auditing
areas where relatives are employed.
d. Internal auditors’ access to records and information
that is considered sensitive.
B
In assessing the competence and objectivity of an
entity’s internal auditor, an independent auditor would least
likely consider information obtained from
a.
Discussions with management personnel.
b. External quality reviews of the internal auditor’s activities.
c.
Previous experience with the internal auditor.
d. The results of analytical procedures.
D
If the independent auditors decide that the work
performed by the internal auditor may have a bearing on their
own procedures, they should consider the internal auditor’s
a. Competence and objectivity.
b. Efficiency and experience.
c. Independence and review skills.
d. Training and supervisory skills.
A
In assessing the objectivity of internal auditors, an
independent auditor should
a.
Evaluate the quality control program in effect for the
internal auditors.
b. Examine documentary evidence of the work
performed by the internal auditors.
c. Test a sample of the transactions and balances that the
internal auditors examined.
d. Determine the organizational level to which the
internal auditors report..
D
Which of the following isnot an assertion relating to
classes of transactions?
a. Accuracy.
b. Consistency.
c. Cutoff.
d. Occurrence.
B
Which of the following is a general principle relating to the
reliability of audit evidence?
a. Audit evidence obtained from indirect sources ra ther
than directly is more reliable than evidence obtained
directly by the auditor.
b. Audit evidence provided by copies is more reliable
than that provided by facsimiles.
c. Audit evidence obtained from knowledgeable inde
pend ent sources outside the client company is more
reliable than audit evidence obtained from nonin de
pendent sources.
d. Audit evidence provided by original documents is
more reliable than audit evidence generated through a
system of effective controls.
C
Which of the following types of audit evidence is themost
persuasive?
a. Prenumbered client purchase order forms.
b. Client work sheets supporting cost allocations.
c. Bank statements obtained from the client.
d. Client representation letter.
C
Which of the following presumptions is correct about the
reliability of audit evidence?
a. Information obtained indirectly from outside sources
is the most reliable audit evidence.
b. To be reliable, audit evidence should be con vinc ing ra
ther than persuasive.
c. Reliability of audit evidence refers to the amount of
cor roborative evidence obtained.
d. Effective internal control provides more assurance
about the reliability of audit evidence.
D
Which of the following statements relating to the ap
propriate ness of audit evidence is always true?
a. Audit evidence gathered by an auditor from out side an
enterprise is reliable.
b. Accounting data developed under satisfactory condi
tions of internal control are more relevant than data
developed under unsatisfactory internal control condi
tions.
c. Oral representations made by management arenot
valid evidence.
d. Evidence gathered by auditors must be both valid and
relevant to be considered appropriate.
D
Which of the following types of audit evidence is theleast
persuasive?
a. Prenumbered purchase order forms.
b. Bank statements obtained from the client.
c. Test counts of inventory performed by the audi tor.
d. Correspondence from the client’s attorney about liti
ga tion.
A
In evaluating the reasonableness of an entity’s ac count ing
estimates, an auditor normally would be concerned about as
sumptions that are
a. Susceptible to bias.
b. Consistent with prior periods.
c. Insensitive to variations.
d. Similar to industry guidelines
A
Which of the following isnot a basic procedure used in an
audit?
a. Risk assessment procedures.
b. Substantive procedures.
c. Tests of controls.
d. Tests of direct evidence.
D
Which of the following procedures would an auditor
ordinar ily perform fi rst in evaluating management’s ac counting
estimates for reasonableness?
a. Develop independent expectations of manage ment’s
es timates.
b. Consider the appropriateness of the key factors or as
sumptions used in preparing the estimates.
c. Test the calculations used by management in de vel op
ing the estimates.
d. Obtain an understanding of how management de vel
oped its estimates.
D
In evaluating the reasonableness of an accounting esti
mate, an auditor most likely would concentrate on key fac tors
and as sumptions that are
a. Consistent with prior periods.
b. Similar to industry guidelines.
c. Objective andnot susceptible to bias.
d. Deviations from historical patterns.
D
In evaluating an entity’s accounting estimates, one
of an auditor’s objectives is to determine whether the
estimates are
a. Not subject to bias.
b. Consistent with industry guidelines.
c. Based on objective assumptions.
d. Reasonable in the circumstances.
D
In testing the existence assertion for an asset, an audi tor
ordinarily works from the
a.
Financial statements to the potentially unrecorded
items.
b. Potentially unrecorded items to the fi nancial state
ments.
c.
Accounting records to the supporting evidence.
d. Supporting evidence to the accounting records.
C
A client uses a suspense account for unresolved ques tions
whose fi nal accounting has not been determined. If a balance
remains in the suspense account at year-end, the auditor would
be most concerned about
a.
Suspense debits that management believes will bene fi t
future operations.
b. Suspense debits that the auditor verifi es will have re
aliza ble value to the client.
c.
Suspense credits that management believes should be
classifi ed as “Current liability.”
d. Suspense credits that the auditor determines to be cus
tomer deposits.
A
Which of the following would not be considered an
analyti cal procedure?
a.
Estimating payroll expense by multiplying the num ber
of employees by the average hourly wage rate and the
total hours worked.
b. Projecting an error rate by comparing the results of a
sta tistical sample with the actual population char acter
istics.
c.
Computing accounts receivable turnover by divid ing
credit sales by the average net receivables.
d. Developing the expected current year sales based on
the sales trend of the prior fi ve years.
B
What type of analytical procedure would an auditor most
likely use in developing relationships among balance sheet ac
counts when reviewing the fi nancial statements of a nonpublic
entity?
a. Trend analysis.
b. Regression analysis.
c. Ratio analysis.
d. Risk analysis.
C
An auditor may achieve audit objectives related to partic
ular assertions by
a. Performing analytical procedures.
b. Adhering to a system of quality control.
c. Preparing auditor working papers.
d. Increasing the level of detection risk
A
An entity’s income statements were misstated due to the
recording of journal entries that involved debits and credits
to an unusual combination of expense and revenue accounts.
The auditor most likely could have detected this fraudulent
financial reporting by
a. Tracing a sample of journal entries to the general
ledger.
b. Evaluating the effectiveness of internal control.
c. Investigating the reconciliations between controlling accounts and subsidiary records.
d. Performing analytical procedures designed to dis close
differences from expectations.
D
Auditors try to identify predictable relationships when
using analytical procedures. Relationships involving trans
actions from which of the following accounts most likely
would yield the high est level of evidence?
a.
Accounts receivable.
b. Interest expense.
c.
Accounts payable.
d. Travel and entertainment expense.
B
Analytical procedures used in the overall review stage of
an audit generally include
a.
Gathering evidence concerning account balances that
have not changed from the prior year.
b. Retesting control procedures that appeared to be in
effec tive during the assessment of control risk.
c.
Considering unusual or unexpected account bal ances
that were not previously identifi ed.
d. Performing tests of transactions to corroborate man
age ment’s financial statement assertions.
C
Which of the following tends to be most predictable for
purposes of analytical procedures applied as substantive proce
dures?
a.
Relationships involving balance sheet accounts.
b. Transactions subject to management discretion.
c.
Relationships involving income statement ac counts.
d. Data subject to audit testing in the prior year.
C
A basic premise underlying the application of analyti cal
procedures is that
a.
The study of fi nancial ratios is an acceptable al terna
tive to the investigation of unusual fl uctua tions.
b. Statistical tests of fi nancial information may lead
to the discovery of material misstatements in the
f
i nancial statements.
c. Plausible relationships among data may reason ably
be expected to exist and continue in the ab sence of
known conditions to the contrary.
d.
These procedures cannot replace tests of balances and
transactions.
C
For all audits of fi nancial statements made in accor
dance with generally accepted auditing standards, the use of
analytical procedures is required to some extent
In the risk assessment stage/As a
substantive procedure/Near-audit
completion
a. Yes No Yes
b. No Yes No
c. No Yes Yes
d. Yes No No
A
An auditor’s analytical proceduresmost likely would be
facilitated if the entity
a. Segregates obsolete inventory before the physical
in ven tory count.
b. Uses a standard cost system that produces vari ance
re ports.
c. Corrects material weaknesses in internal control be
fore the beginning of the audit.
d. Develops its data from sources solely within the
entity.
B
Analytical procedures performed near the end of an
audit suggest that several accounts have unex pected rela
tionships. The results of these proceduresmost likely would
indicate that
a. Irregularities exist among the relevant account bal
ances.
b. Internal control activities arenot operating
effec tively.
c. Additional tests of details are required.
d. The communication with the audit committee should
be revised.
C
Which of the following comparisons would an auditor
most likely make in evaluating an entity’s costs and ex
penses?
a. The current year’s accounts receivable with the prior
year’s accounts receivable.
b. The current year’s payroll expense with the prior
year’s payroll expense.
c. The budgeted current year’s sales with the prior year’s
sales.
d. The budgeted current year’s warranty expense with
the current year’s contingent liabilities.
B
To be effective, analytical procedures performed near the
end of an audit engagement should be performed by
a. The staff accountant who performed the substan tive
au diting procedures.
b. The managing partner who has responsibility for all
au dit engagements at that practice offi ce.
c. A manager or partner who has a comprehensive
knowledge of the client’s business and industry.
d. The CPA fi rm’s quality control manager or partner
who has responsibility for the fi rm’s peer review
pro gram.
C
Which of the following is thebest example of a sub
stantive procedure?
a. Examining a sample of cash disbursements to test
whether expenses have been properly approved.
b. Confi rmation of balances of accounts receivable.
c. Comparison of signatures on checks to a list of autho
rized signers.
d. Flowcharting of the client’s cash receipts system.
B
The objective of tests of details of transactions per formed
as substantive procedures is to
a. Comply with generally accepted auditing stan dards.
b. Attain assurance about the reliability of the ac count
ing system.
c. Detect material misstatements in the fi nancial state ments.
d. Evaluate whether management’s policies and pro ce
dures operated effectively
C
In the context of an audit of fi nancial statements, sub stan
tive procedures are audit procedures that
a. May be eliminated under certain conditions.
b. Are designed to discover signifi cant subsequent events.
c. May be either tests of transactions, direct tests of
fi nan cial balances, or analytical tests.
d. Will increase proportionately with the auditor’s reli
ance on internal control.
C
The auditor willmost likely perform extensive tests for
possi ble understatement of
a. Revenues.
b. Assets.
c. Liabilities.
d. Capital.
C
In determining whether transactions have been re corded,
the direction of the audit testing should be from the
a. General ledger balances.
b. Adjusted trial balance.
c. Original source documents.
d. General journal entries.
C
Which statement is correct concerning the deletion of
audit documentation?
a. Superseded audit documentation should always be de
leted from the audit fi le.
b. After the audit fi le has been completed, the auditor
should not delete or discard audit documentation.
c. Auditors should use professional skepticism in de ter
mining which audit documentation should be deleted.
d. Audit documentation should never be deleted from the
audit fi le.
B
Ignoring any particular legal or regulatory requirement,
audit documentation should be retained
a. A minimum of fi ve years.
b. As long as lead schedules have relevance to forth com
ing audits.
c. Until three years after the client selects another audi tor.
d. Working papers must be maintained indefi nitely.
A
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
A
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.
A
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.
C
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.
C
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.
D
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.
B
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.
A
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.
D
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.
C
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.
B
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.
B
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.
C
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.
B
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.
D
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.
B
(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.
B
(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.
B
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.
C
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.
D
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
B
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.
C
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.
B
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
C
(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.
B
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
A
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.
A
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.
C
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.
B
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.
C
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.
A
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.
D
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.
D
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.
A
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
C
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.
D
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.
A
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.
D
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.”
C
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.
A
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.
A
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.
D
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.
C
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.
B
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
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.
B
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.
A
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.
B
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.
D
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.
A
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.
C
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.
C
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.
C
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.
C
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.
A
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.
D
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.
B
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.
A
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.
D
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.
C
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.
A
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
B
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.
A
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
C
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.
C
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.
A
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.
D
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.
C
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.
C
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.
B
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.
A
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.
C
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.
D
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.
A
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.
D
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.
D
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.
B
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.
C
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.
A
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.
C
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.
B
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.
D
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.
A
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.
D
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.
C
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.
D
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.
C
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.
A
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.
C
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.
B
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
D
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.
A
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
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
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.
D
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
C
“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
C
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
D
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.
B
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.
C
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.
B
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.
B
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
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
A
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.”
B
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
A
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.
B
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.
C
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.
C
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.
D
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.
D
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.
C
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.
D
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.
C
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
D
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.
D
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.
C
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.
D
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.
A
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.
B
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.
C
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.
B
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.
C
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.
C
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.
C
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.
C
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
B
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.
D
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
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.
D
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.
A
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.
B
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.
A
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.
C
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.
C
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.
B
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
D
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
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.
A
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.
C
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
C
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.
A
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.”
B
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
A
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.
B
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.
C
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.
B
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.
D
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.
A
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
B
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.
A
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
D
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.
C
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.
C
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
D
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.
B
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.
A
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.
B
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.
B
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.
D
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
C
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.
D
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.
A
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.
C
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.
D
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
D
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.
B
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.
B
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.
B
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.
C
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.
C
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
D
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.
B
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.
B
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.
B
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.
A
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.
D
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.
A
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
B
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
C
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.
C
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
D
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.
C
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.
D
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
C
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
B
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.
D
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.
A
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.
D
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.
D
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
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
B
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.
C
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.
A
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.
D
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.
D
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.
A
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.
D
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.
D
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.
C
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.
D
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.
C
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.
D
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.
D
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.
C
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.
D
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.
A
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
D
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.
B
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.
D
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.
D
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.
C
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.
B
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.
A
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.
B
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
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
A
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.
D
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.
B
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.
A
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
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.
D
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.
B
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.
C
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
C
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
C
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
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
A
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.
B
Comfort letters ordinarily are signed by the client’s
a. Independent auditor.
b. Underwriter of securities.
c. Audit committee.
d. Senior management.
A
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.
D
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.
A
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.
D
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.
D
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
A
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.
B
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.
A
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.
A
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.
B
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.
C
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.
C
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
A
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
B
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.
A
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
A
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.
C
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.
A
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.
C
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.
A
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.
A
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.
C
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.
C
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
C
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.
A
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.
D
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.
D
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.
D
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.
D
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.
B
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.
D
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.
B
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.
C
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.
B
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.
B
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.
D
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.
B
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.
B
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.
B
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.
A
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.
A
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
A
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.
A
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.
D
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.
D
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.
C
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.
A
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.
B
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.
A
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.
A
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.
C
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.
C
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.
D
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.
A
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.
D
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.
D
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.
D
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.
A
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.
D
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
D
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.
D
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.
B
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.
C
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
A
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?
A
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
A
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.
C
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.
A
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.
A
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.
B
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.
C
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.
A
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
B
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
B
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.
C
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.
C
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.
C
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.
A
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.
D
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.
D
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.
B
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.
B
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.
C
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.
B
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.
A
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.
C
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.
B
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.
C
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
B
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.
B
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.
B
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.
A
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.
A
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
D
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.
A
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.
B
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.
C
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.
B
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.
A
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.
B
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.
B
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.
B
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.
C
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.
C
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.
D
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.
C
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.
C
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
D
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.
A
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.
C
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.
A
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
C
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
B
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
D
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
B
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.
C
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
B
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.
D
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.
D
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.
C
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.
B
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.
D
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.
D
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
B
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.
C
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
A
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.
A
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.
B
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.
B
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.
A
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.
A
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.
D
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.
A
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.
C
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
B
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.
B
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
D
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
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.
D
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
B
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.
B
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.
C
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.
B
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.
A
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.
B
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
D
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.
B
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.
B
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.
B
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.
B
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.
A
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.
A
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.
C
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.
C
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
D
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.
D
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.
C
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
C
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.
C
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.
B
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.
B
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.
C
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.
A
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.
D
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.
C
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.
A
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
D
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.
A
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.
A
(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.
D
(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.
B
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.
C
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.
A
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.
D
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.
C
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.
D
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
C
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.
C
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.
B
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.
B
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.
D
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.
C
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.
D
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
A
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.
D
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.
A
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
C
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.
B
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.
C
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.
A
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.
D
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.
B
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.
A
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.
A
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
C
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.
B
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.
D
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%)
A
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%.
The allowance for sampling risk was
a. 5 1/2%
b. 4 1/2%
c. 3 1/2%
d. 1%
B
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
A
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.
D
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
C
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.
B
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
B
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.
C
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.
D
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.
C
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.
A
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.
C
(refer to illustration on page 157)
What sample size should Hill use?
a. 120
b. 108
c. 60
d. 30
D
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
B
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
A
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.
B
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.
A
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.
A
(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
B
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.
B
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
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.
D
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.
A
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
C
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.
B
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.
B
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
B
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
C
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.
C
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.
B
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.
B
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.
A
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.
C
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.
A
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.
C
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.
C
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.
D
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.
D
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.
A
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.
A
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.
B
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.
D
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.
C
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.
C
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
B
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.
A
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.
A
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.
A
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.
C
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.
D
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.
C
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.
A
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.
C
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.
B
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.
C
(refer to table on page 168)
Which of the following numbers represents the record
count?
a. 1
b. 4
c. 810
d. 900
B
