Which of the following presumptions does not relate to the appropriateness of audit
evidence?
A. The more effective the internal control system, the more assurance it provides about
the accounting data and financial statements.
B. An auditor’s opinion, to be economically useful, is formed within a reasonable time
and based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than
evidence secured solely within the entity.
D. The independent auditor’s direct personal knowledge, obtained through observation
and inspection, is more persuasive than information obtained indirectly.
The advantages of generalized audit software include all of the following except:
A. It involves auditing while the data are being processed (real-time).
B. It is easy to use.
C. The time to develop the application is usually short.
D. An entire population can be examined in some instances.
For each of the following situations, indicate what type of audit report is most
appropriate.
a. The auditor lacks independence in fact, but not necessarily in appearance.
b. There is a scope limitation and it is material but the overall financial statements are
still presented fairly.
c. The uncorrected misstatements are immaterial.
d. There is a departure from GAAP and it is pervasively material.
The five step process in the audit of ICFR includes
A. Form an opinion on the safeguarding of the entity’s assets.
B. Identify controls to test using a top-down, risk-based approach.
C. Form an opinion on the fairness of the presentation of the financial statements.
D. Form an opinion on the effectiveness of internal controls in meeting operational
goals.
Which of the following combinations guarantees a larger sample size?
A. Decrease the desired confidence level and decrease the tolerable deviation rate.
B. Increase the desired confidence level and decrease the tolerable deviation rate.
C. Decrease the desired confidence level and increase the expected deviation rate.
D. Increase the tolerable deviation rate and increase the expected deviation rate.
The auditor should consider all of the following when deciding whether substantive
procedures will be performed at an interim date except:
A. The level of control risk.
B. Scheduling conflicts in the audit firm that make interim testing more convenient.
C. Whether business conditions will change after the interim date.
D. The ability to examine the remaining period.
If the perpetual inventory records show lower quantities of inventory than the physical
count, an explanation of the difference might be unrecorded
A. sales.
B. sales discounts.
C. purchases.
D. purchase discounts.
Jeff Johns is a staff accountant and has been assigned to the audit of Worldwide
Enterprises, Inc. Subsequent to the completion of fieldwork; Jeff was assigned to draft
the audit report. The content of one of the paragraphs he has drafted reads as follows:
As explained in Note 2 to the financial statements, Worldwide Enterprises has charged
goodwill and certain other intangible assets acquired in two separate acquisitions
directly to shareholders’ equity. Under generally accepted accounting principles, these
intangibles should have been recorded as assets and amortized to income over future
periods. Had these intangibles been capitalized, total assets would have increased by
$400,000 as of December 31, 2011 and net income and earnings per share would be
increased by $380,000 and $2.25, respectively (assuming a 20-year amortization
period).
a. Based on the contents of the paragraph above, which condition requiring a departure
from a standard unqualified opinion exists in the engagement?
b. Assuming that the engagement partner agrees with the paragraph Jeff has prepared
above, where in the auditor’s report should the paragraph be placed?
c. How would the materiality of the condition above affect the final choice of opinion?
In verifying the amount of goodwill recorded by an entity, the most convincing
evidence that an auditor can obtain is by comparing the recorded value of assets
acquired with the
A. assessed value as evidenced by tax bills.
B. seller’s book value as evidenced by financial statements.
C. insured value as evidenced by insurance policies.
D. appraised value as evidenced by independent appraisals.
In which of the following instances would the independence of the CPA not be
considered to be impaired? The CPA has been retained as the auditor of a brokerage
firm
A. which owes the CPA audit fees for more than one year.
B. in which the CPA has a large active margin account.
C. in which the CPA’s brother is the controller.
D. which owes the CPA audit fees for current year services and has just filed a petition
for bankruptcy.
A CPA firm would be reasonably assured of meeting its overall responsibility to provide
services that conform with professional standards by
A. adhering to generally accepted accounting principles.
B. implementing an appropriate system of quality control.
C. joining professional societies that enforce ethical conduct.
D. maintaining an attitude of independence in its engagements.
A violation of the profession’s ethical standards would most likely occur when a CPA
who
A. is also admitted to the Bar represents on letterhead to be both an attorney and a CPA.
B. writes a newsletter on financial management also permits a publishing company to
solicit subscriptions by direct mail.
C. is controller of a bank permits the bank to use the controller’s CPA title in the listing
of officers in its publications.
D. refused to hire a new employee does so because the CPA deemed the candidate to be
“too old.”
A CPA’s duty of due care to a client most likely will be breached when a CPA
A. gives a client an oral instead of a written report.
B. gives a client incorrect advice based on an honest error of judgment.
C. fails to give tax advice that saves the client money.
D. fails to follow generally accepted auditing standards.
Classical variables sampling uses normal distribution theory to evaluate the
characteristics of a population based on sample data.
A substantive test of transactions to test the completeness assertion includes
A. tracing a sample of time sheets to the payroll register.
B. testing a sample of payroll checks for the presence of an authorized time sheet.
C. testing postings to the payroll register for a sample of payroll checks.
D. recomputing the accuracy of a sample of payroll checks.
The purpose of analytical procedures at the completion of the audit includes all of the
following except:
A. revising the audit plan.
B. considering overall reasonableness of the financial statements.
C. reviewing adequacy of evidence gathered to investigate unusual fluctuations.
D. recalculating some of the ratios examined during audit planning.
What is the general character of the work conducted in performing a forensic audit for a
company?
A. Providing assurance that the financial statements are not materially misstated.
B. Detecting or deterring fraudulent activity.
C. Offering an opinion on the reliability of the specific assertions made by
management.
D. Identifying the causes of an entity’s financial difficulties.
Match the following
1)MUS misstatement
2)MUS Upper misstatement limit
3)MUS logical unit
4)MUS Sampling unit
a) The total of the projected misstatement plus the allowance for sampling risk
b) an individual dollar
c) the account or transaction that contains the selected dollar
d) the difference between monetary amounts in the entity’s records and amounts
supported by audit evidence
Which of the following best describes why publicly-traded corporations follow the
practice of having the external auditor appointed by the board of directors or elected by
the stockholders?
A. To promote an adversarial relationship between the auditor and the corporation’s
management.
B. To enhance auditor independence from the management of the corporation.
C. To encourage a policy of rotation of the independent auditors.
D. To give management more leverage over the auditor’s decisions.
Ajax, Inc., is an affiliate of Borax, Inc. and is audited by another audit firm. Which of
the following is most likely to be used by the auditor of Borax to obtain assurance that
all guarantees by Borax of Ajax’s indebtedness have been detected?
A. Send the standard bank confirmation request to all of Borax’s lender banks.
B. Review Borax board minutes and obtain a management representation letter.
C. Examine supporting documents for all entries in intercompany accounts.
D. Obtain written confirmation of indebtedness from the auditor of Ajax.
The third general auditing standard requires that due professional care be exercised in
the performance of the examination and the preparation of the report. Due professional
care deals with what is done by the independent auditor and how well it is done. For
example, due care in the matter of audit documents requires that audit documents’
A. Format be neat and orderly and include both a permanent file and a general file.
B. Content be sufficient to provide support for the auditor’s report, including the
auditor’s representation as to compliance with auditing standards.
C. Ownership is determined by the legal statutes of the state where the auditor
practices.
D. Preparation is the responsibility of assistants whose work is reviewed by seniors,
managers, and partners.
Which statement is correct concerning an auditor’s statutory legal liability?
A. The Securities Act of 1933 broadened the auditor’s common law liability and the
Securities Exchange Act of 1934 narrowed it.
B. The auditor has a greater burden of defense under the Securities Act of 1933 than
under the Securities Exchange Act of 1934.
C. Criminal liability only arises under state law.
D. Statutory liability usually modifies the auditor’s liability to the client.
May an accountant plan and perform an engagement to compile or review the financial
statements of a not-for-profit entity if the accountant is unfamiliar with the specialized
industry accounting principles?
A. Only a compilation could be performed without the specialized knowledge.
B. Only a review could be performed without the specialized knowledge.
C. Both a compilation and a review could be performed without the specialized
knowledge.
D. Neither a compilation nor a review could be performed without the specialized
knowledge.
Erik Rekdahl, senior-in-charge, is auditing Koonce Katfood, Inc.’s, long-term debt for
the year ended December 31. Long-term debt is composed of two bond issues, which
are due in 10 and 15 years, respectively. The debt is held by two insurance companies.
Rekdahl has examined the bond agreements for each issue. The agreements provide that
if Koonce fails to comply with the covenants of the contract, the debt becomes payable
immediately. Rekdahl identified the following covenants when reviewing the bond
agreements:
“The debtor company shall endeavor to maintain a working capital ratio of 2 to 1 at all
times, and in any fiscal year following a failure to maintain said ratio, the company
shall restrict compensation of officers to a total of $650,000. Officers include the
chairperson of the board and the president.”
“The debtor company shall keep all property that is security for these debt agreements
insured against loss by fire to the extent of 100 percent of its actual value. Policies of
insurance comprising this protection shall be filed with the trustee.”
“The company is required to restrict 40 percent of retained earnings from availability
for paying dividends.”
“A sinking fund shall be established with the First Morgan Bank of Austin, and
semiannual payments of $500,000 shall be deposited in the fund. The bank may, at its
discretion, purchase bonds from either issue.”
a. Provide any audit steps that Rekdahl should conduct to determine if the company is
in compliance with the bond indentures.
b. List any reporting requirements that the financial statements or footnotes should
include.
In obtaining an understanding of a manufacturing entity’s internal control concerning
inventory balances, an auditor most likely would
A. review the entity’s description of inventory policies and procedures.
B. perform test counts of inventory during the entity’s physical count.
C. analyze inventory turnover statistics to identify slow-moving and obsolete items.
D. analyze monthly production reports to identify variances and unusual transactions.
Which of the following explanations most likely would satisfy an auditor who questions
management about significant debits to the accumulated depreciation accounts?
A. The estimated remaining useful lives of plant assets were revised upward.
B. Plant assets were retired during the year.
C. The prior year’s depreciation expense was erroneously understated.
D. Overhead allocations were revised at year-end.
An accounts receivable account balance is $500,000 and the auditor determines a
sample size of 30 would provide adequate assurance. The auditor plans to use a
monetary-unit sampling plan with systematic sample selection. The auditor notices that
there are six customer accounts of at least $15,000 and would like the systematic
selection technique to select all items that are at least $15,000, even if that means the
sample size is slightly larger than 30. To achieve the auditor’s objectives, the sampling
interval should be
A. 6.
B. 20.
C. 16,666.
D. 15,000.
An auditor’s report on financial statements prepared in accordance with a basis of
accounting other than generally accepted accounting principles should include all of the
following except:
A. an opinion as to whether the basis of accounting used is appropriate under the
circumstances.
B. an opinion as to whether the financial statements are presented fairly in conformity
with the other basis of accounting.
C. reference to the note to the financial statements that describes the basis of
presentation.
D. a statement that the basis of presentation is a basis of accounting other than generally
accepted accounting principles.
In planning an audit of a new client, an auditor most likely would consider the methods
used to process accounting information because such methods
A. Influence the design of internal controls.
B. Affect the auditor’s overall materiality levels.
C. Assist in evaluating the planned audit assertions.
D. Determine the auditor’s acceptable level of audit risk.
Which of the following best describes the concept of audit risk?
A. The risk of the auditor being sued because of association with an auditee.
B. The risk that the auditor will provide a “clean” opinion on financial statements that
are, in fact, materially misstated.
C. The overall risk that a material misstatement exists in the financial statements.
D. The risk that auditors use audit procedures that are inappropriate.
Which of the following statements about the study of auditing is NOT true?
A. The study of auditing can be valuable to future accountants and business decision
makers whether or not they plan to become auditors.
B. The study of auditing focuses on learning the analytical and logical skills necessary
to evaluate the relevance and reliability of information.
C. The study of auditing focuses on learning the rules, techniques, and computations
required to analyze financial statements.
D. The study of auditing begins with the understanding of a coherent logical framework
and techniques useful for gathering and analyzing evidence about others’ assertions.
Assessing control risk at a lower level involves all of the following except:
A. Identifying specific controls to rely on.
B. Concluding that controls are ineffective.
C. Performing tests of controls.
D. Analyzing the achieved level of control risk after performing tests of controls.
During the course of an audit, a CPA observes that the recorded interest expense seems
to be excessive in relation to the balance in the long-term debt account. This
observation could lead the auditor to suspect that
A. long-term debt is understated.
B. discount on bonds payable is overstated.
C. long-term debt is overstated.
D. premium on bonds payable is understated.
Vouching selected items from the payroll register to employee time sheets that have
been approved by supervisory personnel provides evidence that
A. internal controls relating to payroll disbursements were operating effectively.
B. payroll checks were signed by an appropriate officer independent of the payroll
preparation process.
C. only bona fide employees worked and their pay was properly computed.
D. employees worked the number of hours for which their pay was computed.
Which of the following most likely would not be considered an inherent limitation of
the potential effectiveness of an entity’s internal controls?
A. Incompatible duties.
B. Management override.
C. Mistakes in judgment.
D. Collusion among employees.