Testlet 2 (30 items)

Question 1

Which of the following is least likely to be a test of a control?
a. Inquiries of appropriate personnel.
b. Inspection of management’s engagement letter.
c. Observation of the application of a policy.
d. Reperformance of the application of a policy.

Answer 1

B

Question 2

When one auditor succeeds another, the successor auditor should request the
a. Client to instruct its attorney to send a letter of audit inquiry concerning the status of the prior year’s litiga- tion, claims, and assessments.
b. Predecessor auditor to submit a list of internal control weaknesses that have not been corrected.
c. Client to authorize the predecessor auditor to respond to inquiries.
d. Predecessor auditor to update the prior year’s report to the date of the change of auditors.

Answer 2

C

Question 3

A difference of opinion concerning accounting and auditing matters relative to a particular phase of the audit arises between an assistant auditor and the auditor responsible for the engagement. After appropriate consultation, the assistant auditor asks to be disassociated from the resolution of the matter. The working papers would probably be
a. Silent on the matter since it is an internal matter of the auditing firm.
b. Expanded to note that the assistant auditor is com- pletely disassociated from responsibility for the auditor’s opinion.
c. Expanded to document the additional work required, since all disagreements of this type will require
ex panded sub stantive testing.
d. Expanded to document the assistant auditor’s position, and how the difference of opinion was resolved.

Answer 3

D

Question 4

On the audit of a nonissuer (nonpublic) company, the pur- pose of performing risk assessment procedures is to
a. Obtain an understanding of the entity and its environment.
b. Reduce detection risk.
c. Evaluate management ability.
d. Determine the operating effectiveness of controls.

Answer 4

A

Question 5

Under the ethical standards of the profession, which of the following situations involving independent members of an auditor’s family is most likely to impair the auditor’s independence?
a. A parent’s immaterial investment in a client.
b. A first cousin’s loan from a client.
c. A spouse’s employment as CEO of a client.
d. A sibling’s loan to a director of a client.

Answer 5

C

Question 6

Which of the following controls may prevent the failure to bill customers for some shipments?
a. Each shipment should be supported by a prenumbered sales invoice that is accounted for.
b. Each sales order should be approved by authorized personnel.
c. Sales journal entries should be reconciled to daily sales summaries.
d. Each sales invoice should be supported by a shipping document.

Answer 6

A

Question 7

Which of the following is a control weakness for a company whose inventory of supplies consists of a large number of individual items?
a. Supplies of relatively little value are expensed when purchased.
b. The cycle basis is used for physical counts.
c. The storekeeper is responsible for maintenance of per-
petual inventory records.
d. Perpetual inventory records are maintained only for
items of significant value.

Answer 7

C

Question 8

The accounts payable department receives the purchase order form to accomplish all of the following except:
a. Compare invoice price to purchase order price.
b. Ensure the purchase had been properly authorized.
c. Ensure the goods had been received by the party
requesting the goods.
d. Compare quantity ordered to quantity purchased.

Answer 8

C

Question 9

Before applying substantive tests to the details of asset and liability accounts at an interim date, the auditor should
a. Assess the difficulty in controlling incremental audit risk.
b. Investigate significant fluctuations that have occurred
in the asset and liability accounts since the previous
balance sheet date.
c. Select only those accounts that can effectively be
sampled during year-end audit work.
d. Consider the tests of controls that must be applied at
the balance-sheet date to extend the audit conclusions reached at the interim date.

Answer 9

A

Question 10

Which of the following situations would most likely require special audit planning by the auditor?
a. Some items of factory and office equipment do not bear identification numbers.
b. Depreciation methods used on the client’s tax return differ from those used on the books.
c. Assets costing less than $500 are expensed even though the expected life exceeds one year.
d. Inventory is comprised of precious stones.

Answer 10

D

Question 11

What body has the responsibility for issuing auditing standards for auditors of issuer (public) companies?
a. The AICPA’s Auditing Standards Board.
b. The Chief Accountant of the Securities and Exchange
Commission.
c. The Public Company Accounting Oversight Board. d. The Financial Accounting Standards Board.

Answer 11

C

Question 12

Morgan, CPA, is the group engagement partner (principal auditor) for the audit of a nonpublic corporation. Jones, CPA, has audited and reported on the financial statements of a significant subsidiary of the corporation. Morgan is satisfied with the independence and professional reputation of Jones, as well as the quality of Jones’ audit. With respect to Morgan’s report on the consolidated financial statements, taken as a whole, Morgan
a. Must not refer to the audit of Jones.
b. Must refer to the audit of Jones.
c. May refer to the audit of Jones.
d. May refer to the audit of Jones, in which case Morgan
must include in the auditor’s report on the consolidated financial statements a qualified opinion with respect to the examination of Jones.

Answer 12

C

Question 13

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the
a. Cash receipts journal to the sales journal.
b. Sales journal to the cash receipts journal.
c. Source documents to the accounting records.
d. Accounting records to the source documents.

Answer 13

D

Question 14

The auditor’s audit plan for the examination of long-term debt should include steps that require the
a. Verification of the existence of the bondholders.
b. Examination of any bond trust indenture.
c. Inspection of the accounts payable subsidiary ledger.
d. Investigation of credits to the bond interest income
account.

Answer 14

B

Question 15

All corporate capital stock transactions should ultimately be traced to the
a. Minutes of the Board of Directors.
b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates.

Answer 15

A

Question 16

According to the ethical standards for the profession, which of the following would impair the independence of an auditor in providing an audit for First State Bank, a nonpublic financial institution?
a. The accountant has an automobile loan with the bank collateralized by the automobile.
b. The accountant has a credit card with the bank with an outstanding balance of $12,000.
c. The accountant has a $20,000 loan at the bank collat- eralized by a certificate of deposit.
d. The accountant has a demand deposit account of $25,000 with the bank.

Answer 16

B

Question 17

When the audited financial statements of the prior year are presented together with those of the current year, the continuing auditor’s report should cover
a. Both years.
b. Only the current year.
c. Only the current year, but the prior year’s report should
be presented.
d. Only the current year, but the prior year’s report should be referred to

Answer 17

A

Question 18

Information accompanying the basic financial statements should not include
a. An analysis of inventory by location.
b. A statement that the allowance for doubtful accounts is
adequate.
c. A statement that the depreciable life of a new asset is
twenty years.
d. An analysis of revenue by product line.

Answer 18

B

Question 19

The objective of auditing procedures applied to segment information is to provide the auditor with a reasonable basis for concluding whether
a. The information is useful for comparing a segment of one enterprise with a similar segment of another enterprise.
b. Sufficient evidential matter has been obtained to allow the auditor to be associated with the segment information.
c. A separate opinion on the segment information is necessary due to inconsistent application of accounting principles.
d. The information is presented in conformity with the FASB guidance on segment information in relation to the financial statements taken as a whole.

Answer 19

D

Question 20

An accountant has been asked to issue a review report on the balance sheet of a nonissuer (nonpublic) company but not to report on the other basic financial statements. The accountant may not do so.
a. Because compliance with this request would result in an incomplete review.
b. Because compliance with this request would result in a violation of the ethical standards of the profession.
c. If the scope of the inquiry and analytical procedures has been restricted.
d. If the review of the balance sheet discloses material de- partures from generally accepted accounting principles.

Answer 20

C

Question 21

An auditor was unable to obtain audited financial state- ments or other evidence supporting an entity’s investment in a foreign subsidiary. Between which of the following opinions should the entity’s auditor choose?
a. Adverse and unmodified (unqualified) with an emphasis-of-matter paragraph added.
b. Disclaimer and unmodified (unqualified) with an em- phasis-of-matter paragraph added.
c. Qualified and adverse.
d. Qualified and disclaimer.

Answer 21

D

Question 22

In which of the following cases would the auditor be most likely to conclude that all of the items in an account under con- sideration should be examined rather than tested on a sample basis?
a. The measure of tolerable misstatement is: Large
Misstatement frequency is expected to be: Low
b. The measure of tolerable misstatement is: Small
Misstatement frequency is expected to be: High
c. The measure of tolerable misstatement is: Large
Misstatement frequency is expected to be: Low
d. The measure of tolerable misstatement is: Small
Misstatement frequency is expected to be: Low

Answer 22

B

Question 23

Which of the following factors is generally not considered in determining the sample size for a test of controls?
a. Risk of incorrect acceptance.
b. Tolerable rate.
c. Risk of assessing control risk too low.
d. Expected population deviation rate.

Answer 23

A

Question 24

Hart, CPA, is concerned about the type of fee arrangements that are permissible under the profession’s ethical standards. Which of the following professional services may be performed for a contingent fee?
a. A review of financial statements.
b. An examination of prospective financial statements.
c. Preparation of a tax return.
d. Information technology consulting.

Answer 24

D

Question 25

A limitation on the scope of an auditor’s procedures is likely to result in a report with a(n)
a. Qualified opinion: Yes
Adverse opinion: Yes
b. Qualified opinion: Yes
Adverse opinion: No
c. Qualified opinion: No
Adverse opinion: Yes
d. Qualified opinion: No
Adverse opinion: No

Answer 25

B

Question 26

Which of the following is least likely to be considered when assessing inherent risk?
a. Nonroutine transactions.
b. Estimation transactions.
c. Susceptibility to theft.
d. Expected effectiveness of controls.

Answer 26

D

Question 27

A proper report on the compilation of the financial state- ments that omit notes disclosure
a. Includes an adverse opinion.
b. Indicates that management has omitted such note dis-
closures.
c. Includes a qualification or disclaimer of opinion on the accuracy of such note disclosures.
d. Indicates that note disclosures are not necessary for those not informed about such matters.

Answer 27

B

Question 28

Which of the following is most likely to result in modification of a compilation report?
a. A departure from generally accepted accounting princi- ples.
b. A lack of consistency in application of generally ac- cepted accounting principles.
c. A question concerning an entity’s ability to continue as a going concern.
d. A major uncertainty facing the financial statements.

Answer 28

A

Question 29

Which of the following is an accurate statement of the na- ture of the modification of report on a compilation of financial statements of nonissuer company when the accountant is not independent?
a. The report need not be modified.
b. The report must include a statement that the accountant
is not independent but cannot indicate the reason for the
lack of independence.
c. The report must include a statement that the accountant
is not independent and may indicate the reason for the
lack of independence.
d. A report may not be issued when the accountant is not independent

Answer 29

C

Question 30

Which of the following is used to obtain evidence that the client’s equipment accounts are not understated?
a. Analyzing repairs and maintenance expense accounts.
b. Vouching purchases of plant and equipment.
c. Recomputing depreciation expense.
d. Analyzing the miscellaneous revenue account.

Answer 30

A