Information asymmetry seldom occurs.
A series of business and related auditing failures led to the passage of the
Sarbanes-Oxley Act (2002).
Confidence level and sampling risk are related to sample size.
Internal control consists of six components.
Every contingent liability must be recorded.
Electronic commerce is an example of a category of assurance services.
Generally, the financial statements of U.S. companies must be prepared based on
GAAP.
Auditing services and attestation services are the same.
For most companies, stockholders’ equity includes the following three accounts:
preferred stock, paid-in capital, and retained earnings.
The primary audit context with which an auditor is concerned is the auditee’s industry
or business.
Attestation standards provide guidance for performing assurance services with respect
to several types of engagements, including prospective financial statements.
The engagement partner is typically responsible for doing the detailed audit testing.
Haphazard selection allows the auditor to select items judgmentally.
A legal letter will include and evaluate all contingent liabilities of the company.
The return of vendor purchases is a part of the revenue process.
The auditor typically begins an audit of retained earnings by obtaining a schedule of
account activity for the period.
Generally, auditors rely on controls when auditing the property management function
and therefore less substantive testing is used.
The Principles of Professional Conduct set forth the minimum standards.
The choice of which audit report to issue depends on the condition and the materiality
of any departure.
The audit committee generally includes senior executives of the organization.
A receiving report is used to document the ordering of goods.
The accounts payable department is responsible for ensuring that all vendor invoices,
cash disbursements, and adjustments are recorded in the accounts payable records.
The general cash account is normally the principal account used to disburse payroll.
The independence standards issued by the PCAOB do not prohibit the provision of tax
services to an attest client.
Inherent risk includes sampling risk and detection risk.
Payroll-related expenses normally are not a material cost to the organization.
Audit sampling is commonly used to gather confirmation audit evidence.
The classification assertion refers to transactions and events being recorded in the
correct accounting period.
Monetary-unit sampling is based on attribute sampling concepts.
If the auditor has detected misstatements in prior audits, the assessment of inherent risk
for the property management process will usually be set higher.
Changes that do not affect consistency are normally disclosed in the footnotes but do
not require an explanatory/emphasis-of-matter paragraph in the audit report.
A comparison of the current year’s inventory turnover ratio with previous years’ may
indicate the presence of obsolete inventory.
Product costs should be matched directly with specific transactions and are recognized
upon recognition of revenue.
A receiving report records the shipment of goods to customers.
There are few inherent risk factors that directly affect the human resource management
process and its related accounts for non-officers.
To recover against an auditor in a negligence case, the client must prove that the client
sustained an actual loss or damage.
Income statement accounts must be accounted for in accordance with GAAP.
If there is substantial doubt about the entity’s ability to continue as a going concern, the
auditor should obtain information about the management’s plans to mitigate the problem
and assess the likelihood that such plans can be implemented.
Which of the following circumstances most likely would cause an auditor to suspect an
employee payroll fraud scheme?
A. There are significant unexplained variances between standard and actual labor cost.
B. Payroll checks are disbursed by the same employee each payday.
C. Employee time sheets are approved by individual departmental supervisors.
D. A separate payroll bank account is maintained on an imprest basis.
In the first audit of an entity, because of the entity’s record retention policies, an auditor
was not able to gather sufficient evidence about the consistent application of accounting
principles between the current and the prior year, as well as the amounts of assets or
liabilities at the beginning of the current year. If the amounts in question could
materially affect current operating results, the auditor would
A. be unable to express an opinion on the current year’s results of operations and cash
flows.
B. express a qualified opinion on the financial statements because of a client-imposed
scope limitation.
C. withdraw from the engagement and refuse to be associated with the financial
statements.
D. specifically state that the financial statements are not comparable to the prior year
because of an uncertainty.
The auditor can best verify an entity’s bond sinking fund transactions and year-end
balance by
A. recomputation of interest expense, interest payable, and amortization of bond
discount or premium.
B. confirmation with individual holders of retired bonds.
C. confirmation with the bond trustee.
D. examination and count of the bonds retired during the year.
Section 404 of the Sarbanes-Oxley Act includes which of the following?
A. A requirement that management of a publicly traded company issues an assessment
of internal control that covers the entire year.
B. Specific guidance on what constitutes adequate internal control.
C. A requirement that management of a publicly traded company accepts responsibility
for establishing and maintaining adequate internal controls.
D. A requirement that management of a publicly traded company issues an assessment
regarding the efficiency of internal control for the year.
In connection with the examination of bonds payable, an auditor would expect to find in
a bond agreement
A. the issue date and maturity date of the bond.
B. the names of the original subscribers to the bond issue.
C. the yield to maturity of the bonds issued.
D. the company’s debt-to-equity ratio at the time of issuance.
Which of the following is the most effective control activity to detect vouchers prepared
for the payment of goods that were not received?
A. Counting of goods upon receipt in the storeroom.
B. Matching of purchase order, receiving report, and vendor invoice for each voucher in
the accounts payable department.
C. Comparison of goods received with goods requisitioned in the receiving department.
D. Verification of vouchers for accuracy and approval in the internal audit department.
All of the following refer to the competence of the internal audit function except:
A. The party in the entity to which the internal audit function reports.
B. The quality of internal audit documents and reports.
C. Professional certification.
D. Supervision and review of internal audit activities.
Engagement letters include all of the following except:
A. A list of additional services that will be provided.
B. A list of adjusting journal entries.
C. Information about the audit fee.
D. Arrangements involving the use of specialists.
In the context of an audit of internal controls, the auditor must document all of the
following except:
A. The extent to which he or she relied upon work performed by others.
B. The auditor’s understanding and evaluation of the design of each of the components
of the entity’s internal control over financial reporting.
C. Transcripts of the auditor’s discussion with management concerning the points at
which misstatements could occur.
D. The evaluation of any deficiencies discovered that could result in a modification of
the auditor’s report.
Which of the following best describes what is meant by generally accepted auditing
standards?
A. Audit assertions generally determined on audit engagements.
B. Acts to be performed by the auditor.
C. Standards of quality for the auditor’s performance.
D. Procedures to be used to gather evidence to support financial statements.
Which of the following is a general audit test?
A. Fee assessment procedures.
B. Tests of controls.
C. Preparation of corporate tax returns.
D. Active testing procedures.
Rule 10b-5 under Section 10(b) of the Securities Exchange Act of 1934 imposes
liability on an accountant for violation of certain duties. Which of the following is an
investor not required to prove to recover from a CPA?
A. A material, factual misrepresentation or omission.
B. Reliance by the plaintiff on the financial statements.
C. Damages suffered as a result of reliance on the financial statements.
D. The security price was artificially inflated as a result of the materially misstated
financial statements.
Examining a sample of cancelled checks for an authorized signature tests which of the
following assertions for cash?
A. Authorization.
B. Completeness.
C. Cutoff.
D. Accuracy.
Evaluating a prospective client requires which of the following steps?
A. Communicate with the predecessor auditor.
B. Preplan the audit.
C. Establish the terms of the engagement.
D. None of these.
When an auditor selects a sample of items from the vouchers payable register for the
last month of the period under audit and traces these items to underlying documents, the
auditor is gathering evidence primarily in support of the assertion that
A. recorded obligations were paid.
B. incurred obligations were recorded in the correct period.
C. recorded obligations were valid.
D. cash disbursements were recorded as incurred obligations.
Auditors are more concerned with the occurrence assertion for revenues than the
completeness assertion because
A. entities are more likely to overstate than understate revenues.
B. entities are more likely to understate than overstate revenues.
C. it is difficult to determine when services have been performed.
D. the allowance for doubtful accounts often is understated.
Following the issuance of a PCAOB draft report, how many days does the CPA firm
have to respond to accusations?
A. 10 days.
B. 30 days.
C. 50 days.
D. 90 days.
The primary purpose of establishing quality control policies and procedures for
deciding whether to accept a new client is to
A. enable the CPA firm to attest to the reliability of the client.
B. satisfy the CPA firm’s duty to the public concerning the acceptance of new clients.
C. minimize the likelihood of association with clients whose management lacks
integrity.
D. anticipate before performing any fieldwork whether an unqualified opinion can be
expressed.
Which of the following best describes the fundamental, underlying reason for why there
is demand for an independent auditor to report on financial statements?
A. A management fraud may exist and it is more likely to be detected by auditors if they
are independent.
B. Different interests may exist between the company preparing the statements and the
parties using the statements.
C. A misstatement of account balances may exist and it is the independent auditor’s
responsibility to ensure that financial statements are not misstated.
D. A poorly designed internal control system may be in place.
When reporting on comparative financial statements where the financial statements of
the prior year have been examined by a predecessor auditor whose report is not
presented, the successor auditor should make
A. no reference to the predecessor auditor.
B. reference to the predecessor auditor only if the predecessor auditor expressed a
qualified opinion.
C. reference to the predecessor auditor only if the predecessor auditor expressed an
unqualified opinion.
D. reference to the predecessor auditor regardless of the type of opinion expressed by
the predecessor auditor.
With respect to ethics, the justice-based approach
A. suggests that auditors should always verify ownership of a client’s material tangible
assets.
B. is primarily concerned with equity and impartiality.
C. suggests that an individual’s actions should not violate the rights of any individual.
D. recognizes that decisions involve trade-offs between costs and benefits.
Which of the following is the authoritative body designated to promulgate attestation
standards for nonpublic entities?
A. AICPA (Auditing Standards Board).
B. Governmental Accounting Standards Board.
C. Financial Accounting Standards Board.
D. General Accounting Office.
When are an auditor’s reporting responsibilities not met by attaching an explanation of
the circumstances and a disclaimer of opinion to the entity’s financial statement?
A. When the auditor believes the financial statements are misleading.
B. When the auditor was unable to observe the taking of the physical inventory.
C. When the auditor is uncertain about the outcome of a material uncertainty.
D. When the auditor has performed insufficient auditing procedures to express an
opinion.
Which one of the following would the auditor consider to be an incompatible operation
if the cashier receives remittances from the mailroom?
A. The cashier prepares the daily deposit.
B. The cashier makes the daily deposit at a local bank.
C. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D. The cashier endorses the checks.
Which of the following is allowable for a CPA?
A. A used car loan from a banking client where the client has a lien on the car.
B. An uncollateralized signature loan from a client.
C. Owning more than five percent of the outstanding shares of client stock in a
retirement account.
D. The audit engagement partner (or partner equivalent) serves on the client’s audit
committee.
An entity has a large and active investment portfolio that is kept in a bank safe-deposit
box. If the auditor is unable to examine and count the securities at the balance sheet
date but will examine and count the securities shortly thereafter, the auditor most likely
will
A. request that the bank confirm to the auditor the contents of the safe-deposit box at
the balance sheet date.
B. examine supporting evidence for transactions occurring during the year.
C. count the securities at a subsequent date and confirm with the bank whether
securities were added or removed since the balance sheet date.
D. request that the entity have the bank seal the safe-deposit box until the auditor can
count the securities at a subsequent date.
If completeness is a concern for accounts payable, auditors will send accounts payable
confirmations to
A. primarily vendors with large accounts payable balances.
B. primarily vendors with small or zero accounts payable balances.
C. all vendors.
D. a random sample of all vendors.
Based on a 5% risk of assessing control risk too low, how would an auditor interpret a
computed upper deviation rate of 7%?
A. The auditor is willing to accept a deviation rate of 7% before deciding not to rely on
the control.
B. There is a 5% chance that the deviation rate in the population is less than 7%.
C. There is a 5% chance that the deviation rate in the population exceeds 7%.
D. There is a 95% chance that the deviation rate in the population equals 7%.
In statistical or nonstatistical sampling methods used in substantive testing, an auditor
most likely would stratify a population into meaningful groups if
A. monetary-unit sampling (MUS) is used.
B. the population contains both very high and very low recorded amounts.
C. the auditor’s estimated tolerable misstatement is extremely small.
D. the standard deviation of recorded amounts is relatively small.
During a review of the financial statements of a nonpublic entity, an accountant
becomes aware of inadequate disclosure that is material to the financial statements. If
management refuses to correct the financial statement presentations, the accountant
should
A. issue an adverse opinion.
B. issue an “except for” qualified opinion.
C. disclose this departure from generally accepted accounting principles in a separate
paragraph of the report.
D. express only limited assurance on the financial statement presentations.
When testing a computerized accounting system, which of the following is false
regarding the test data approach?
A. The test data need to consist of only those valid and invalid conditions in which the
auditor is interested.
B. Only one transaction of each type needs be tested.
C. Test data are processed by the entity’s computer programs under the auditor’s control.
D. The test data must consist of all possible valid and invalid conditions.
In performing an attestation engagement, a CPA typically
A. supplies litigation support services.
B. assesses control risk at a low level.
C. expresses a conclusion about an assertion.
D. provides management consulting advice.
Reviewing notes paid or renewed after the balance sheet date to determine if there are
unrecorded liabilities at year-end can be used to test the assertion of
A. existence.
B. completeness.
C. rights and obligations.
D. valuation and allocation.
An internal control questionnaire indicates that an approved receiving report is required
to accompany every check request for payment of merchandise. Which of the following
procedures provides the greatest assurance that this control is operating effectively?
A. Select and examine receiving reports and ascertain that the related canceled checks
are dated no earlier than the receiving reports.
B. Select and examine receiving reports and ascertain that the related canceled checks
are dated no later than the receiving reports.
C. Select and examine canceled checks and ascertain that the related receiving reports
are dated no earlier than the checks.
D. Select and examine canceled checks and ascertain that the related receiving reports
are dated no later than the checks.
An auditor selects a sample from the file of shipping documents to determine whether
invoices were prepared. This test is performed to assess the assertion of
A. authorization and accuracy.
B. completeness.
C. cutoff.
D. occurrence.
The key inherent risk factors an auditor must consider when auditing the purchasing
process are industry factors. Which two are most important and why?
Which professional and regulatory bodies establish the ethical and professional rules for
auditors of: (1) public companies and (2) private companies?
How do accounting standards regarding accounting for the impairment or disposal of
long-lived assets affect the audit of property, plant, and equipment?
List two ways an auditor can test the existence and completeness of insurance policies.
Listed below are six assertions regarding the financial presentations made in the
purchasing process. For each, give an example of how an auditor could use one of the
typical documents in the purchasing process to test the assertion.
Occurrence
Completeness
Authorization
Accuracy
Cutoff
Classification
For an auditor to examine management’s assertions about the effectiveness of internal
control in an attestation engagement, three conditions are necessary. Briefly explain
them.
Summarize the concept behind monetary-unit sampling (MUS). How does MUS use
attribute-sampling theory?
When using analytical procedures, the auditor first needs to develop an expectation with
which to compare recorded results. What is meant by “precision of the expectation,”
and what factors affect the precision of analytical procedures?
When an auditor sets control risk low, sufficient evidence can be obtained for most
payroll accounts through an understanding of internal controls, substantive analytical
procedures, and tests of details of transactions. However, there are several accounts in
the payroll cycle that may require more attention. Name the accounts and explain why
the additional testing is necessary.
What is the difference between a contingent liability and a commitment?
The Sarbanes-Oxley Act of 2002 grants the PCAOB the ability to undertake two
functions over registered public accounting firms and persons associated with such
firms. Briefly explain the purpose of the PCAOB, making sure to reference their two
major functions.
Your uncle Bob, a CPA, has recently started auditing and he wants your advice on some
tests of sales transactions he is conducting. Bob selected a haphazard sample of 15 sales
with a total book value of $75,000. In his sample, he found a total of $500 in net
overstatement errors. The total sales balance per book is $10,000,000. Overall
materiality for the engagement is $300,000. Tolerable misstatement for sales is $70,000.
If the sample results indicate that Bob’s best estimate of total misstatement in sales is
$35,000, can Bob safely conclude that no additional work is needed in this area?
Include in your answer a clear discussion of how sample results are compared to
tolerable misstatement.
Explain the relationship between sample size, materiality, and desired level of
assurance.
The SEC’s rules with respect to services provided by auditors are predicated on three
basic principles of auditor objectivity and independence. What are the three basic
principles?
When can a CPA disclose confidential information without the client’s consent?
Discuss the internal control communication requirements of the PCAOB. What must
auditors of public companies report to those charged with governance?