Delta Life Insurance Co. prepares its financial statements on an accounting basis
insurance companies use pursuant to the rules of a state insurance commission. Wall,
CPA, is Delta’s auditor. If Wall discovers that the statements are not suitably titled, Wall
should
A. disclose any reservations in an explanatory paragraph and qualify the opinion.
B. apply to the state insurance commission for an advisory opinion.
C. issue a special statutory basis report that clearly disclaims any opinion.
D. explain in the notes to the financial statements the terminology used.
Which of the following methods allow fictitious and actual transactions to be processed
together without client operating personnel being aware of the testing process?
A. Integrated test facility
B. Input controls matrix
C. Parallel simulation
D. Data entry monitor
When auditing the market value of an investment, an auditor would be least likely to
A. examine quoted market prices.
B. evaluate management’s procedure for determining market prices.
C. make his or her own determination of market prices.
D. confirm market prices with a broker.
An agent of a bond issuer who handles the administrative aspects of a loan and ensures
that the borrower complies with the terms of the bond indenture is called a
A. registrar.
B. transfer agent.
C. trustee.
D. none of the above.
From the auditors’ point of view, inventory counts are more acceptable prior to the year
end when
A. internal control is weak.
B. accurate perpetual inventory records are maintained.
C. inventory is slow moving.
D. significant amounts of inventory are held on a consignment basis.
After obtaining an understanding of internal controls and assessing control risk on the
audit of a non-public company, an auditor decided to perform tests of controls. The
auditor most likely decided that
A. it would be efficient to perform tests of controls that would result in a reduction in
planned substantive tests.
B. additional evidence to support a further reduction in control risk is not available.
C. an increase in the assessed level of control risk is justified for certain financial
statement assertions.
D. there were many internal control weaknesses that could allow errors to enter the
accounting system.
Which of the following would not be a place in which owners’ equity transactions
would be documented?
A. Capital budget.
B. Minutes of the meetings of the board of directors.
C. Proxy statements.
D. Securities offering registration statements.
Which of the following audit procedures most likely would provide an auditor with the
most assurance about the effectiveness of the operation of an entity’s internal control?
A. Confirmation with outside parties
B. Inquiry of client personnel
C. Successful re-performance of the control activity
D. Observation of client personnel
The auditor tested a sample of recorded sales invoices for evidence of credit approval.
Based on the results of the sample, the auditor concluded that there was a satisfactory
rate of approvals. Unknown to the auditor, credit approvals in the population were not
satisfactory. This would be an example of
A. risk of overreliance.
B. risk of underreliance.
C. risk of incorrect acceptance.
D. risk of incorrect rejection.
Analytical procedures performed near the end of an audit generally include
A. considering unusual or unexpected account balances that were not previously
identified.
B. performing tests of transactions to corroborate management’s financial statement
assertions.
C. gathering evidence concerning account balances that have not changed from the
prior year.
D. retesting control activities that appeared to be ineffective during the assessment of
control risk.
The decision of a company to have a transfer agent handle exchanges of shares is
related primarily to which of the functional responsibilities?
A. Rights and obligations.
B. Custody.
C. Record keeping.
D. Periodic reconciliation.
When testing a company’s cost accounting system, the auditor uses procedures that are
primarily designed to determine that
A. quantities on hand have been computed based on acceptable cost accounting
techniques that reasonably approximate actual quantities on hand.
B. physical inventories agree substantially with book inventories.
C. the system is in accordance with generally accepted accounting principles and is
functioning as planned.
D. costs have been properly assigned to finished goods, work-in-process, and cost of
goods sold.
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.
During a review the auditor is required to obtain written representations from
management. Which of the following is NOT one of the required elements of the
representation?
A. Management’s responsibility for the fair presentation of the financial statements
B. Management’s belief that it has answered all inquiries fully and truthfully
C. Management has made all adjustments identified during the review
D. Management has disclosed information about subsequent events
The services provided by internal auditors do not include
A. audits of financial statements for security registration statements.
B. review of control systems that ensure compliance with company policies, laws, and
regulations.
C. review of effectiveness in achieving program results in comparison to
pre-established objectives and goals.
D. appraisals of the economy and efficiency of operations.
When a predecessor auditor has examined the prior-years’ financial statements
presented in comparative format, the current auditors’ report should
A. make no reference to the predecessor auditors’ report.
B. reference the predecessor auditors’ report in the introductory paragraph, Auditor’s
Responsibility section, and opinion paragraph.
C. reference the predecessor auditors’ report in an other-matter paragraph.
D. disclaim an opinion on the prior-years’ financial statements.
When an audit team does not receive a response on a positive accounts receivable
confirmation, auditors should do all of the following except
A. send a second request.
B. do nothing for immaterial balances.
C. examine shipping documents.
D. examine client correspondence files.
The auditors conclude that there is a material inconsistency in the “other information”
in an annual report to shareholders containing audited financial statements. If the
auditors conclude that the financial statements do not require revision, but the entity
refuses to revise or eliminate the material inconsistency, the auditors may
A. issue a qualified opinion on the entity’s financial statements, citing a departure from
generally accepted accounting principles.
B. consider the matter closed since the other information is not included in the audited
financial statements.
C. issue an adverse opinion on the entity’s financial statements due to inadequate
disclosure.
D. revise the report on the entity’s financial statements to include an other-matter
paragraph describing the material inconsistency.
Which of the following forms of organization would NOT be allowed under Rule 505
of the Professional Code of Conduct?
A. Limited liability partnership; all partners are CPAs
B. Limited liability partnership; 70% of partners are CPAs
C. Limited liability corporation; all shareholders are CPAs
D. Partnership; 40% of partners are CPAs
In determining the effectiveness of an entity’s policies and procedures relating to the
occurrence assertion for payroll transactions, auditors most likely would inquire about
and
A. observe the separation of duties concerning personnel responsibilities and payroll
disbursement.
B. inspect evidence of accounting for prenumbered payroll checks.
C. recompute the payroll deductions for employee fringe benefits.
D. verify the preparation of the monthly payroll account bank reconciliation.
Inventory count tags are controlled
A. to prevent counting errors.
B. to test cutoff.
C. to prevent subsequent addition of goods to the inventory.
D. for all of the above reasons.
An audit of the financial statements of Camden Corporation is being conducted by
external auditors. The external auditors are expected to
A. certify the correctness of Camden’s financial statements.
B. make a complete examination of Camden’s records and verify all of Camden’s
transactions.
C. give an opinion on the fair presentation of Camden’s financial statements in
conformity with the applicable financial reporting framework (e.g., GAAP, IFRS).
D. give an opinion on the attractiveness of Camden for investment purposes and
critique the wisdom and legality of its business decisions.
An auditor selected an invoice for a large inventory purchase and vouched the invoice
to the receiving report. Which ASB transaction assertion is the auditor most likely
testing?
A. Occurrence
B. Completeness
C. Rights and obligations
D. Valuation
Which of the following items would appear in written representations in the audit of a
public entity but not a nonpublic entity?
A. Statements related to management’s responsibility for the entity’s financial
statements
B. Statements related to management’s responsibility for designing internal control to
prevent and detect fraud
C. An indication that all subsequent events have been disclosed to the auditors
D. Management’s opinion as to the effectiveness of its internal control over financial
reporting
The sum of customers’ unpaid balances that is compared to the general ledger balance
comes from
A. a total of sales invoices.
B. a total of shipping orders.
C. the sales journal.
D. the accounts receivable trial balance.
Lauren hires Humphrey, a CPA, to audit her financial statements. The engagement letter
includes a statement acknowledging that audited financial statements are required to be
filed with a regulatory body by October 1. Humphrey does not complete the audit until
October 5. Lauren is late filing the financial statements and is fined $100,000 by the
regulatory body. Lauren would most likely sue Humphrey claiming
A. breach of contract.
B. ordinary negligence.
C. gross negligence.
D. constructive fraud.
Which of the following is not an off-balance-sheet item?
A. Purchase commitment.
B. Capitalized lease.
C. Loan commitment.
D. Synthetic lease.
Lauren hires Humphrey, a CPA, to provide an audit of her financial statements. The
engagement letter includes a statement acknowledging that audited financial statements
will be provided to financial institutions for a loan, but does not name any financial
institutions. Humphrey completes the audit and issues an unqualified opinion. Based on
the audited financial statements, Key Largo Bank approves the loan to Lauren. Four
months later, Lauren files for bankruptcy. Key Largo Bank would most likely sue
Humphrey claiming
A. it was in privity of the contract.
B. it was a primary beneficiary.
C. it was a foreseen party.
D. it was a foreseeable party.
Samples to test internal control procedures are intended to provide a basis for an auditor
to conclude whether
A. the control procedures are operating effectively.
B. the financial statements are materially misstated.
C. the risk of incorrect acceptance is too high.
D. overall materiality for planning purposes is at a sufficiently low level.
When the auditor concludes that a control is functioning properly when, in fact, it is
not, the auditor has committed the
A. risk of underreliance.
B. risk of overreliance.
C. risk of incorrect acceptance.
D. risk of incorrect rejection.
Auditors record the last bill of lading used at the time of the inventory count to
A. search for unrecorded sales.
B. test cutoff.
C. verify ownership.
D. all of the above.
Which of the following is an internal control activity that could prevent a paid
disbursement voucher from being presented for payment a second time?
A. Vouchers should be prepared by individuals who are responsible for signing
disbursement checks.
B. Disbursement vouchers should be approved by at least two responsible management
officials.
C. The date on a disbursement voucher should be within a few days of the date the
voucher is presented for payment.
D. The official who signs the check should compare the check with the voucher and
should stamp PAID on the voucher documents.
Which of the following would not be an objective of a fraud investigation?
A. Determine from the evidence if a fraud has been committed.
B. Determine the scope of the fraud.
C. Identify internal control weaknesses that allowed the fraud to occur.
D. Determine the amount of restitution that should be received from the perpetrators.
A sampling plan in which an initial sample is selected and the audit team either draws a
final conclusion or selects additional items before drawing a final conclusion is called
A. attributes sampling.
B. discovery sampling.
C. sequential sampling.
D. statistical sampling.