Management always uses journal entries to commit fraud because they are not reviewed
by auditors.
The familiarity threat is the most relevant issue for mandatory partner or audit firm
rotation.
Test of controls are a type of substantive procedure.
Goodwill is the excess of the purchase price over the fair market value of the acquired
company’s tangible assets, identifiable intangible assets, and liabilities.
When the risk of fraud is high in financial statements, the auditor should assign less
experienced auditors to the engagement.
Reclamation costs are an inherent risk associated with natural resources.
Most natural resource companies use geologists to establish an estimate of the reserves
contained in a new discovery.
The Sarbanes-Oxley Act sought to improve audit quality by removing the auditor
independence requirements.
Audit planning workpapers are prepared to support the foundation of the audit and are
prepared for the client to assist in their understanding of the specific audit procedures
that will be performed.
Control activities are the component of internal control that includes control actions that
have been established by policies and procedures
Pro forma financial information shows what the significant effects might have been had
a consummated or proposed transaction or event occurred at an earlier date.
Research has shown that auditors’ qualifications of audit reports are better predictors of
going-concern problems than are Z-score models.
Negative confirmations are used as an appropriate test with statistical sampling
techniques.
Materiality judgments are made in light of the surrounding circumstances, but need not
necessarily involve both quantitative and qualitative considerations.
One aspect of forensic accounting focuses on identifying the person who has
perpetrated the fraud and having that person confess to the fraud.
Substantive tests of accounts payable and related expense accounts for valuation usually
involve simply verifying the mathematical accuracy of the accounts, and agreeing them
to general ledger and supporting documentation.
Internal documentation is more reliable to the auditor if the internal control surrounding
the documentation is considered strong than if it is considered weak.
The PCAOB’s general standards provide guidance to audit firms in selecting and
training their professionals.
The primary importance of the audit program is its guidance of the overall conduct of
the audit.
Auditors are constantly challenged to evaluate the quality of a client’s estimates,
including areas such as obsolescence of inventory, allowance for doubtful accounts, and
tax provisions among others.
Successful corporate governance depends upon successful management of the company,
as management has the primary responsibility for creating a culture of performance
with integrity and ethical behavior.
If a lawyer refuses to furnish the requested information about the client’s contingencies
to the auditor, the auditor should issue an unqualified audit opinion.
The standard report on a review of separately issued interim financial statements of
public companies identifies the information reviewed, indicates that the standards of the
PCAOB were followed in performing the review, explains the nature of a review,
disclaims an opinion, and provides negative assurance that the auditor is not aware of
any material departures from GAAP.
When a successor auditor contacts a company’s previous auditor, successor auditor
might obtain information related to client management’s integrity.
Fraud detection procedures should only be performed for clients that have had fraud
problems in the past.
A risk of material misstatement of 100% indicates that material misstatement is highly
likely.
Gains and losses are not considered in audit testing, as they do not need to be disclosed.
Generally accepted auditing standards (GAAS) require the auditor to observe the taking
of the physical inventory at year-end.
Ulanda and Mudana, CPAs are performing an audit on McArnee, Inc. Ulanda selects a
sample from certain source documents and traces them forward to the accounts payable
ledger. The purpose of this test is to determine the possibility of understated liabilities.
Rationalization involves the mindset of the fraudster to justify committing the fraud.
An aging of accounts receivable is useful in estimating the reasonableness of the
allowance for doubtful accounts.
Knowledge of industry product trends is not crucial to the auditor’s identification of the
potential for impairment of assets as the auditor must focus attention on the accounting
rules.
Valuation is the most complex assertion related to inventory.
Audit reports on financial statements can be signed only by those who are licensed as
CPAs by their state board of accountancy
The assessment as to whether a misstatement in a cash-flow classification is material
should be primarily based on an income statement perspective.
Auditing standards requires technical knowledge in auditing but not in the client’s
business.
In addition to controls being specific, they may be broad, such as policies regarding a
code of ethics.
There is a hierarchy of rights to consider when applying rights theory.
A company’s website can contain useful information that can help an auditor understand
the products and strategies of the company.
Which of the following statements best describes the outcome of the auditor
discovering fraud in the financial statements?
A.The outcome will depend on the type of the fraud, along with its materiality.
B.Management must disclose any and all fraud directly in the footnotes.
C.The auditor is required to include a full description of the fraud in the audit report to
the financial statements.
D.There is no bearing on the financial statements by fraud that is discovered by the
auditor.
Which of following actions satisfies Rule 201 of the General Standards of the Code of
Professional Conduct definition of professional competence?
A.Having sufficient collegiate and continuing professional education to perform the
audit.
B.Only accepting engagements that the firm’s members can competently perform.
C.Adequately planning and supervising of professional performance.
D.None of the above satisfy Rule 201.
At what level does the auditor assess the risk of material misstatement?
A.The financial statement level.
B.The company level.
C.The assertion level.
D.Both A and C.
E.All of the above.
Use of reasonableness tests by Bono Mullins, PC will include relationships between
financial but not non-financial data.
Which of the following best describes the nature of assets of held-for-sale operations?
A.Impairment testing based on most likely sale or disposal price.
B.Impairment testing if plants are closed or equipment is not used.
C.Lower of cost or market impairments, including an allowance for obsolescence.
D.Estimates and assumptions made in preparation of the estimate of income tax
expense for the year.
Which of the following is a reason why an auditor needs an understanding of internal
controls?
A.To provide individual comments on internal control non-compliance.
B.To become comfortable that the client will pay its audit bills.
C.To assess materiality.
D.To assess the risk of possible misstatements in the financial statements.
Which one of the following factors is not an inherent risk associated with long-lived
assets?
A.Obsolescence of assets.
B.Impairment of assets.
C.Incomplete recording of disposals.
D.Lack of physical controls over the long-lived assets.
Which of the following is an example of poorly-developed audit documentation?
A.Clear communication as to how testing was performed, the results and conclusions.
B.Organization and assembly of documentation in an orderly fashion.
C.Headings that include the name and signature of the client representative that the
auditor interacted with while performing testing.
D.Authenticated identification of the person responsible for completing the procedure
and conclusions.
Which of the following items is not contained in the standard report on a review of
separately issued interim financial statements of public companies?
A.A description of the information reviewed.
B.A statement indicating that the standards of the PCAOB were followed in performing
the review.
C.A description of the nature of the review.
D.Positive assurance that the auditor is not aware of any material departures from
GAAP.
In the audit of accounting estimates, such as the allowance for doubtful accounts, the
auditor strives to provide reasonable assurance about which of the following?
A.All material accounting estimates have been developed properly.
B.The estimates are reasonable.
C.The estimates are presented in accordance with GAAP.
D.All of the above are true.
Which of the following documents will an auditor use to demonstrate an understanding
of internal control?
A.Checklists, disclosures and procedures.
B.The audit report, internal control opinions and confirmations.
C.Workpapers, engagement letters and management representation letters.
D.Questionnaires, narratives and flowcharts.
Which of the following statements is false regarding compilation procedures?
A.The practitioner should have a general knowledge of the organization’s industry, the
nature of its accounting records, the accounting basis to be used (GAAP or a special
purpose framework other than GAAP), and the form and content of the financial
statements.
B.The practitioner is required to make inquiries or perform procedures to verify,
corroborate, or review information provided by the client.
C.The practitioner is not required to obtain an understanding of internal control over
financial reporting.
D.The practitioner should read the financial statements, including footnotes, to make
sure that they are appropriate in form and free from obvious material misstatement.
During the course of an audit, misstatements that are individually immaterial may be
detected. What should the auditor do with these?
A.Permanently pass on these immaterial misstatements as they do not individually
impact the financial statements.
B.Request that management footnote the immaterial misstatements in the financial
statements for fair presentation.
C.Accumulate all of the known and projected misstatements to determine if the impact
is material in the aggregate.
D.Roll them forward for three years when they will become material enough to adjust.
What are the performance standards required for interim review engagements on the
quarterly financial information of public companies?
A.Statements on Standards for Accounting and Review Services.
B.Standards of the Public Company Accounting Oversight Board.
C.Statements on Reviews for Public Registrants and Securities Acts.
D.Standards set by the Public Oversight Board of the Enforcement Division of the SEC.
An individual does not need to agree to uphold the code of professional conduct in
order to become licensed as a CPA.
The internal control that requires that “checks are pre-numbered and accounted for”
satisfies which assertion?
A.Accuracy.
B.Existence.
C.Completeness.
D.Posting and summarization.
The auditing standards issued by the PCAOB are identical to the auditing standards
issued by the AICPA.
Which one of the following attributes is not required of an auditor?
A.Independence.
B.Bias.
C.Integrity.
D.Technical competence.
Which of the following would be a Type II subsequent event?
A.Information becomes available that provides evidence about the valuation of an
estimate or reserve that had been accrued at year end.
B.A sale of inventory below carrying value provides evidence that the net realizable
value was less than cost at year end.
C.A stock dividend or split that takes place during the subsequent period should be
disclosed. In addition, earnings-per-share figures should be adjusted to show the
retroactive effect of the stock dividend or split.
D.A material change occurs in the value of investment securities after the balance sheet
date.
Which of the following audit procedures does not address existence/occurrence for
accounts receivables and sales?
A.Trace bill of lading to sales invoice and sales journal.
B.Confirm balances of unpaid invoices with customers.
C.Examine subsequent collection.
D.Scan sales journal for duplicate entries.
After a natural resource such as gas or coal is used up by the client, the client is
responsible for restoring the land to its original condition. What is the cost of this
restoration called?
A.Depreciation expense.
B.Depletion expense.
C.Amortization expense.
D.Reclamation expense.
The process of vouching helps establish which of the following regarding recorded
transactions?
A.Transactions have been recorded.
B.Transactions are complete.
C.Transactions are valid.
D.Transactions are presented properly.
Which of the following would be used by the auditor to address kiting?
A.Cut-off bank reconciliations.
B.Bank transfer schedules.
C.Bank confirmations-account balances.
D.Bank confirmations-loan guarantees.
What does the review service provided by the CPA firm require?
A.It requires the CPA to make inquiries concerning matters affecting the financial
statements.
B.It requires the CPA to confirm accounts receivable.
C.It requires the CPA to test internal controls.
D.It requires the CPA to provide reasonable assurance.
Which of the following is an example of the type of analytics that an auditor would use
for inventory?
A.Number of day’s sales in receivables compared to industry averages.
B.Inventory turnover for the previous five years.
C.Number of obsolete units this period compared to last.
D.Salaries of marketing personnel as a percent of total inventory.
Which one of the following is false regarding the adequacy of disclosures in a financial
statement audit?
A.The auditor should consider matters for disclosure while gathering evidence during
the course of the audit, not just at the end of the audit.
B.One of the key disclosures is a summary of significant accounting policies used by
the company.
C.Disclosures should be limited to only checklist items.
D.The auditor’s report does not specifically cover the statements made by management
in the “Management Discussion and Analysis” (MD&A) section of the annual report.
Which of the following factors would be least likely to affect the estimate of the
warranty liability?
A.Changes in the product.
B.Changes in the nature of the warranty.
C.Changes in the sales staff.
D.Changes in sales volume.
Much of the understanding of revenue transactions for compliance with GAAP can be
performed by accomplishing which of the following tasks?
A.Examining sales contracts and inquiry of management.
B.Confirming sales with customers.
C.Discussing the transactions with qualified members of the Financial Accounting
Standards Board.
D.Comparing shipping documents with invoices.
When the auditor reviews vendor invoices while testing disbursements to determine
whether the client actually owes a liability for the accounts payable, the auditor is
testing for which assertion?
A.Completeness.
B.Existence.
C.Rights and Obligations.
D.Valuation.
Which of the following guidelines is not a presentation that pro forma financial
information should adhere to?
A.It should describe the transaction or event that is reflected in the pro forma financial
information.
B.It should describe significant assumptions used to develop the pro format
adjustments.
C.It should make clear that the pro forma financial information is indicative of results
that would have been achieved had the transaction or event actually taken place at an
earlier time.
D.It should describe any significant uncertainties about those assumptions.
A justified departure from GAAP may result in which of the following?
A.A disclaimer of an audit opinion.
B.An adverse opinion.
C.An unqualified audit opinion with an explanatory paragraph before the opinion
paragraph or a qualified opinion.
D.A standard unqualified opinion.
How did the Sarbanes-Oxley Act strengthen auditor independence?
A.By requiring auditors to provide reports in accordance with the Foreign Corrupt
Practices Act.
B.By requiring auditors to report the nature of any auditor-client disagreements to the
SEC.
C.By requiring audit committees to appoint the auditors.
D.By requiring a different audit firm from the one that performs the audit to prepare the
client’s tax return.
What should internal controls be design to do?
A.Detect errors.
B.Detect and prevent errors.
C.Prevent errors.
D.Eliminate the possibility of fraud.
Which of the following are categories that do not reflect the contingent nature of losses
and the guiding criteria organized around probability of outcomes as provided by the
FASB?
A.Guaranteed.
B.Reasonably possible.
C.Remote.
D.Probable.
How would the auditor categorize a situation when the financial statements do not
contain a footnote the auditor believes is necessary for fair presentation?
A.A scope limitation.
B.An uncertainty.
C.A departure from GAAP.
D.An act discreditable.
Discuss what pervasive control activities are and provide an example of at least three.
Define the term “internal control” and identify the major components of an internal
control system.
What additional information might the auditor choose to analyze to determine whether
or not the financial statements are misstated by a material amount?
What are the steps to implement an attribute sampling plan?
Discuss the advantages of monetary unit sampling over other sampling methods.
Discuss the auditor’s responsibility to communicate fraud to the audit committee. When
is the auditor required to communicate possible fraud to parties other than the audit
committee and management?
What is the difference between historical financial information and pro forma financial
information? Discuss the guidelines that should be adhered to when presenting pro
forma financial information.
Identify at least eight sources of evidence and testing the auditor may use in the audit of
marketable securities by major assertion tested.
What is the difference between reasonable assurance engagements and limited
assurance engagements?
In place of the ten historical standards that governed the auditing profession, as part of
the clarity project the AICPA developed seven fundamental principles that govern
audits. The four categories, with their specific principles, are:
You are the auditor of Maple Bank for the year 2010. Maple has a large number of
customers with consumer loan accounts. The loan accounts have balances averaging
$800 in a homogeneous population and the customers usually pay close attention to
their balances.
Your preliminary assessment of internal control over the loan area is that control risk is
low and results of tests of controls support that assessment. Inherent risk is deemed to
be lower as well.
Discuss the confirmation process and the types of confirmations that may be used for
the audit of Maple Bank. Which confirmation type would you select for Maple and
why?
Before procedures using statistical or non-statistical sampling methods begin, the
auditor must determine how the sample will be selected. Discuss the various types of
sample selection, when they are used and, generally, how they are used. Give examples.
Provide two examples of a Type I subsequent event and explain how these events would
be treated in the financial statements.
The instructor must review the student’s responses, as they may vary.
Examples may include, but are not exclusive to:
Discuss what audit independence is and why it is important to the audit firm and the
profession. What are some major threats to audit firm independence and what are some
of the steps that audit firms and the profession have taken in addressing those threats?