Two accounts receivable balance-related audit objectives are not affected by assessed
control risk for the sales and cash receipts classes of transactions. These are
A) valuation allocation.
B) allocation, rights and obligations.
C) valuation, rights and obligations.
D) accuracy, existence.
The leading precedent-setting case in third-party liability was a 1931 U.S. case,
Ultramares v. Touche. What is the key aspect of this case?
A) to succeed, claimants must be foreseebale users of the audited financial statements
that are part of the claim process
B) ordinary negligence is insufficient for liability to third parties because of lack of
privity of contract
C) the auditor must have actual knowledge of the users of the financial statements to
establish privity
D) there is no general auditor liability to shareholders, since the loss of equity was
suffered by the company
A client’s performance measurement system includes key performance indicators that
management uses to
A) measure its profitability.
B) compare its performance with prior periods.
C) prepare the financial statements.
D) measure progress toward its objectives.
The inventory and distribution cycle can be thought of as comprising two separate but
closely related systems, one involving the actual physical flow of goods, and the other
the
A) internal control over those goods.
B) related costs.
C) storing of the goods.
D) prevention of waste, obsolescence, and theft.
If an auditor would like to estimate how many sales invoices have errors (such as no
required order number showing or authorization for customers exceeding their credit
limit) , the auditor would likely use
A) random sampling with replacement.
B) sampling for attributes.
C) sampling for variables.
D) stratified random sampling.
Your client has experienced a major data breach with lawsuits and fines pending of
significant and uncertain amounts. These events are disclosed in the client financial
statements and clearly explained in the notes. How do these events affect the
independent auditors report? The auditor would use
A) a standard unqualified auditor’s report.
B) an emphasis of matter paragraph titled “Data Breach” to highlight the events.
C) an other matters paragraph titled “Data Breach” to highlight the amounts.
D) a qualified audit opinion due to the size of the uncertainty.
The test of details of balance procedure which requires the auditor to review contracts
with suppliers and customers and inquire of management for the possibility of the
inclusion of consigned or other non-owned inventory is an attempt to satisfy the
objective of
A) existence.
B) completeness.
C) realizable value.
D) rights and obligations.
If accounts receivable accounts with credit balances are significant, they should be
A) written off.
B) reclassified as accounts payable.
C) corrected by making adjusting entries.
D) moved to the debit side.
A well-designed computerized system of perpetual inventory data files includes
information about the
A) units of inventory purchased, sold, and on hand.
B) unit costs of inventory purchased, sold, and on hand.
C) units and unit costs of inventory purchased, sold, and on hand.
D) units of raw materials, work-in-process, and finished goods.
Senior management of Mega Corp. is entitled to receive large bonuses if they achieve
earnings targets. What is the effect of this on the risks associated with recording of
revenue? It increases
A) inherent risks associated with revenue cutoff and existence assertions.
B) inherent risks associated with revenue cutoff and completeness assertions.
C) control risks associated with revenue cutoff and existence assertions.
D) control risks associated with revenue cutoff and completeness assertions.
A major control available in a small company, which might not be feasible in a large
company, is
A) a wider segregation of duties.
B) use of sequentially numbered documents.
C) fewer transactions to process.
D) the owner-manager’s personal interest and close relationship with the personnel.
Big Bank had a program failure occur on Sunday night due to a maintenance program
error. Transaction posting was interrupted, with several errors occurring in posting to
the master files. Although sales had been posted to the general ledger, individual
accounts were not recorded until subsequent days. The general transaction-related audit
objective affected by this activity is
A) timing.
B) accuracy.
C) occurrence.
D) classification.
To succeed in an action against the auditor, the client must be able to show that
A) the auditor was grossly negligent.
B) the auditor was fraudulent.
C) there is a close causal connection between the auditor’s breach of the standard of due
care and the damages suffered by the client.
D) there was a written contract.
If inherent risk is considered at the assertion level, why does the nature of the client’s
business affect inherent risk?
A) Certain accounts, such as inventory, are affected by the nature of the client’s
business.
B) If the client has really basic manufacturing processes, inherent risk is low.
C) When there is a risk of technological obsolescence, a specialist must be used during
the engagement.
D) Accounts such as cash, notes and mortgages payable vary depending upon the type
of business.
The responsibility for adopting a sound and appropriate financial reporting framework
and corresponding accounting policies, maintaining adequate internal controls, and
making fair representations in the financial statements rests
A) with management.
B) with the auditor.
C) equally with management and the auditor.
D) with the internal audit department.
Which of the following best describes what the auditor means by the exception rate in
the attribute sampling plan? The
A) number of errors that can reasonably be expected to be found in a population.
B) frequency with which a certain characteristic occurs within a population.
C) degree of confidence that the sample is representative of the population.
D) dollar range within which the true population total can be expected to fall.
The essence of an effectively controlled organization lies in the
A) effectiveness of its auditor.
B) effectiveness of its internal auditor.
C) attitude of its employees.
D) attitude of its management.
Describe an ethical dilemma that an auditor or an accountant might face in his or her
business career, then illustrate how the auditor or accountant might use the six-step
approach presented in Chapter 3 to resolve that dilemma. Be specific.
If management and salespeople are compensated on the basis of achieving high sales
targets, there is increased incentive to record sales before they have been earned. In
such a situation, the auditor will increase the extent of testing for which of the
following transaction-related audit objectives for sales?
A) cutoff and classification
B) classification and occurrence
C) occurrence and cutoff
D) completeness and cutoff
When auditing contingent liabilities, the primary objective at the initial stage of the
tests is to determine
A) the materiality of any liability.
B) what constitutes adequate disclosure of the liability.
C) the likelihood of the liability.
D) the existence of the liability.
Narratives, flowcharts, and internal control questionnaires are three commonly used
methods of
A) documenting the auditor’s understanding of internal controls.
B) testing internal controls.
C) designing the audit manual and procedures.
D) documenting the auditor’s understanding of client’s organizational structure.
PA has been asked to accept the audit engagement of BarneyBlues Corporation. PA sent
a letter to the predecessor auditor asking whether there was any reason why he should
not accept the engagement. Assuming that the prior year audit went smoothly, what
would be an appropriate response by the predecessor auditor?
A) Provide a brief statement that there is no reason of which he or she is aware that
would prevent accepting the engagement.
B) Send a copy of the entire working paper file to PA.
C) Telephone PA and say that PA should not take the engagement because the fee
charged was too large.
D) Send a copy of the tax returns and tax assessments to PA.
Comparison of individual notes payable outstanding with the prior year could detect
what type of possible misstatement?
A) Misstatement of interest expense or accrued interest, or omission of a note payable
B) Omission or misstatement of a note payable
C) Misclassification of a note payable as long term rather than current
D) Misstatement of notes payable, interest expense or accrued interest
The auditor has determined that the risks are high that the client would overvalue
inventory. Which audit assertions would require additional testing?
A) accuracy and existence
B) allocation and accuracy
C) accuracy and valuation
D) valuation and classification
In the scope paragraph of the audit report, the use of the term “reasonable assurance” is
intended to indicate that
A) no misstatements exist in the financial statements.
B) no material misstatements exist in the statements.
C) there is some possibility that material misstatements still exist in the financial
statements.
D) there is a possibility that immaterial misstatements still exist in the financial
statements.
A common use of block testing is testing
A) cut-off.
B) existense.
C) authorization.
D) valuation.
There are two categories of lawsuits: an outstanding (or asserted) claim, and a(n)
A) possible or unasserted claim.
B) disputed claim among several parties.
C) settled claim.
D) claims that could result in material misstatements.
A review of any part of an organization’s procedures and methods for the purpose of
evaluating efficiency and effectiveness is classified as a(n)
A) audit of financial statements.
B) compliance audit.
C) operational audit.
D) production audit.
As part of audit planning, you have calculated gross margin for the last five years, and
compared gross margin to industry averages. Your client’s gross margin has increased
by about 5% in the current year, while the industry gross average has declined. One
possible cause of this increased gross margin is
A) higher cost of goods sold.
B) increased bad debt expenses.
C) fictitious revenue.
D) fictitious expenses.
The starting point for the verification of the balance in the general bank account is to
obtain
A) the client’s December bank statement and reconcile it.
B) a bank reconciliation from the client.
C) a cutoff bank statement directly from the bank.
D) the client’s cash account balance from the general ledger.
CAS 200 explains that the purpose of the financial statement audit is to express an
opinion on the financial statements. This opinion is an assessment of whether the
financial statements are presented fairly using
A) Canadian generally accepted accounting principles (GAAP) only.
B) an applicable financial reporting framework.
C) Management’s assertions.
D) Rules of professional conduct.
To determine that sales are accurately charged, the unit prices on the duplicate sales
invoices are normally compared with
A) the original invoices.
B) the amounts recorded in the sales journal for that transaction.
C) the amounts posted to the customer’s account in the accounts receivable master file.
D) an approved item master file.
The auditor would most likely issue a disclaimer of opinion because of
A) the client’s failure to present supplementary information.
B) inadequate disclosure of material information.
C) a client-imposed scope limitation.
D) the qualification of an opinion by the other auditor of a subsidiary where there is a
division of responsibility.
There are many elements of quality control at the firm level. Which element does “a
firm should establish a formal code of conduct that includes procedures for individuals
to disclose differences of opinion and any inappropriate conduct” belong to?
A) leadership and responsibilities within the firm
B) general ethical requirements
C) general human resource policies
D) engagement quality control review