Auditing And Assurance Services 14th Edition

1) Because of the cycle's pervasive nature, audit tests of the payroll cycle are usually extensive. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Auditors should obtain copies of the client's code of ethics and minutes of the meetings of the board of directors to aid in their understanding of the company's management and governance structure. A) True B) False Answer:[cpmembership

1) In a leading securities law and CPA liabilities case, the U.S. Supreme Court ruled in 1976 in Hochfelder v. Ernst & Ernst that before CPAs could be held liable for Rule 10b-5 of the Securities Exchange Act of 1934, what would be required to be shown to the court was the auditor's: A)

1) A company's internal control procedures over the acquisition cycle should prevent the preparation of a voucher for goods that have not yet been received. Which of the following is the best procedure to assure vouchers are not prepared for goods not received? A) purchase order and vendor invoice are matched to the receiving

1) Inquiries of clients and reperformance normally have a low cost associated with them. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The primary purpose of a surprise payroll payoff is to detect employees who have reported more time than was actually worked (fraudulent hours). A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 3) The introductory paragraph of the standard audit report states

1) The accountant's report on the examination of prospective financial statements should include a caveat that the prospective results may not be achieved. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) An auditor using nonstatistical sampling cannot: A) B) C) D) Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 3) Changes in reporting entities, such as the inclusion of an additional company in combined financial statements, affect comparability but

1) The preliminary judgment about materiality and the amount of audit evidence accumulated are ________ related. A) directly B) indirectly C) not D) inversely Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) The most common case in which conditions beyond the client's and auditor's control cause a scope restriction is an engagement: A) agreed upon after the client's balance sheet date B) where the client

1) The auditor must gather sufficient and appropriate evidence during the course of the audit. Sufficient evidence must: A) be well documented and cross-referenced in the audit documents B) be based on sources that are external to company C) provide evidence that prove or disprove an audit objective/assertion D) be persuasive enough to enable the

1) A company issued long-term notes payable for cash during the year under audit. To ascertain that this transaction was properly recorded, the auditor's best course of action is to: A) trace the cash received from the issuance to the accounting records B) confirm the results of the issuance with the underwriter or investment

1) What client information is needed by auditors in creating lead schedules? A) Interim statements prepared by the client for the company's 3rd quarter financial results B) General ledger information, including unadjusted ending balances and beginning balances for accounts C) A schedule of adjusting entries made by the client for all balance sheet accounts D) Detailed

1) Which of the following audit risk components may be assessesed in non-quantitative terms? A) B) C) D) Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) A major consideration in assigning staff to an audit engagement is the experience levels required for the work, while a less important consideration is maintaining staff continuity on the engagement. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 3) An auditor has been assigned

1) Which of the following statements about the audit of fixed assets is the least correct? A) The primary accounting record for manufacturing equipment and other property, plant and equipment is generally a fixed asset master file B) Manufacturing equipment and current assets are normally audited in the same fashion regardless of the activity

1) If a potential loss on a contingent liability is remote, the liability usually is: A) disclosed in footnotes, but not accrued B) neither accrued nor disclosed in footnotes C) accrued and indicated in the body of the financial statements D) disclosed in the auditor's report but not disclosed on the financial statements Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2)

1) Information and idea exchange sessions by the audit team are required by SAS No. 99. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) To test for proper sales cutoff, an auditor would obtain the number of the last bill of lading issued during the period under audit and verify that the item shipped had been excluded from

1) When a pervasive scope limitation exists which paragraphs will be included in the independent auditors report? A) B) C) D) Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Which of the following is not defined as an act discreditable in either the Rules or the Interpretations of the A) The CPA firm's partner in charge failed to file his tax return for the

1) Directed sample selection, block sample selection, and haphazard sample selection are three types of probabilistic sample selection methods. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) A high detection risk equates to a low amount of audit evidence needed. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 3) Auditor's need to exhibit professional skepticism when auditing a client. This auditing standard is

1) As a consequence of his failure to adhere to generally accepted auditing standards in the course of his examination of the Lamp Corp., Harrison, CPA, did not detect the embezzlement of a material amount of funds by the company's controller. As a matter of common law, to what extent would Harrison be

1) The method used to measure the estimated total error amount in a population when there is both a recorded value and an audited value for each item in the sample is: A) difference estimation B) mean-per-unit estimation C) ratio estimation D) monetary-unit sampling Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) Whenever the client imposes restrictions on the scope of the

1) An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the: A) sales register to the accounts receivable ledger B) sales register to the meter department records C) accounts receivable ledger to the sales register D) meter department records to the sales register Answer:[cpmembership

1) Presentation and disclosure related audit objectives would be performed in which phase of the audit process? A) plan and design audit approach B) perform audit tests for controls and transactions C) perform analytical procedures and tests of balances D) complete the audit and issue the audit report Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) One key internal control to prevent

1) Compilation reports may be of all but which of the following types? A) compilation with limited independence B) compilation with full disclosure C) compilation without independence D) compilation that omits substantially all disclosures Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) Limited liability companies are structured and taxed like a general partnership, but their owners have limited personal liability similar to

1) Governmental Auditing Standards recognize that because of public accountability over governmental activities the acceptable tolerable misstatement as compared to commercial businesses may be: A) equal B) lower C) higher D) indeterminable Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) The audit procedure "Test clerical accuracy by footing the journals and tracing postings to general ledger and to accounts payable and inventory master files"

1) What event initiates a transaction in the sales and collection cycle? A) receipt of cash B) delivery of product to a customer C) identification of a new customer D) customer request for goods Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) Because of the importance of tests of controls and substantive tests of transactions for acquisitions and cash disbursements, attributes sampling

1) If, when obtaining an understanding of control activities of a relatively small client, the auditor identified no control activities, the auditor would probably set a high assessment of control risk. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The primary accounting record for manufacturing equipment and other fixed assets is the: A) depreciation ledger B) fixed asset master file C)

1) Which of the following groups establishes and maintains the company's internal controls? A) Internal auditors B) Board of Directors C) Management D) Audit committee Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) Completeness and existence are the auditor's primary objectives in auditing manufacturing equipment. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 3) The appropriate assumption to make regarding the overall percent of error in those population items containing

1) The least helpful common audit test to verify current period acquisitions of property, plant, and equipment is examining vendors' invoices and receiving reports. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Which of the following statements regarding the letter of representation is not correct? A) It is prepared on the client's letterhead B) It is addressed to the

1) In order to promote audit efficiency the auditor considers cost in selecting audit tests to perform. Which of the following audit tests would be the most costly? A) Analytical Procedures B) Risk Assessment Procedures C) Tests of Controls D) Tests of Details of Balances Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) Statements on Standards for Accounting and Review Services (SSARS)

1) A system walkthrough is primarily used to: A) test balances B) test details of transactions C) gain an understanding of internal controls D) determine acceptance of the client Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) Which of the following is not a general control? A) sSeparation of IT duties B) systems development C) processing controls D) hardware controls Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 3) When controls are deemed

1) In the context of financial statement auditing, fraud is defined as an intentional misstatement of a material fact regarding balances, transactions or presentation of the financial statements. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) Which of the following is most correct when using audit sampling for exception rates? A) auditor is concerned with the lowest rate B) auditor

1) Which of the following is considered audit evidence? A) B) C) D) Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales? A) Compare shipping documents with sales records B) Apply gross profit rates to inventory disposed of during the period C) Trace payments received subsequent to

1) The purpose of phase 3 in the "process for understanding internal control and assessing control risk" is to: A) design, perform and evaluate tests of controls B) obtain and document an understanding of internal control design an operation C) assess control risk D) decide planned detection risk and substantive tests Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) After a purchase

1) Which of the following is an advantage of systematic sample selection over random number sampling? A) It provides a stronger basis for statistical conclusions B) It enables the auditor to use the more efficient 'sampling with replacement" tables C) There may be correlation between the location of items in the population, the feature of

1) In third-party suits, which of the auditor's defenses contends lack of privity of contract? A) Lack of duty B) Non-negligent performance C) Contributory negligence D) Absence of causal connections Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) If an auditor "proves" the bank statement in the month subsequent to the balance sheet date, it is primarily a test for: A) errors B) omissions C) kiting D)

1) When auditing insurance expense, auditors normally rely on analytical procedures and limited testing of the debits to ensure that they arose from credits to prepaid insurance. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The four categories for describing the size of audit firms include: the Big Four international firms; national firms; regional and local firms; and

1) Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) The criterion that is most likely to be used as a framework in evaluating a company's internal control over financial reporting under Section 404 of the Sarbanes-Oxley

1) Transactions with related parties must be disclosed in the financial statements if they are deemed to be material. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The international standards for the professional practice of internal auditing include which two categories of standards? A) attribute and performance B) competency and professional skepticism C) performance and integrity D) ethics and rules of

1) To succeed in an action against the auditor, the client must be able to show that: A) the auditor was fraudulent B) the auditor was grossly negligent C) there was a written contract D) there is a close causal connection between the auditor's behavior and the damages suffered by the client Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) Examining the

1) Which of the following is the primary basis used to decide materiality for a for-profit entity? A) net sales B) net assets C) net income before tax D) all of the above Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) During the course of an audit, a CPA observes that the recorded interest expense seems to be excessive in relation to the

1) Many small/local accounting firms do not perform audits as their primary services to their clients include accounting and tax. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) Sarbanes-Oxley requires management to issue an internal control report that includes two specific items. Which of the following is one of these two requirements? A) A statement that management is

1) When internal controls over a given financial statement account are assessed as highly effective, the auditor need not obtain audit evidence for that account beyond testing the controls. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Given the audit procedures below, which one provides the most reliable evidence? A) Confirmations B) Recalculation C) Reperformance D) Observations Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 3) You are a

1) Which balance-related audit objective cannot be assessed using monetary unit sampling? A) Accuracy B) Completeness C) Existence D) All of the above can be assessed using monetary unit sampling. Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) The acquisition and payment cycle is highly controlled and not well-structured in most companies. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 3) The principal issue to be resolved in cases

1) After the auditor has completed all audit procedures, it is necessary to combine the information obtained to reach an overall conclusion as to whether the financial statements are fairly presented. This is a highly subjective process that relies heavily on: A) generally accepted auditing standards B) the C) generally accepted accounting principles D) the auditor's

1) A bill of lading is a special type of sales invoice used when goods are shipped interstate. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) An audit report prepared by Garrett and Brown, CPAs, is provided below. The audit for the year ended December 31, 2012 was completed on March 1, 2013, and the report was issued

1) The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods. A) bill of lading B) sales invoice C) picking ticket D) remittance advice Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The auditor's objectives for the sales and cash collections activities when the client is primarily

1) As the acceptable level of detection risk increases, an auditor may change the: A) timing of substantive tests by performing them at an interim date rather than year end B) timing of the tests on controls by performing them throughout the year rather than at one time C) assess the level of inherent risk

1) When the amount in the petty cash account is immaterial, most auditors would choose to test the account for reasons of client expectations. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) When preparing a standard inquiry of client's attorney letter, the client's letterhead should be used, and the letter should be signed by the client company's

1) Section 10 and Rule 10b-5 of the Securities Exchange Act of 1934 are often referred to as: A) the antifraud provisions B) the new issues provisions C) the full-employment act for accountants D) the RICO provisions Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) A positive confirmation is more reliable evidence than a negative confirmation because: A) fewer confirmations can be sent out B)

1) When do most companies record sales returns and allowances? A) During the month in which the sale occurs B) During the accounting period in which the return occurs C) Whenever the customer contacts the company regarding the credit D) During the month after the sale occurs Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) The auditor's best defense when existing

1) The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the: A) existence objective B) completeness objective C) ownership objective D) valuation objective Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Which one of the following is not an inherent risk factor in the financial statements? A) The company made 3 acquistions

1) Which of the following accounts is not included in the acquisitions class of transactions? A) Inventory B) Prepaid expenses C) Purchase discounts D) Accounts payable Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) The trait that distinguishes auditors from accountants is the: A) auditor's ability to interpret accounting principles generally accepted in the United States B) auditor's education beyond the Bachelor's degree C) auditor's ability

1) When the auditor suspects that fraud may be present, SAS No. 99 requires the auditor to: A) terminate the engagement with sufficient notice given to the client B) issue an adverse opinion or a disclaimer of opinion C) obtain additional evidence to determine whether material fraud has occurred D) re-issue the engagement letter Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2)

1) For privately held companies who of the following is responsible for establishing auditing standards? A) Securities and Exchange Commission B) Public Company Accounting Oversight Board C) Auditing Standards Board D) National Association of Accounting Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) A member in public practice shall neither receive from, nor pay to, a client a commission when the member or

1) One purpose of performing preliminary analytical procedures in the planning phase of an audit is to help the auditor make a preliminary assessment of control risk. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Service auditors do not issue which of the following types of reports? A) report on implemented controls B) report on controls that have

1) What are the two major balance-related audit objectives in testing payroll liabilities? A) Accuracy and detail tie-in B) Completeness and valuation C) Completeness and rights and obligations D) Accuracy and cutoff Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) There is very little opportunity for confirmation from third parties of balance sheet accounts related to the payroll and personnel cycle. A) True B)

1) When the auditor evaluates the effect of a change in accounting principle, the materiality of the change should be evaluated based on: A) the prior years presented B) the current year C) guidelines included in GAAS D) the effect on total assets Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Under the Securities Exchange Act of 1934, most of the litigation

1) What is the purpose of applying stratified sampling to a population? A) B) C) D) Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) Which of the following is a factor that relates to incentives to misappropriate assets? A) Significant accounting estimates involving subjective judgments B) Significant personal financial obligations C) Management's practice of making overly aggressive forecasts D) High turnover of accounting, internal audit

1) Which of the following would the auditor expect to find in the client's management representation letter? A) management's recommendations for internal control effectiveness improvements B) management's plans for improving product quality C) management's compliance with contractual arrangements that impact the financial statements D) management's goals for improving earnings per share Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) The inventory and warehousing

1) An auditor who was engaged to perform an examination of the financial statements of a nonpublic entity has been asked by the client to refrain from performing various audit procedures and change the nature of the engagement to a review of the financial statements in accordance with standards established by the A) qualify

1) A substantive test for accounts payable that would be used to provide evidence regarding the occurrence assertion would be to: A) agree a sample of vouchers to authorized purchase orders B) recalculate the accuracy of the vouchers and the authorized purchase orders C) trace vouchers to the client's purchases journal D) vouch a sample

1) Which of the following statements is most correct about an auditor's required communication with management and those charged with corporate governance? A) The auditor is required to inform those charged with governance about significant errors discovered and subsequently corrected by management B) Any significant matter reported to those charged with governance must also

1) Which is usually included in the engagement letter? A) B) C) D) Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Research indicates that the most effective way to prevent and deter fraud is to: A) implement programs and controls that are based on core values embraced by the company B) hire highly ethical employees C) communicate expectations to all employees on an annual basis D)

1) The extent of tests of details of balances cannot be reduced when transaction-related audit objectives have been satisfied by tests of controls or substantive tests of transactions. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be

1) Companies would normally recognize an account payable when the goods are received by the company. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The primary audit objectives to focus on when auditing debt are: A) accuracy and completeness B) accuracy and existence C) completeness and valuation D) accuracy and valuation Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 3) The chart of accounts is a control and

1) Auditors should evaluate which of the following before evaluating application controls because of the potential for pervasive effects. A) input controls B) control environment C) processing controls D) general controls Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 2) Whenever subsequent events are used to evaluate the amounts included in the statements, care must be taken to distinguish between conditions that existed at

1) Operational audits are often categorized as functional, organizational, or special assignments. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) Procedures to obtain an understanding of internal control may suffice for tests of controls when the auditor is assessing automated controls. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 3) For compilations, an accountant does which of the following? A) B) C) D) Answer:[cpmembership level="2,3,4,5"] D[/cpmembership] 4) The relationship of

1) Acceptable risk of assessing control risk too low (ARACR) and acceptable risk of incorrect acceptance (ARIA) are inversely related; that is, a decrease in ARACR is accompanied by an increase in ARIA. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The higher the assessed control risk, the lower will be the acceptable risk of assessing control risk

1) The auditor's primary concern about authorization centers on shipment of goods to customers. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Independent registrars commonly disburse cash dividends to shareholders. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 3) When labor is a material factor in inventory valuation, the auditor should place special emphasis on testing the internal controls concerning: A) fictitious employees B) authorization

1) In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern. A) accuracy B) existence C) completeness D) none of the above Answer:[cpmembership level="2,3,4,5"] C[/cpmembership] 2) For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper

1) The overall objective in the audit of the acquisition and payment cycle is: A) to ensure the reliability of the affected accounts B) to ensure the accuracy of the affected accounts C) to evaluate whether the affected accounts are fairly stated in accordance with accounting standards D) to evaluate whether fraudulent payments were made Answer:[cpmembership

1) Expulsion from the A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) Which of the following is the most effective control procedure to detect vouchers that were prepared for the payment of goods that were not received? A) Count goods upon receipt in storeroom B) Match purchase order, receiving report, and vendor's invoice for each voucher in accounts payable

1) With whom should the auditor communicate whenever he or she determines that senior management fraud may be present, even if the matter might be considered inconsequential? A) PCAOB B) audit committee C) an appropriate level of management that is at least one level above those involved D) the internal auditors Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) The Securities and Exchange

1) When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) The underlying reason for a code of professional conduct for any profession is: A) the need for public confidence in the quality of service of the profession B) that it provides a safeguard

1) Cost is never an adequate justification for omitting a necessary procedure or not gathering an adequate sample size. A) True B) False Answer:[cpmembership level="2,3,4,5"] A[/cpmembership] 2) Auditors follow a four step approach to reduce assessed control risk. Which of the following is not one of the four? A) Apply transaction related audit objectives to a class of

1) For proper internal control, there should be adequate separation of duties. However, the extent of separation of duties considered "adequate" does not depend on the size of the organization. A) True B) False Answer:[cpmembership level="2,3,4,5"] B[/cpmembership] 2) For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objective? A) Existence B) Completeness C) Rights D) Detail tie-in Answer:[cpmembership