When using confirmations to provide evidence about the completeness assertion for
accounts payable, the appropriate population most likely would be
A. vendors with whom the entity has previously done business.
B. amounts recorded in the accounts payable subsidiary ledger.
C. payees of checks drawn in the month after the year-end.
D. invoices filed in the entity’s open invoice file.
Inventory turnover increased substantially from the prior year. (Select 3 explanations)
(A) Items shipped on consignment during the last month of the year were recorded as
sales.
(B) A significant number of credit memos for returned merchandise that were issued
during the last month of the year were not recorded.
(D) Year-end purchases of inventory were understated by incorrectly excluding items
received before the year end.
2. Accounts receivable turnover decreased substantially from the prior year. (Select 3
explanations)
(A) Items shipped on consignment during the last month of the year were recorded as
sales.
(B) A significant number of credit memos for returned merchandise that were issued
during the last month of the year were not recorded.
(F) A smaller percentage of sales occurred during the last month of the year, as
compared to the prior year.
3. Allowance for doubtful accounts increased from the prior year, but allowance for
doubtful accounts as a percentage of accounts receivable decreased from the prior year.
(Select 3 explanations)
(A) Items shipped on consignment during the last month of the year were recorded as
sales.
(B) A significant number of credit memos for returned merchandise that were issued
during the last month of the year were not recorded.
(F) A smaller percentage of sales occurred during the last month of the year, as
compared to the prior year.
Below are two independent situations.
A. Grinner and Greeter, CPAs, were engaged to perform an audit of the financial
statements of Happy Inc. Happy’s management would not allow Grinner and Greeter to
confirm any of the accounts receivable. All other auditing procedures were performed
as considered necessary by Grinner and Greeter and no issues were encountered.
However, Grinner and Greeter were unable to satisfy themselves with regard to the
balance in accounts receivable.
B. Tick and Tie, CPAs, were performing their annual audit of Johnson Manufacturing
Company. Johnson is currently being sued for $2,000,000 related to an alleged
defective product that they sold to a customer. Johnson’s legal counsel has told Tick and
Tie that it is probable that Johnson will lose the suit and have to pay the entire
$2,000,000. Johnson’s management has included information in the footnotes about the
lawsuit. However, they have not recorded any loss or liability in the income statement
or balance sheet.
Which of the following claims concerning the quality of auditors’ work would least
likely result in civil liability for damages?
A. Gross negligence amounting to constructive fraud
B. Failure to investigate possible fraud when other entities in the industry have
experienced frauds
C. Reckless disregard of evidence that the financial statements do not conform to
generally accepted accounting principles
D. Issuing an unqualified auditors’ opinion when evidence suggests that the financial
statements were not prepared according to generally accepted accounting principles
A retailer’s physical count of inventory was higher than that shown by the perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but the tags placed on the items had not been
taken off and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been recorded.
C. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
D. An item purchased FOB shipping point had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.
When testing the completeness assertion for a liability account, an auditor ordinarily
works from the
A. financial statements to the potentially unrecorded items.
B. potentially unrecorded items to the financial statements.
C. accounting records to the supporting evidence.
D. trial balance to the subsidiary ledger.
Which of the following accounts would most likely be audited in connection with a
related balance sheet account?
A. Property tax expense.
B. Payroll expense.
C. Research and development.
D. Legal expense.
Why is appropriately defining the population so important in a sampling application?
A. To permit the appropriate number of sample items to be selected
B. To ensure that the appropriate audit procedures can be applied to sample items
C. To enhance the likelihood of obtaining a representative sample and meet the
objective of the sampling application
D. To reduce the likelihood of failing to identify material misstatements in an account
balance or class of transactions
The sampling plan for nonstatistical sampling is the same as statistical sampling except
for which of the following steps?
A. Define the characteristic of interest.
B. Define the population.
C. Measure the sample items.
D. Evaluate the sample results.
An audit plan for accounts payable would not include which of the following
procedures?
A. Obtaining a trial balance of recorded accounts payable.
B. Sending confirmation to accounts with zero balances.
C. Reviewing cash receipts for the period after year-end.
D. Obtaining written client representations about related-party payables and pledges of
assets as collateral for liabilities.
Which reporting options do auditors have if the client’s financial statements are not
presented according to the applicable financial framework (e.g., GAAP, IFRS)?
A. Unmodified opinion or disclaimer of opinion
B. Qualified opinion or disclaimer of opinion
C. Unmodified opinion or adverse opinion
D. Qualified opinion or adverse opinion
A company employs three accounts payable clerks and one treasurer. Their
responsibilities are as follows:
Which of the following would indicate a weakness in the company’s internal controls?
A. Clerk 1 opens all of the incoming mail.
B. Clerk 2 reconciles the accounts payable ledger with the general ledger monthly.
C. Clerk 3 mails the checks and remittances after they have been signed.
D. The treasurer uses a stamp for signing checks.
The auditors have determined that there is substantial doubt about an entity’s ability to
continue as a going concern. When considering the appropriateness of management’s
disclosures and severity of the uncertainty, all of the following reports could be issued,
except
A. qualified opinion based on a material and pervasive uncertainty.
B. unmodified opinion with an emphasis-of-matter paragraph describing the
uncertainty.
C. adverse opinion based on inadequate disclosure of the uncertainty.
D. disclaimer of opinion based on a material and pervasive uncertainty.
Which of the following phrases would auditors most likely include in their report when
expressing a qualified opinion on the entity’s financial statements because of inadequate
disclosure?
A. “Subject to the departure from generally accepted accounting principles, as described
above.”
B. “With the foregoing explanation of these omitted disclosures.”
C. “Except for the omission of the information discussed in the preceding paragraph.”
D. “Does not present fairly in all material respects.”
Generally accepted auditing standards (GAAS) give auditors considerable discretion to
decide the amount of work required to satisfy auditing standards guiding internal
control evaluation and related audit planning. Which of the descriptions below best
expresses the minimum amount of work permitted by GAAS for nonpublic companies?
A. Do not obtain an understanding of client environment, accounting, or control
activities. Do not document the decision to assess control risk at maximum. Perform
100% substantive audit on all financial statement transactions and balances.
B. Obtain an understanding of client environment, accounting, and control activities.
Document the decision to assess control risk at maximum. Perform an extensive but not
100% substantive audit on financial statement transactions and balances.
C. Obtain an understanding of client environment, accounting, and control activities,
and perform detail tests of controls. Document the decision to assess control risk below
the maximum. Perform restricted substantive audit on financial statement transactions
and balances, considering the control risk assessment.
D. Obtain an understanding of client environment, accounting, and control activities,
and perform detail tests of controls. Document the decision to assess control risk at
zero. Perform no substantive audit on financial statement transactions and balances,
since zero control risk means that no errors or fraud can reach the accounts.
After obtaining an understanding of a client’s financial reporting control activities, the
auditor would next
A. test the client’s control activities.
B. assess the final control risk.
C. document the understanding obtained.
D. plan the remainder of the audit work.
The usual source for journal entries posted to the general ledger to record the purchase
of inventory is
A. sales invoices updated with cost data from the inventory records department.
B. purchase invoices updated with cost data from the inventory records department.
C. receiving reports updated with cost data from the accounts payable department.
D. vouchers payable journal from the accounts payable department.
An internal control questionnaire for payroll processing occurrence assertion would not
include which of the following questions?
A. Are names of terminated employees reported in writing to the payroll department?
B. Is the payroll compared to personnel files periodically?
C. Are checks distributed by the employee’s immediate supervisor?
D. Are all wage rates determined by contract or approved by a personnel officer?
Which of the following factors is most likely established based on the results of prior
audit examinations?
A. Expected misstatement
B. Population size
C. Risk of incorrect acceptance
D. Tolerable misstatement
Which of the following is an example of a material accounting change that requires
recognition in an unmodified opinion on the entity’s financial statements?
A. A change in the estimate of useful lives used to depreciate property, plant and
equipment
B. A change in the entity’s form of reporting entity
C. Management has changed from one generally accepted accounting principle to
another but has not provided reasonable justification
D. A change from an accounting principle that conforms with GAAP to one that does
not
Keeping track of securities owners for payment of interest or dividends is usually done
by the company’s
A. treasurer.
B. broker.
C. transfer agent.
D. registrar.
What is the primary drawback with respect to the use of sampling?
A. Individuals may fail to obtain a true understanding of the question they are
examining.
B. The time spent in planning and selecting the sample may exceed the time savings
from examining only a subset of the items.
C. The conclusion reached by examining a sample of items may differ from the
conclusion that would be reached if the entire population were examined.
D. Sampling cannot be used to examine account balances that are material to the
financial statements.
Audit teams would most likely introduce test data into a computerized payroll system to
test internal controls related to the
A. existence of unclaimed payroll checks held by supervisors.
B. early cashing of payroll checks by employees.
C. discovery of invalid employee identification numbers.
D. proper approval of overtime by supervisors.
Select the description that best illustrates sampling risk.
A. Applying audit procedures, which are inappropriate for the audit objectives
B. Failing to recognize misstatements or deviations in the documents examined
C. Arriving at incorrect statistical conclusions due to computational errors
D. Choosing a sample which has proportionately more errors than the population
Counting inventory on the warehouse floor and tracing the count to the inventory
compilation provides evidence to support which management (PCAOB) assertion?
A. Existence or occurrence.
B. Completeness.
C. Rights and obligations.
D. Valuation or allocation.
Which of the following is true with respect to the risk of incorrect acceptance?
A. The risk of incorrect acceptance is determined in the planning stages of the audit
prior to the study of internal control.
B. The risk of incorrect acceptance has an inverse relationship with sample size.
C. The risk of incorrect acceptance exposes the auditor to an efficiency loss.
D. The risk of incorrect acceptance may occur when the true (but unknown) account
balance is fairly stated.
An auditor tests an entity’s control that matches shipping documents to sales invoices
before they are recorded in the financial statements as revenue in support of
management’s financial statement assertion of
A. valuation or allocation.
B. presentation and disclosure.
C. existence or occurrence.
D. rights and obligations.
Which of the following is a management assertion regarding account balances at the
period end?
A. Transactions and events that have been recorded have occurred and pertain to the
entity.
B. Transactions and events have been recorded in the proper accounts.
C. The entity holds or controls the rights to assets, and liabilities are obligations of the
entity.
D. Amounts and other data related to the transactions and events have been recorded
appropriately.
Mary Todd is auditing White House Furniture. In selecting a sample of purchases, she
finds that a purchase order is missing. She should
A. select another purchase to test.
B. have the client recreate the purchase order.
C. consider the sample item a deviation.
D. ask the client if the purchase was authorized.
In which of the following situations would the auditor be more likely to use monetary
unit sampling as opposed to classical variables sampling?
A. Larger expected misstatement: Yes; Concern with overstatements: Yes
B. Larger expected misstatement: Yes; Concern with overstatements: No
C. Larger expected misstatement: No; Concern with overstatements: Yes
D. Larger expected misstatement: No; Concern with overstatements: No
Revenues are normally considered to have been earned when
A. all possibility of return has expired.
B. the company has substantially accomplished what it must to be entitled to the
benefits.
C. the cash is collected.
D. goods have been shipped.
If an audit team performing a monetary unit sampling application selects a sample using
a systematic random selection method, which of the following is true with respect to
accounts with a balance greater than the sampling interval?
A. They have a 100% probability of being selected.
B. They have no probability of being selected.
C. They have a greater than 50% probability of being selected.
D. They have a less than 50% probability of being selected.
Which of the following client internal control activities is not usually performed in the
treasurer’s department?
A. Verifying the accuracy of checks and vouchers
B. Controlling the mailing of checks to vendors
C. Approving vendors’ invoices for payment
D. Canceling payment vouchers when paid