The greatest risk of recording transactions in the incorrect period occurs during the
roll-forward period.
A special purpose framework can use a cash basis financial reporting framework.
The PCAOB does not currently have a mandate for convergence with other auditing
standards.
If management or those charged with governance do not demonstrate a commitment to
internal control over noncompliance with laws and regulations, then the auditor should
withdraw from the engagement.
Two paragraphs should be added to the auditor’s report when the auditor concludes that
substantial doubt remains about the client’s ability to continue as a going concern for a
reasonable period of time.
Many corporate websites now include sustainability reports, and the placement on those
websites is usually quite prominent.
The auditor is obligated to report significant deficiencies in the control structure
discovered during an audit to the audit committee or its equivalent.
Walkthroughs and inquiries are often used to obtain an understanding of internal
controls.
Auditors are responsible for having the appropriate competence and capabilities to
perform the audit, should comply with ethical requirements, and maintain professional
skepticism throughout the audit.
The valuation assertion is most relevant to the audit of marketable securities.
Some companies choose to provide no objective assurance regarding their sustainability
reports.
In computerized purchase operations the computer matches three documents, the
purchase order, the receiving report, and the monthly statement, and if the three match
within a prespecified tolerable limit, the invoice is approved for payment.
When circumstances preclude an auditor from performing certain procedures and the
auditor can be satisfied using other alternative procedures, a disclaimer of opinion will
be rendered.
Individuals receiving confirmations from the auditor are asked to respond directly to the
client being audited as to whether they agree or disagree with the information.
The auditor’s primary concern with accounts payable is that of existence.
During the time period of 1998 to 2007, the median size of public company perpetrating
fraud rose tenfold to $100 million (as compared to the previous ten years).
A review of the terms of client debt agreements assists the audit of the presentation and
disclosure assertion for accounts receivable.
Insistence from the CEO that she must be present at all meetings between the audit
committee and internal/external auditors would cause auditors to assess inherent risk at
a higher level.
If preliminary analytical procedures identify some unexpected relationships, the auditor
would conclude that there is not a heightened risk of material misstatements.
When auditing only a single financial statement or a specific element, account, or item
of a financial statement, the auditor will have a better understanding of the entity than if
the auditor audited the entity’s complete set of financial statements.
The auditor of James Corporation should be alert to the risk of material misstatements
when James Corporation’s cash flows from operations are negative and net income
(rather than loss) is reported.
All major accounting disagreements with management, even if eventually resolved,
should be discussed with the audit committee.
The quality of electronic evidence depends on the controls built into the information
system.
The most important lesson to be learned from The Great Salad Oil Swindle is that
auditors can commit fraud by falsely including inventory that does not exist.
Procedures such as a cutoff test and a search for unrecorded liabilities are related to
subsequent events.
An example of fraudulent financial reporting is the CFO intentionally overstating sales
to boost profits.
An audit must be performed by persons who can make sound judgments relating to
complex accounting issues.
Relevance and reliability of evidence make up the appropriateness of audit evidence.
Inquiries of client personnel are not an effective means of evidence gathering by an
auditor.
Internal audits are seldom an effective deterrent to the theft of cash.
The reporting standard of the PCAOB includes consistency, disclosure, and due
professional care.
In attribute sampling if the selected item cannot be located, the auditor should assume
that the control procedure was not followed and assess that item as a failure.
In assessing risk relating to fraud, auditors brainstorm about potential fraud risks.
The International Auditing and Assurance Standards Board’s term assurance
engagement means the same as The American Institute of Certified Public Accountants’
term attestation engagement.
Auditors usually perform relatively limited substantive analytics for cash accounts and
instead focus on substantive tests of details.
The auditor uses professional judgment to determine which audit procedures to
perform.
Which of the following situations would normally be discovered as part of the test of
the bank reconciliation?
A.Failure to bill a customer.
B.Failure to include a deposit in transit on the bank reconciliation.
C.Duplicate payment of a vendor’s invoice.
D.Payment to an employee for more hours than she worked.
Which of the following controls over cash would an auditor expect to observe?
A.Reconciliation of the general ledger to the subsidiary ledger.
B.Checks permanently marked “for deposit only” with the proper routing information.
C.Internal audits of marketable securities held in the company’s lockbox.
D.Authorization privileges given only to those employees using the accounting system.
What are the two topics that attestation standards provide guidance on?
A.They provide a plan for the engagement and criteria about who can participate in the
engagement.
B.They provide guidance about gathering evidence regarding specific assertions and
communicate an opinion on the fairness of the presentation to a third party.
C.They provide sufficient assurance on subject matter and appropriate assurance about
reporting.
D.They provide guidance on reviewing evidence and compiling evidence.
Which the following is not a reason for a public company to receive an audit?
A.Potential bias in providing information.
B.Closeness between a user and the organization.
C.Complexity of the processing systems.
D.Remoteness between a user and the organization.
Which organization issued the Internal Control, Integrated Framework which serves as
the primary criterion for evaluating the quality of a company’s internal control system?
A.PCAOB.
B.COSO.
C.AICPA.
D.GAO.
When performing attribute sampling, which of the following varies directly with the
sample size?
A.The expected failure rate.
B.The tolerable failure rate.
C.The risk of overreliance.
D.The nonsampling risk.
What are the two levels of assurance that can be provided in an attestation engagement?
A.Risk assurance and reduction assurance.
B.Professional assurance and compliance assurance.
C.Sufficient assurance and appropriate assurance.
D.Reasonable assurance and limited assurance.
Analytical procedures conducted at the end of an audit are performed to examine trends
and changes. What is typically another purpose of analytical procedures at the end of
the audit?
A.To document planning in accordance with GAAS.
B.To provide the client with a value added service in conjunction with audit activities.
C.To ask “hard questions” about the company’s results and its relationship to external
factors.
D.To increase the amount of items reported in the management letter.
An internal control benefit of centralized purchasing in an organization includes which
of the following?
A.Separation of authorization from the custody and recording function.
B.Favorite vendors used multiple times.
C.Increased compensation of agents through side agreements.
D.Mathematically accurate vendor invoices.
Before releasing the audit report, which of the following would the auditor most likely
do?
A.Issue a management letter.
B.Perform an analytical review.
C.Check on a schedule of partner rotation.
D.Estimate client fee for subsequent services to be performed.
An auditor selects a sample of items recorded and traces them back to the supporting
documentation. This is an example of which of the following?
A.Directional testing for existence.
B.Directional testing for completeness.
C.Direct testing for valuation.
D.Direct testing for rights.
Non-sampling risk deals with which of the following?
A.Not carrying out the appropriate audit procedure.
B.Drawing an incorrect inference from the sample results.
C.Inappropriately diagnosing client’s problems.
D.Both A and C.
Which of the following is an example of a reasonableness test?
A.Estimate the account balance and determine whether that amount is close to what the
client recorded.
B.Inquire whether significant changes have been made.
C.Tour the production facilities.
D.Send confirmations to major vendors.
To determine whether any accounts receivable are pledged or assigned to others, the
auditor would most likely perform which of the following procedures?
A.Examine subsequent collections.
B.Test a sample of transactions to the general ledger.
C.Review loan agreements and board of directors’ meeting minutes.
D.Derive an independent estimate of the allowance and compare it to pledged assets.
Which of the following are limitations of using the MUS sampling method?
A.MUS is not very useful in testing for understatement.
B.MUS is not very useful in testing for zero and negative amounts.
C.N MUS is not very useful in testing if the auditor expects numerous misstatements.
D.All of the above.
What form of evidence is used by the auditor to verify bank reconciliation items?
A.Cash counting observation.
B.General ledger.
C.Bank reconciliation.
D.Cutoff statement.
Which of the following is not considered a part of external assurance over sustainability
reporting, as stated by the Global Reporting Initiative (GRI) Reporting Framework?
A.External assurance engagements should be conducted by those with competence in
the subject matter and assurance practices
B.External assurance engagements should assess whether the sustainability report is
reasonable, balanced, and appropriately inclusive.
C.External assurance engagements should assess the extent to which the report preparer
has applied the GRI Reporting Framework in reaching its conclusions.
D.External assurance engagements can be issued by the CFO of the company issuing
the sustainability report.
In considering corporate governance responsibilities and accountabilities, which of the
following are considered stakeholders to whom the board of directors, management,
and internal auditors are accountable?
A.Shareholders/owners.
B.External auditors.
C.Regulators.
D.Both A and C.
E.All of the above.
Which one of the following is not a fundamental internal control the auditor would
expect to find in place for a cash processing system?
A.Segregation of duties
B.Electronic payments
C.Authorization of transactions
D.Periodic internal audits
The Standards of the PCAOB can be broken up into three categories, i.e., general,
fieldwork, and reporting. Which of the following concepts is considered in the reporting
standards?
A.Consistency in the application of accounting principles.
B.Sufficient appropriate evidence.
C.Internal control.
D.Planning and supervision.
When the auditor used the audit procedure vouching she is primarily concerned with
which of the following assertions?
A.Completeness.
B.Existence.
C.Authorization.
D.Classification.
Which of the following is a factor that the auditor should consider as they affect the
reliability and relevance of information produced by a management’s specialist?
A.Competence, capabilities, and objectivity of that specialist.
B.Work performed by that specialist.
C.Appropriateness of that specialist’s work as audit evidence for the relevant assertion.
D.All of the above.
Which of the following must exist prior to the recognition of revenue by a company
from the sale of a product?
A.The cash is realized on the sale of the product.
B.A price is discussed based upon the customer’s resale of the product.
C.The customer is given the option to return the product at any time.
D.The product is adequately delivered to the customer.
In a large company, who usually monitors the internal control?
A.Internal auditors.
B.PCAOB.
C.CFO.
D.External auditors.
The FASB has set a hierarchy of inputs to consider in assessing fair value. Price taken
from a recent trade on the NIKKEI of an index stock would fall under which level?
A.Level 0.
B.Level 1.
C.Level 2.
D.Level 3.
The auditor of the revenue cycle of ABC Company computes an estimate of ABC’s
allowance for doubtful accounts and compares it to the estimate provided by ABC’s
management. The purpose for this procedure is to substantiate which assertion?
A.Existence of receivables.
B.Cutoff of receivables.
C.Valuation of receivables.
D.Rights to receivables.
PCAOB Auditing Standard 5 does not identify which of the following situations as one
in which the auditor will modify the audit report on ICFR effectiveness?
A.When there is a restriction on the scope of the engagement.
B.When there is other information contained in management’s annual report on ICFR.
C.When elements of management’s annual report on internal control are incomplete or
improperly presented.
D.When the annual report includes a copy of the annual certification pursuant to
Section 302 of the Sarbanes-Oxley Act.
Alternative procedures that would provide evidence of the existence of receivables
would include which of the following?
A.Physical observation of customer facilities.
B.Review of subsequent collections.
C.Analysis of the aged trial balance.
D.A confirmation to the client management for customer accounts.
What types of companies can have a compilation performed in accordance with the
AICPA standards?
A.Public Companies: Yes; Nonpublic Companies: Yes
B.Public Companies: No; Nonpublic Companies: No
C.Public Companies: No; Nonpublic Companies: Yes
D.Public Companies:Yes; Nonpublic Companies: No
Observation suffers from which of the following limitations?
A.Observation of processing is rarely unobtrusive.
B.Observation of processing on one day does not necessarily indicate how transactions
were processed on a different day.
C.All the above.
D.None of the above.
During which of the following phases of the audit are analytical review procedures
required by the auditing standards?
A.The planning phase of the audit.
B.The final review phase of the audit.
C.Both the planning and final review phases of the audit.
D.Performance of tests of controls.
The division of responsibility between the reporting company’s management and the
audit firm is described in which one of the following?
A.Scope paragraph.
B.Introductory paragraph.
C.Notes to the financial statements.
D.Opinion paragraph.
A justified departure from GAAP may result in which of the following?
A.A disclaimer of an audit opinion.
B.An unqualified audit opinion with an explanatory paragraph either before or after the
opinion paragraph.
C.An adverse opinion.
D.A qualified opinion.
MUS is based on which of following?
A.Attributes sampling theory.
B.Classical variables sampling.
C.Both a. and b…
D.Neither a. or b.
Which of the following is not a long-term liability account with a high risk of material
misstatement?
A.Warranty reserves.
B.Pension obligations.
C.Other postemployment benefits.
D.Marketable securities.
What are the key perspectives and concerns that auditors should be aware of when
making materiality judgments? Explain the purpose of materiality judgments and
common benchmarks.
Auditors are required to actively conduct a financial statement audit with the mindset
that fraud may exist. What is the general process that an auditor goes through to assess
the risk of fraud and test accordingly?
What are some common procedures that the auditor will complete when performing a
review of interim financial information?
Identify the factors that an auditor would consider when choosing between
non-statistical sampling and statistical sampling.
What are the considerations that may cause a quantitatively small misstatement to be
considered material?
Describe the responsibilities of audit committees, and list at least four responsibilities
that the NYSE has mandated for audit committees.
What are the three broad types of audit procedures? What is the purpose of each test?
For the past five years, Clark CPAs has audited the financial statements of a
manufacturing company. During this period, the audit scope was limited by the client as
to the observation of the annual physical inventory. Because Clark CPAs considers the
inventories to be material and was not able to satisfy the audit requirements by using
other auditing procedures, the firm was unable to express an unqualified opinion on the
financial statements in each of the five years.
The CPA was allowed to observe physical inventories for the current year ended
December 31, 2014, because the client’s bank would no longer accept the audit reports.
However, to minimize audit fees, the client requested that the CPA not extend audit
procedures to the inventory as of the beginning of the year, January 1, 2014.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?
What is an imprest payroll account and why is it used by companies?
Explain the meaning of “directional testing” and identify the reasons why directional
testing leads to audit efficiency. Give examples of directional testing for the existence
and completeness assertions.
Describe the purpose of the management representation letter.
What is internal control as defined by COSO? Also explain, the other elements of the
definition that are important to internal control
Write the three general auditing standards of the PCAOB.
What is the purpose of using analytical review procedures in the final review stages of
the audit?
John Beasley is interviewing with public audit firms to become an auditor. John does
not believe that fraud is a “big deal” in client organizations and argues that most
individuals in management of companies are “honest people”. He believes that auditors
are becoming too cynical.
Discuss the five management financial statement assertions identified in the PCAOB
Standards. Provide examples.
Discuss what is meant by ‘sampling risk” and “nonsampling risk”.
What are the five basic types of financial statement audit reports?
What are some typical controls that affect multiple assertions for long-lived assets?