Testlet 3 (30 items) Flashcards
The risk that an auditor’s procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement does exist is referred to as
a. Audit risk.
b. Inherent risk.
c. Control risk.
d. Detection risk.
D
Which of the following is an audit least likely to detect?
a. Theft of cash received from collection of accounts receivable.
b. Intentional omission of transactions relating to equipment purchases.
c. Intentional violations of occupational safety and health laws.
d. Misapplication of accounting principles relating to in- ventory.
C
Prior to beginning fieldwork on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should
a. Reduce audit risk by lowering the preliminary levels of materiality.
b. Design special substantive tests to compensate for the lack of industry expertise.
c. Engage financial experts familiar with the nature of the industry.
d. Obtain a knowledge of matters that relate to the nature of the entity’s business.
D
For purposes of an audit of internal control performed un- der Public Company Accounting Oversight Board standards, a significant deficiency is a control deficiency that
a. Is at least as severe as a material weakness.
b. Is probable of occurring in an amount that is material.
c. Must be communicated to those responsible for over-
sight of the company’s financial reporting.
d. Remains unresolved at the date of completion of final
internal control analysis procedures.
C
A significant deficiency is a matter that must be com- municated to those responsible for oversight of the company’s financial reporting process because it should be of interest to those individuals.
Under the ethical standards of the profession, the following investments in a client is not considered to be a direct financial interest?
a. An investment held through a nonclient regulated mutual fund.
b. An investment held through a nonclient investment club.
c. An investment held in a blind trust.
d. An investment held by the trustee of a trust.
A
Audit evidence on the proper segregation of duties is ordinarily is best obtained by
a. Preparation of a flowchart of duties performed by available personnel
b. Inquiring whether control activities operated consistently throughout the period.
c. Reviewing job descriptions prepared by the personnel department.
d. Direct personal observation of the employees who apply control activities.
D
In considering internal control, the auditor is basically concerned that it provides reasonable assurance that
a. Operational efficiency has been achieved in accordance with management plans.
b. Material misstatements due to errors and fraud have been prevented or detected.
c. Controls have not been circumvented by collusion.
d. Management cannot override the system.
B
In properly designed internal control, the same employee should not be permitted to
a. Sign checks and cancel supporting documents.
b. Receive merchandise and prepare a receiving report.
c. Prepare disbursement vouchers and sign checks.
d. Initiate a request to order merchandise and approve
merchandise received.
C
Which of the following is an effective control over cash payments?
a. Signed checks should be mailed under the supervision of the check signer.
b. Spoiled checks that have been voided should be disposed of immediately.
c. Checks should be prepared only by persons responsible for cash receipts and cash disbursements.
d. A check-signing machine with two signatures should be utilized.
A
Inquiries of warehouse personnel concerning possible obsolete or slow-moving inventory items provide assurance about management’s assertion of
a. Completeness.
b. Existence.
c. Presentation.
d. Valuation.
D
The primary reason an auditor requests letters of inquiry be sent to a client’s attorneys is to provide the auditor with
a. A description and evaluation of litigation, claims,
and assessments that existed at the date of the balance sheet.
b. An expert opinion as to whether a loss is possible, probable, or remote.
c. The opportunity to examine the documentation concerning litigation, claims, and assessments.
d. Corroboration of the information furnished by management concerning litigation, claims, and assessments.
D
Lott and Lott, CPAs, recently acquired a public company as an audit client. With respect to this client, the Sarbanes- Oxley Act of 2002 requires
a. Rotation of accounting firms every five years.
b. Joint audits by two auditing firms.
c. Rotation of the partner in charge of the audit every five
years.
d. Joint management of the audit by two or more
partners.
C
When providing limited assurance that the financial statements of a nonissuer (nonpublic) entity require no material modifications to be in accordance with generally accepted ac- counting principles, the accountant should
a. Understandinternalcontrol.
b. Test the accounting records that identify inconsistencies
with the prior year’s financial statements.
c. Understand the accounting principles of the industry in
which the entity operates.
d. Develop audit programs to determine whether the en-
tity’s financial statements are fairly presented.
C
According to the ethical standards for the profession, which of the following fee arrangements is prohibited?
a. A fee for a review of financial statements that is based on time spent on the engagement.
b. A fee for a review of financial statements that is based on time spent and a premium for the risk involved.
c. A fee for a review engagement that is based on a fixed
fee of $5,000.
d. A fee for a review engagement that varies depending on
the amount of financing that the company may obtain.
D
Which of the following procedures is not included in a re- view engagement of a nonissuer (nonpublic) entity?
a. Inquiries of management.
b. Inquiries regarding events subsequent to the balance
sheet date.
c. Any procedures designed to identify relationships
among data that appear to be unusual.
d. Tests of internal control.
D
