While there is no professional requirement to do so on audit engagements, CPAs
frequently issue a formal “management” letter to clients. The primary purpose of this
letter is to provide
A) evidence indicating whether the auditor is reasonably certain that internal accounting
control is operating as prescribed.
B) a permanent record of the internal accounting control work performed by the auditor
during the course of the engagement.
C) the client with the CPA’s recommendations for improving any part of the client’s
business.
D) a summary of the auditor’s observations that resulted from the auditor’s special study
of internal control.
You are auditing Manufacturing Company and testing the audit related objective of
completeness for the equipment accounts. Which of the following audit procedures is
most likely to achieve your objective?
A) Examine vendor invoices and receiving reports.
B) Physically examine assets.
C) Examine vendor invoices of closely related accounts such as repairs and
maintenance.
D) Trace individual acquisitions to the fixed asset master file.
Generally accepted accounting principles require that revenue be reported net of sales
returns and allowances
A) if practical.
B) if required by industry practice.
C) if the amounts are material.
D) any of the above
When the auditor believes the year-end bank reconciliation may be intentionally
misstated, it is appropriate to perform extended tests of the year-end bank
reconciliation. Assuming the client has a October 31 year-end, these extended tests
would not include
A) comparing all September 30 reconciling items with canceled checks and other
documents in the October bank statement.
B) comparing all canceled checks and deposit slips in the October bank statement with
the October cash disbursements and receipts records.
C) carrying out all proper procedures subsequent to the end of the year with the use of
the bank cutoff statement.
D) determining that all outstanding checks had cleared by the date of the bank cutoff
statement.
Which of the following would not be included in a CPA’s report based upon a review of
the financial statements of a nonpublic entity?
A) a statement that the review was in accordance with generally accepted auditing
standards
B) a statement that all information included in the financial statements is the
representation of management
C) a statement that the review primarily consists of analytical procedures and inquiries
D) a statement that the accountant has conducted a review
Which of the following are changes that affect the comparability of financial statements
but not the consistency and therefore, do not have to be included in the auditor’s report?
A) error corrections not involving principles
B) changes in accounting estimates
C) variations in the format and presentation of financial information
D) all of the above
Match eight of the following terms (a-n) with the definitions provided below (1-8):
a. Foreign Corrupt Practices Act
b. Securities Exchange Act of 1934
c. Securities Litigation Uniform Standards Act of 1998
d. Securities Act of 1933
e. Ultramares doctrine
f. audit risk
g. audit failure
h. standards failure
i. business failure
j. absence of causal connection
k. contributory negligence
l. lack of duty to perform
m. nonnegligent performance
________ 1. a situation in which an incorrect audit opinion is issued because it failed to
comply with the requirements of auditing standards
________ 2. a federal statute dealing with companies that trade securities on national
and over-the-counter exchanges. Auditors are involved because the annual reporting
requirements include audited financial statements.
________ 3. an auditor’s legal defense under which the auditor claims that the client’s
own actions either resulted in the loss that is the basis for damages or interfered with
the conduct of the audit in such a way that prevented the auditor from discovering the
cause of the loss
________ 4. a federal statute that makes it illegal to offer a bribe to an official of a
foreign country
________ 5. a common-law approach to third-party liability in which ordinary
negligence is insufficient for liability to third parties, because of the lack of privity of
contract between the third-party and the auditor unless the third-party is a primary
beneficiary
________ 6. a federal statute designed to significantly reduce the potential damages in
federal securities-related litigation by providing for proportionate liability in most cases
________ 7. an auditor’s legal defense under which the auditor claims that the audit was
performed in accordance with generally accepted auditing standards
________ 8. an auditor’s legal defense under which the auditor claims that the failure to
follow auditing standards did not cause the damages suffered by the client
The Sarbanes-Oxley Act of 2002 makes it a felony to destroy or create documents to
impede or obstruct a federal investigation. Those provisions were adopted following
which of the following legal cases?
A) United States v. Natelli
B) United States v. Andersen
C) ESM Government Securities v. Alexander Grant & Co.
D) United States v. Simon
The auditor is examining the accounting entries made to the accumulated depreciation
account during the year and notices a significant amount of debits to the account.
Which of the following provides the most logical explanation?
A) large number of asset retirements
B) salvage values were revised downward
C) useful lives were revised downward
D) allocation of fixed overhead were revised
Which of the following factors does not contribute to the number of lawsuits against
auditors?
A) large civil court judgments against CPA firms awarded in a few cases
B) growing awareness of the responsibilities of public accountants by users of financial
statements
C) the simplicity of auditing and accounting functions
D) an increased consciousness by the SEC for its responsibility for protecting investors’
interests
When determining sample sizes for accounts payable tests,
A) sample sizes rarely vary from audit to audit.
B) auditors must try to ensure that the population includes all potential payables.
C) defining the population is a simple procedure.
D) all of the above are correct.
Which of the following is not a common audit procedure used to search for contingent
liabilities?
A) examine letters of credit
B) examine payroll reports
C) review internal revenue agent reports
D) analyze legal expense
With increases in the complexity of transactions and the need for expanded disclosures
about these transactions, assertions about the ________ have increased in importance.
A) existence
B) account balances
C) presentation and disclosure
D) classes of transactions
Which of the following statements is most correct with respect to separation of duties?
A) A person who has temporary or permanent custody of an asset should account for
that asset.
B) Employees who authorize transactions should not have custody of related assets.
C) Employees who open cash receipts should record the amounts in the subsidiary
ledgers.
D) Employees who authorize transactions should have recording responsibility for these
transactions.
Match six of the terms (a-k) with the descriptions/definitions provided below (1-6):
a. bank reconciliation
b. branch cash account
c. cash equivalents
d. cutoff bank statement
e. general cash account
f. imprest payroll account
g. imprest petty cash fund
h. kiting
i. proof of cash
j. standard bank confirmation form
k. lapping
________ 1. a fund of cash maintained within the company for small cash acquisitions,
expenses, or to cash employees’ checks
________ 2. a form approved by the AICPA and American Bankers’ Association
through which the bank responds to the auditor about bank balance and loan
information
________ 3. excess cash invested in short-term, highly liquid investments such as time
deposits, certificates of deposit, and money market funds
________ 4. the primary bank account for most organizations
________ 5. the transfer of money from one bank account to another and improperly
recording the transfer so that the amount is recorded as an asset in both accounts
________ 6. the document usually prepared by client personnel of the differences
between the cash balance recorded in the general ledger and the amount in the bank
account
Which of the following methods of sample selection is appropriately used when
selecting a random sample?
A)
B)
C)
D)
The audit objective that requires that existing notes payable be included in the notes
payable schedule is satisfied by performing which of the following audit procedures?
A) Confirm notes payable.
B) Trace the total of the notes payable schedule to the general ledger.
C) Review the notes payable schedule to determine whether any are related parties.
D) Review the bank reconciliation for new notes credited directly to the bank account
by the bank.
The Sarbanes-Oxley Act requires a cooling off period of ________ before a member of
an audit team can work for a client in a key management position?
A) one year
B) eighteen months
C) three years
D) five years
Which substantive analytical procedure would help determine if there are unrecorded or
nonexistent accounts?
A) Review the list of accounts payable for unusual items.
B) Compare acquisition-related expense account balances with prior years.
C) Calculate ratios, such as accounts payable divided by current liabilities.
D) Calculate ratios, such as sales divided by gross profit.
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
Which is usually included in the engagement letter?
A)
B)
C)
D)
When accounting principles are not consistently applied, and the materiality level is
immaterial, the auditor will issue a(n)
A) standard unmodified opinion.
B) unmodified opinion with an explanatory paragraph.
C) adverse opinion.
D) disclaimer opinion.
Which accounts are involved in the sales class of transactions?
A) accounts receivable and sales returns and allowances
B) cash and allowance for uncollectible accounts
C) sales allowances and accounts receivable
D) accounts receivable and sales
The amount(s) set by the auditor at less than the materiality for the financial statements
as a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial
statements as a whole is referred to as
A) the materiality range.
B) the error range.
C) tolerable materiality.
D) performance materiality.
A misstatement in the financial statements can be considered material if knowledge of
the misstatement will affect a decision of
A) the PCAOB.
B) a reasonable user of the financial statements.
C) an accountant.
D) the SEC.
With respect to a small company’s system of purchasing supplies, an auditor’s primary
concern should be to obtain satisfaction that supplies ordered and paid for have been
A) requested by and approved by the same individual.
B) used in the course of business and solely for business purposes during the year under
audit.
C) received, counted, and checked to quantities and amounts on purchase orders and
invoices.
D) properly recorded as assets and systematically amortized over the estimated useful
life of the supplies.
Which of the auditor’s defenses is ordinarily not available when lawsuits are filed by a
third party?
A) absence of causal connections
B) contributory negligence
C) nonnegligent performance
D) lack of duty
Which of the following is an accurate statement regarding recent actions brought
against accountants by clients and third parties?
A) Litigants will first seek state remedies because of the availability of class-action
litigation.
B) Gross negligence by the auditor must be proven under the Securities Acts of 1933
and 1934.
C) The greatest growth in CPA liability litigation bas been under the federal securities
laws.
D) The amount of damages that plaintiffs can receive is greater under common law than
under the federal securities laws.
Performance materiality is often set at a(n) ________ level for notes payable.
A) high
B) moderate
C) low
D) unknown
In determining that the accounts payable cutoff is correct, it is essential that the cutoff
tests be coordinated with the
A) confirmation of payables.
B) tests of long-term liabilities.
C) observation of inventory.
D) cash count.
Why do auditors establish a preliminary judgment about materiality?
A) to determine the appropriate level of staff to assign to the audit
B) so the client can know what records to make available to the auditor
C) to help plan the appropriate evidence to accumulate
D) to finalize the control risk assessment
Matching the supplier’s invoice, the purchase order, and the receiving report prior to
preparing the voucher would normally be the responsibility of the
A) warehouse receiving function.
B) purchasing function.
C) general accounting function.
D) treasury function.