A confirmation is used to
A. Verify the inventory count is correct.
B. Verify that a control is being observed.
C. Verify a representation from a third party.
D. Verify that a specific trend is correct.
In general, material frauds perpetrated by which of the following are most difficult to
detect?
A. Internal audit function.
B. Keypunch operator.
C. Cashier.
D. Controller.
Which of the following statements is not true concerning assurance services?
A. The growth in assurance services has been driven in part by users’ demands for more
relevant information.
B. Assurance services focus on improving the quality of information or its context, for
decision makers.
C. Unlike audit and attestation engagements, an engagement to perform assurance
services does not require the CPA to consider information reliability.
D. Auditing and attestation services can be viewed as subsets of assurance services
since there is overlap in their objectives.
The expectation that an internal auditor does not accept gifts that may impair judgment
is based on the principle of
A. integrity.
B. objectivity.
C. confidentiality.
D. competency.
The controller of Excello Manufacturing, Inc., wants to use ratio analysis to identify the
possible existence of idle equipment or the possibility that equipment has been disposed
of without having been written off. Which of the following ratios would best
accomplish this objective?
A. Depreciation expense/book value of manufacturing equipment.
B. Accumulated depreciation/book value of manufacturing equipment.
C. Repairs and maintenance cost/direct labor costs.
D. Gross manufacturing equipment cost/units produced.
Jay and Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally
gave an unqualified opinion on the financial statements even though material
misstatements were discovered as a result of the audit. The financial statements and
Jay’s unqualified opinion were included in a 10-K (annual report filed with the SEC) for
the company. Which of the following statements is correct regarding Jay’s liability to a
purchaser of the offering under Section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934?
A. Jay will be liable if the purchaser relied on Jay’s unqualified opinion on the financial
statements.
B. Jay will be liable if Jay was negligent in conducting the audit.
C. Jay will not be liable if the purchaser’s loss was under $500.
D. Jay will not be liable if the misstatement resulted from an omission of a material fact
by Jay.
The type of report issued under a PrimePlus assurance engagement is likely which of
the following?
A. Unqualified.
B. Assurance.
C. Audit.
D. Agreed-upon procedures.
Which of the following situations has the best chance of being detected when a CPA
compares revenues and expenses reported for the year being audited (current year) with
the prior year and investigates all changes exceeding a fixed percentage?
A. An increase in property tax rates has not been recognized in the company’s current
year accrual.
B. The cashier began lapping accounts receivable in the current year.
C. Because of worsening economic conditions, the current year provision for
uncollectible accounts was inadequate.
D. The company changed its capitalization policy for small tools in the current year.
A CPA reviews an entity’s payroll procedures. The CPA would consider internal control
to be less than effective if a payroll department supervisor was assigned the
responsibility for
A. distributing payroll checks to employees.
B. reviewing and approving time reports for subordinate employees.
C. hiring subordinate employees.
D. initiating requests for salary adjustments for subordinate employees.
Which of the following events occurring after the issuance of an entity’s financial
statements and the auditor’s report most likely would cause the auditor to make further
inquiries about the previously issued financial statements?
A. An uninsured natural disaster occurs that may affect the entity’s ability to continue as
a going concern.
B. A contingency is resolved that had been disclosed in the audited financial statements.
C. New information is discovered concerning undisclosed lease transactions in the
audited period.
D. A subsidiary that accounts for 25 percent of the entity’s consolidated net income is
sold.
On the basis of audit evidence gathered and evaluated, an auditor decides to increase
the assessed level of risk of material misstatement from that originally planned. To
achieve an overall audit risk level that is substantially the same as the planned audit risk
level, the auditor would
A. Decrease amount of substantive testing.
B. Decrease detection risk.
C. Increase detection risk.
D. Increase materiality levels.
In determining the sample size for a test of controls, an auditor should consider the
expected deviation rate, desired confidence level, and the
A. tolerable deviation rate.
B. risk of incorrect acceptance.
C. nature and cause of deviations.
D. population size.
Which of the following activities most likely would detect whether payroll data are
accurately processed?
A. Monitor authorized distribution of data control sheets.
B. Use test data to verify the accurate performance of payroll processing.
C. Examine source documents for approval by supervisors.
D. Segregate duties between approval of hardware and software specifications.
An “integrated audit” as stated in Section 404 of the Sarbanes-Oxley Act means
A. The auditor must consider the integrated thoughts and ideas of everyone on the audit
staff.
B. The auditor must conduct two audits, one on the effectiveness of internal control and
one on the financial statements, in an integrated way.
C. The auditor must integrate the same objectives whether auditing internal control or
auditing the financial statements.
D. Two independent CPA firms must work together on the audit.
In the course of the examination of financial statements for the purpose of expressing
an opinion, the auditor normally prepares a schedule of unadjusted differences for
which the auditor did not propose adjustments when they were discovered. What is the
primary purpose of this schedule?
A. To point out to the responsible entity officials the errors made by various company
personnel.
B. To summarize the adjustments that must be made before the company can prepare
and submit its federal tax return.
C. To identify the potential financial statement effects of errors or disputed items that
were considered immaterial when discovered.
D. To summarize the errors made by the company so that corrections can be made after
the audited financial statements are released.
Which of the following internal control activities most likely would ensure that all
billed sales are correctly posted to the accounts receivable ledger?
A. Daily sales summaries are compared to daily postings to the accounts receivable
ledger.
B. Each sales invoice is supported by a prenumbered shipping document.
C. The accounts receivable ledger is reconciled daily to the control account in the
general ledger.
D. Each shipment on credit is supported by a prenumbered sales invoice.
Which of the following would an accountant not need to know when conducting a
compilation?
A. The accounting principles and practices of the industry in which the entity operates.
B. A general understanding of the nature of the entity’s business transactions and the
form of its accounting records.
C. The accounting basis on which the financial statements are to be presented.
D. The accountant would need to know all of the other items listed when conducting a
compilation.
Which of the following procedures would an auditor most likely perform to obtain
evidence about an entity’s subsequent events?
A. Reconcile bank activity for the month after the balance sheet date with cash activity
reflected in the accounting records.
B. Obtain a letter from the entity’s attorney describing any pending litigation,
unasserted claims, and loss contingencies.
C. Review the treasurer’s monthly reports on temporary investments owned, purchased,
and sold.
D. Examine on a test basis the purchase invoices and receiving reports for several days
after the inventory date.
In assessing the competence of the internal audit function, an independent CPA most
likely would obtain information about the
A. Quality of the work of the internal audit function.
B. Organization’s commitment to integrity and ethical values.
C. Influence of management on the scope of the internal audit function duties.
D. Organizational levels to which the internal audit function reports.
Analytical procedures may be classified as being primarily which of the following?
A. Tests of controls.
B. Substantive procedures.
C. Tests of ratios.
D. Detailed tests of balances.
Which of the following accounts is not affected by cash disbursement transactions?
A. Cash.
B. Accounts payable.
C. Purchase discounts.
D. Purchase returns.
In the audit of financial statements, an auditor’s primary consideration regarding an
internal control policy or procedure is whether the policy or procedure
A. Reflects management’s philosophy and operating style.
B. Affects management’s financial statement assertions.
C. Provides adequate safeguards over access to assets.
D. Enhances management’s decision-making processes.
The Sarbanes-Oxley Act enhances prosecutorial tools available in major fraud cases by
A. expanding laws against fraud and obstruction of justice.
B. increasing criminal penalties for fraud and its cover-up.
C. strengthening sentencing guidelines applicable to large-scale frauds.
D. all of these are true.
Shipping orders are forwarded from the revenue process to
A. the materials requisitions department.
B. finished goods stores.
C. raw materials stores.
D. inventory management.
Which of the following best illustrates the concept of sampling risk?
A. A randomly chosen sample may not be representative of the population as a whole
(regarding the characteristic being tested).
B. An auditor may select audit procedures that are not appropriate to achieve the
specific objective.
C. An auditor may fail to recognize errors in the documents examined for the chosen
sample.
D. The documents related to the chosen sample may not be available for inspection.
Which of the following procedures would an auditor most likely include in the initial
planning of a financial statement audit?
A. Perform detailed testing of the individual balance sheet accounts.
B. Examining documents to detect illegal acts having a material effect on the financial
statements.
C. Considering whether the client’s accounting estimates are reasonable in the
circumstances.
D. Determining the extent of involvement of the client’s internal audit function.
The likelihood of assessing control risk too high is the risk that the sample selected to
test controls
A. does not support the auditor’s planned assessed level of control risk when the true
operating effectiveness of internal control justifies such an assessment.
B. contains misstatements that could be material to the financial statements when
aggregated with misstatements in other account balances or transactions classes.
C. contains proportionately fewer deviations from prescribed internal controls than exist
in the balance or class as a whole.
D. does not support the tolerable misstatement for some or all of management’s
assertions.
Testing depreciation calculations for a sample of property, plant, and equipment tests
the assertion of
A. existence.
B. completeness.
C. valuation and allocation.
D. rights and obligations.
When assessing the risk of material misstatement, auditors evaluate the reasonableness
of an entity’s accounting estimates. An auditor normally would be concerned about
assumptions that are
A. Susceptible to bias.
B. Consistent with prior periods.
C. Insensitive to variations.
D. Similar to industry guidelines.
The public has turned to CPAs to provide assurance services primarily because
A. the independence and objectivity of CPAs increase the public trust.
B. there is a need to develop new revenue streams for accounting firms.
C. audits do not provide reliable information for decision makers.
D. CPAs have been proactive in identifying new types of assurance services to market
to customers.
Other bases of accounting (special purpose frameworks) include all of the following
except:
A. tax basis.
B. non-GAAP methods used for internal reporting.
C. cash basis.
D. regulatory basis.
An auditor, using the same degree of due care as other members of the profession, fails
to identify an inadequate allowance for bad debts. This occurrence is an example of
A. negligence.
B. fraud.
C. an error in judgment.
D. constructive negligence.