An entity that, as part of its normal business operations, makes loans or extends credit
to the general public, is referred to as a:
A. financial institution.
B. savings and loan.
C. federal reserve bank.
D. FDIC.
When audit tests are performed at an interim date, the auditor must
(a) obtain a letter from management to confirm the continued performance of internal
controls and accuracy of the year-end balances.
(b) perform roll forward audit procedures to determine whether a control continued to
perform the same way through year-end.
(c) reconcile account balances tested at an interim date with the year-end balances in the
same accounts.
(d) Both (b) and (c)
Comparing the balance per the accounts payable subsidiary ledger with the general
ledger:
a. achieves the completeness assertion.
b. achieves the authorization assertion.
c. achieves the existence assertion.
d. All of the above.
Where can auditors obtain information about a potential client company?
(a) The company’s Web site.
(b) Reports filed with the SEC.
(c) The shareholders.
(d) Both a and b.
Procedures that fall into the category of tests of controls are used by the company as
well as:
a. the audit committee.
b. the auditor.
c. the customers.
d. the IRS.
e. the SEC.
Substantive audit procedures:
a. support direct audit tests for expenses.
b. can detect unusual relationships between accounts. TYPO
c. Both a and b.
d. None of the above.
Tracing shipping documents to prenumbered sales invoices provides evidence that:
a. shipments to customers were properly invoiced.
b. no duplicate shipments or billings occurred.
c. all goods ordered by customers were accounted for.
d. all prenumbered sales invoices were accounted for.
e. shipments to customers were properly vouched.
An auditor wishing to reperform a control review over a voucher invoice would:
(a) recalculate the amount paid for accuracy.
(b) trace the vendor to the approved vendor list.
(c) trace price paid to the approved vendor price list.
(d) All of the above.
To ensure that a client’s raw materials, work-in-process, and finished goods inventories
are physically protected from theft or damage, an auditor could perform a test of
controls such as:
a. selecting a sample of inventory items from the inventory records and inspecting them
for consistency with the category of records.
b. reviewing the company’s inventory policies for adherence to GAAP.
c. observing the client’s physical inventory count to assess whether the company’s
procedures are being followed.
d. touring the storage and production facilities and observe the security procedures in
place.
An audit engagement letter specifies that management of the client company is
responsible for all of the following except:
(a) preparing the financial statements.
(b) maintaining effective ICFR.
(c) providing the company’s financial records for the auditor.
(d) performing the audit in accordance with PCAOB standards.
An auditor expresses an unqualified opinion on the financial statements of a publically
held client. Subsequent to the audit, the client files for bankruptcy protection. The
auditor issuing the unqualified opinion may:
a. cite its reliance on the work of the auditor issuing the SAS 70 report.
b. disown the opinion as it relies on the work of another auditor.
c. cite its work on the client’s internal controls as the basis for issuing the opinion.
d. None of the above.
Which of the following must the auditor consider when deciding whether to perform
additional testing of a service provider in the presence of a SAS 70 report?
a. The time period covered in the SAS report.
b. The relationship of controls tested at the service provider to those at the client
organization.
c. The quality of the audit report and firm conducting the SAS 70 report.
d. Both a and b only.
Who is responsible for the design and operation of ICFR?
a. The auditor.
b. The company’s management.
c. Both a and b.
d. None of the above.
To properly instruct and review the work of audit team members, the supervising
auditor must:
(a) keep abreast of accounting and audit issues and manage differences of opinion
among team members regarding audit findings.
(b) obtain instruction from the chair of the audit committee regarding the objectives of
the audit engagement.
(c) communicate with the predecessor auditor regarding differences of opinion
regarding prior year audit findings.
(d) all of the above
Which of the following is least likely to be used as a source of information about a
potential new audit client?
(a) The potential client company’s predecessor auditor.
(b) The potential client’s management and directors.
(c) Former employees and shareholders of the potential client company.
(d) Published financial information of the potential client company.
Which of the following risks can the auditor control:
(a) audit risk.
(b) detection risk.
(c) inherent risk.
(d) control risk.
A test of the valuation assertion for new long-term debt would be:
(a) trace the amount received from the debt issuance to the general ledger.
(b) recalculate the amortization of premium or discount.
(c) recalculate the interest expense.
(d) All of the above.
A public company must:
a. register with the SEC.
b. undergo an integrated audit.
c. trade on a stock exchange.
d. Both a and b.
There are many different concepts of “what is right” presented in your textbook. The
concept that supports the progressive income tax in the United States is:
A. right is whatever creates the greatest good.
B. right is the decision made by a governing entity.
C. right is the decision made by the group of people affected.
D. right is whatever the law requires.
Substantive analytical procedures include:
a. calculating commission expense as a percent of sales.
b. calculating payroll tax expense as a percent of compensation expense.
c. comparing direct labor expense as a percent of sales.
d. All of the above.
The reason auditors collect evidence is to:
(a) determine if management’s assertions are fair.
(b) obtain a reasonable basis for forming an opinion on the financial statements.
(c) obtain a reasonable basis for forming an opinion on the effectiveness of ICFR.
(d) All of the above.
The amount of evidence collected during an audit has a direct relationship to:
(a) expected risk.
(b) accuracy of management assertions.
(c) appropriateness of management assertions.
(d) All of the above.
Which of the below is considered a sampling frame?
a. Individual accounts receivable accounts.
b. Individual inventory accounts.
c. A transaction file.
d. None of the above.
A summary judgment:
a. Is brought by the plaintiff’s attorney.
b. Is brought by the defendant’s attorney.
c. Seeks to dismiss the case before evidence is presented at trial.
d. Both b and c.
If the product must be retrieved from storage or a warehouse before it can be shipped, a
document is used to authorize the:
a. shipment.
b. transaction.
c. invoice.
d. retrieval.
e. report.
Testing the valuation of securities would involve:
(a) tracing security values to internal sources of information.
(b) comparing inputs used in the valuation process to the underlying documents.
(c) tracing amounts shown in the investment ledger to amounts shown on investment
statements.
(d) None of the above.
The nature, timing, and extent of audit needed audit tests will depend upon the answers
to each of the following questions except
(a) How could a material misstatement happen?
(b) What internal controls has the client implemented to address potential
misstatements?
(c) How might internal controls fail such that a material misstatement occurs?
(d) How many times have material misstatements been undetected?
Land development and home building companies provide warranties for:
a. impaired assets.
b. manufacturer’s defects and latent defects.
c. amenities.
d. obsolete or slow-moving items.
An account that is particularly difficult to audit in the automotive industry is:
a. accounts payable.
b. warranty liability.
c. cash disbursements.
d. All are equally difficult.
Which of the following audit steps for observing a client’s inventory count are to be
performed after the physical count is complete?
a. Obtain the number of the receiving report and shipping document for the last item of
the period and check to see that the inventory is properly included or excluded.
b. Inquire of client’s management about whether any inventory owned by others is held
on consignment.
c. Trace items selected and included in audit test recounts into the client’s inventory
records.
d. Check for the sequential numbering of tags used in the physical counts, including
identification of all used and unused numbers.
Statistical analyses are required whenever an auditor estimates the unknown error for an
account balance.
Discussions with client personnel as to the effectiveness of controls are not
recommended.
The audit report must contain explanatory language if there is a going concern issue.
Auditors report their chargeable hours using timesheets.
The schedule of audit findings summarizes the results of the audit.
The auditor must index the files to conform to the balance sheet.
At the end of the accounting period, adjustments for under- or overapplied overhead are
simply posted to the inventory accounts.
The PCAOB does not allow haphazard sampling.
SIC is used to classify companies into industries.
The receiving department uses information supplied by the purchasing department
when receiving raw materials.
Manufacturers use purchase accounts; retailers use inventory accounts.
A client keeps his records in a shoebox with little evidence supporting the entries. This
is sufficient to support conclusions in generating an audit report.
Audit failure only occurs if the client goes bankrupt.
An audit by the IRS may indicate an illegal act.
Controls are needed to ensure that goods are received on a timely basis and bills are
sent out for all goods that are received.
Audit risk is a function of inherent risk, control risk, and engagement risk.
The lead schedule is the client’s working trial balance.
Jessica Chatman is a staff auditor assigned the task of performing tests of internal
controls for the JC Automotive Parts engagement. Before she begins testing,
Jessica must first determine the timing of her tests. Because JC Automotive is a very
small engagement, all controls are manual. In planning the tests, she identifies one
control as a significantly recurring control over the revenue account that occurs once a
week (52 times a year). For another area, she identifies a control that is over
adjusting entries and occurs quarterly (four times a year).
In planning the timing of the tests of the internal controls over financial
reporting, which should Jessica plan to test more frequently? Would your answer
change if the controls over the revenue account were automatic controls that did not
change over the reporting period? Explain.