Substantive analytical procedures should not be used in the audit of property, plant, and
equipment.
Common law is written law enacted by the legislative branches of governments.
An auditor may be unable to express an unqualified opinion if an immaterial departure
from GAAP is present in the financial statements.
Proper segregation of duties is critical for the human resource management process.
Assets no longer used in operations are accounted for in essentially the same manner as
those used in operations.
Audit risk is the auditor’s exposure to loss or injury of his or her reputation from events
arising in connection with financial statements audited.
With a nonstatistical sampling application, the auditor relies on professional judgment
rather than the laws of probability to reach a conclusion about the audit test.
When auditing a public company, the auditor must form an opinion on the effectiveness
of internal control over financial reporting, or issue a disclaimer in the event of a scope
limitation.
The external auditor is required to make a number of important communications to the
audit committee during or at the end of the audit engagement.
The auditor must understand internal control before assessing inherent risk.
An indirect financial interest is defined as a financial interest that is owned or is under
the control of an individual or entity.
Once the controls in the inventory system have been tested, the auditor sets the level of
control risk.
The Code of Professional Conduct does not allow an auditor to disclose confidential
client information without the client’s consent.
When the entity’s perpetual inventory master files are inadequate, the auditor will
probably choose to test the physical inventory prior to the balance sheet date.
To prevail in a suit alleging negligence, a third party must prove that the auditor had a
duty to the auditor’s client to exercise due care.
The responsibility to assess the entity’s ability to continue as a going concern rests
solely with the auditor.
The first phase of audit planning is risk assessment.
Materiality significantly impacts the auditor’s decisions about how much and what kind
of evidence to gather.
Confidence level is the complement of sampling risk.
The completeness assertion refers to ensuring that transactions and events that should
have been recorded actually have been recorded.
A financial statement audit must be conducted based on GAAP.
Inherent risk for prepaid expenses would generally be assessed as low because these
accounts do not usually include complex transactions.
Generally, all dividends that are declared and paid will be audited.
Decision makers demand reliable information that is provided by accountants.
The larger the sample, the lower the confidence level and the lower the sampling risk.
The combination of inherent risk and control risk is referred to as client risk.
Auditing is a type of attest service.
A positive confirmation requests that customers respond whether they agree or not with
the amount due to the entity stated in the confirmation.
Reading contracts and loan agreements is one way to identify unrecorded contingent
liabilities.
The objective of monetary-unit sampling is to test the assertion that no material
misstatements exist in an account balance or class of transactions.
The three components that make up the cost of producing a product include materials,
direct labor, and indirect labor.
The two standards of fieldwork for attestation engagements do not include the
requirement that the CPA gain an understanding of internal control.
The auditor failing to complete the services agreed to in the contract with the client is
subject to liability under breach of contract.
Limited assurance is provided in a review engagement.
Sale of finished goods is a part of the inventory management process.
The human resource function is responsible for managing the personnel needs of the
organization.
Inventory should be valued using the lower-of-cost-or-market rule.
Most public companies must follow the guidelines of AS5.
The major control procedure for preventing fictitious inventory transactions from being
recorded is proper segregation of duties.
Revenue is realized when a product or service is exchanged for cash or a promise to pay
cash or other assets that can be converted into cash.
Which of the following is an element of a CPA firm’s quality control system that should
be considered in establishing its quality control policies and procedures?
A. Using the audit risk model.
B. Using statistical sampling techniques.
C. Assigning personnel to engagements.
D. Considering audit risk and materiality.
A basic objective of a CPA firm is to provide professional services that conform to
professional standards. Reasonable assurance of achieving this basic objective is
provided through
A. compliance with generally accepted reporting standards.
B. a system of quality control.
C. a system of peer review.
D. continuing professional education.
An auditor discovers a likely fraud during an audit but concludes that the overall effect
of the fraud is not sufficiently material to affect the audit opinion. The auditor should
probably
A. Disclose the fraud to the appropriate level of the client’s management.
B. Disclose the fraud to appropriate authorities external to the client.
C. Discuss with the client the additional audit procedures that will be needed to identify
the exact amount of the fraud.
D. Modify the audit program to include tests specifically designed to identify the fraud
and its impact on the financial statements.
Which of the following is not a topic that requires special consideration by management
during management’s internal control assessment process and by the auditor during the
audit of internal control?
A. Multiple locations and business units.
B. Service organizations.
C. The role of the auditor in internal control.
D. Safeguarding assets.
To improve accountability for fixed asset retirements, management most likely would
implement a system of internal control that includes
A. continuous analysis of the repairs and maintenance account.
B. periodic inquiry of plant executives by internal auditors as to whether any plant
assets have been retired.
C. continuous utilization of sequentially numbered retirement work orders.
D. periodic inspection of insurance policies by the internal auditors.
To achieve effective control over fixed asset additions, a company should establish
activities that require
A. capitalization of the cost of fixed asset additions in excess of a specific dollar
amount.
B. performance of recurring fixed asset maintenance work solely by maintenance
department employees.
C. any fixed asset additions that are not used in the business to be classified as
investments.
D. authorization and approval of major fixed asset additions.
As an in-charge auditor, you are reviewing a summary of control weaknesses in cash
disbursement procedures. Which one of the following weaknesses, standing alone,
should cause you the least concern?
A. Checks are signed by only one person.
B. Signed checks are distributed by the controller to approved payees.
C. Treasurer fails to establish validity of names and addresses of check payees.
D. Cash disbursements are made directly out of cash receipts.
The auditor may conclude that depreciation charges are insufficient by noting
A. insured values greatly in excess of book values.
B. large amounts of fully depreciated assets.
C. continuous trade-ins of relatively new assets.
D. excessive recurring losses on assets retired.
An auditor who uses statistical sampling for attributes in testing internal controls is
most likely to reduce the planned reliance on a prescribed control when the
A. sample deviation rate plus the allowance for sampling risk equals the tolerable
deviation rate.
B. sample deviation rate is less than the expected population deviation rate used in
planning the sample.
C. tolerable deviation rate less the allowance for sampling risk exceeds the sample
deviation rate.
D. sample deviation rate plus the allowance for sampling risk exceeds the tolerable
deviation rate.
The confirmation of customers’ accounts receivable rarely provides reliable evidence
about the completeness assertion because
A. many customers merely sign and return the confirmation without verifying its
details.
B. recipients usually respond only if they disagree with the information on the request.
C. customers may not be inclined to report understatement errors in their accounts.
D. auditors typically select many accounts with low recorded balances to be confirmed.
For which of the following events would an auditor issue a report that does not include
any reference to consistency?
A. A change in the method of accounting for inventories.
B. A change from an accounting principle that is not generally accepted to one that is
generally accepted.
C. A change in the service life used to calculate depreciation expense.
D. A change in accounting principle without reasonable justification from management.
Which of the following is not a concern as to whether a misstatement is qualitatively
material?
A. The misstatement hides a failure to meet analysts’ expectations.
B. The misstatement is less than 5% of pretax income.
C. The misstatement increases management’s compensation.
D. The misstatement changes a small amount of profit to a small reported loss.
The auditor must be independent of the auditee unless
A. The lack of independence does not influence his or her professional judgment.
B. Both parties agree that the independence issue is not a problem.
C. The lack of independence is insignificant.
D. None of the abovethe auditor cannot lack independence.
An important primary purpose of the auditor’s review of the entity’s procurement
system should be to determine the effectiveness of the activities to protect against
A. improper materials handling.
B. unauthorized persons issuing purchase orders.
C. mispostings of purchase returns.
D. excessive shrinkage or spoilage.
Which of the following is a conceptual difference between the attestation standards and
generally accepted auditing standards?
A. The attestation standards provide a framework for the attest function beyond
historical financial statements.
B. The requirement that the practitioner be independent in mental attitude is omitted
from the attestation standards.
C. The attestation standards do not permit an attest engagement to be part of a business
acquisition study or a feasibility study.
D. None of the standards of fieldwork in generally accepted auditing standards are
included in the attestation standards.
In addition to evaluating the frequency of deviations in tests of controls, an auditor
should also consider certain qualitative aspects of the deviations. The auditor most
likely would give broader consideration to the implications of a deviation if it was
A. the only deviation discovered in the sample.
B. identical to a deviation discovered during the prior year’s audit.
C. caused by an employee’s oversight.
D. initially concealed by a forged document.
Which of the following statements best describes an inherent limitation of the
monetary-unit sampling method?
A. It can only be used for substantive testing of asset accounts.
B. It requires the use of a computer system to perform the required calculations.
C. Misstatement rates must be large and the misstatements must be overstatements.
D. Misstatement rates must be small and the misstatements must be overstatements.
In an engagement to express an opinion on one or more specified elements, accounts, or
items of a financial statement, the auditor can generally audit only those specified
elements and not the entire set of financial statements. However, the auditor is required
to audit the entire set of financial statements if the elements specified include
A. net Income.
B. stockholders’ Equity.
C. net Income and Stockholders’ Equity.
D. assets.
A company sells a particular product only in the last month of its fiscal year. The
company uses commission agents for such sales and pays them 6% of their net sales 30
days after the sales are made. The agents’ sales were $10 million. Experience indicates
that 10% of the sales are usually not collected and 2% are returned in the first month of
the new year. The auditor would expect the year-end balance in the accrued
commissions payable account to be
A. $528,000.
B. $540,000.
C. $588,000.
D. $600,000.
A primary purpose of internal controls is to
A. Form a basis for evaluating employees.
B. Monitor production quality.
C. Avoid clerical errors.
D. Meet objectives of maintaining reliable documents and records and accurate
financial reporting.
The first PCAOB general standard requires that the examination of financial statements
is to be performed by a person or persons having adequate technical training and
A. Independence with respect to the financial statements and supplementary
disclosures.
B. Exercising professional care as judged by peer reviewers.
C. Proficiency as an auditor, which likely has been acquired from previous experience.
D. Objectivity as an auditor as verified by proper supervision.
For the purpose of determining proper cutoff for inventory, the auditor will select a
sample from which of the following for a few days before and after year-end?
A. Materials requisitions.
B. Production schedules.
C. Receiving documents.
D. Purchase orders.
Factors that the auditor should consider as increasing the effectiveness of the audit
committee include all of the following except whether:
A. It is independent of management.
B. It is comprised almost exclusively of members of management, ensuring detailed
knowledge of the company’s operations.
C. It asks management difficult questions.
D. It interacts regularly with internal audit personnel.
As a result of analytical procedures conducted during the planning phase, the
independent auditor determines that the gross profit percentage has declined from 30%
in the preceding year to 20% in the current year. The auditor should
A. Express an opinion that is qualified due to the inability of the company to continue
as a going concern.
B. Evaluate management’s performance in causing this decline.
C. Require footnote disclosure.
D. Consider the possibility of an error in the financial statements.
Which of the following would not necessarily be a related party transaction?
A. Sales to another corporation with a similar name.
B. Purchases from another corporation that is controlled by the corporation’s chief
stockholder.
C. Loan from the corporation to a major stockholder.
D. Sale of land to the corporation by the spouse of a director.
For each analytical procedure listed below, identify a potential misstatement in the
property management accounts it could help find.
a. Compute the ratio of depreciation expense to the related property, plant, and
equipment accounts and compare to prior years’ ratios
b. Compare monthly or annual repairs and maintenance with previous years
c. Compute ratio of insurance expense to the related property, plant, and equipment
accounts and compare to prior years’ ratios
Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Cash flows from operating activities are negative.
B. Research and development projects are postponed.
C. Significant related party transactions are pervasive.
D. Stock dividends replace annual cash dividends.
An auditor most likely would limit substantive tests of sales transactions when control
risk is assessed as low for the existence or occurrence assertions concerning sales
transactions and the auditor has already gathered evidence supporting
A. opening and closing inventory balances.
B. cash receipts and accounts receivable.
C. shipping and receiving activities.
D. cutoffs of sales and purchases.
In connection with the examination of the consolidated financial statements of Mott
Industries, Frazier, CPA, plans to refer to another CPA’s examination of the financial
statements of a subsidiary company. Under these circumstances, Frazier’s report must
disclose
A. the name of the other CPA and the type of report issued by the other CPA.
B. the portion of the financial statements examined by the other CPA.
C. the nature of Frazier’s review of the other CPA’s work.
D. in a footnote the portions of the financial statements that were covered by the
examinations of both auditors.
For private companies, accounting firms are prohibited from providing
A. outsourced internal audit services.
B. audit services.
C. review services.
D. none of these.
An organizational structure is important for all of the following reasons except:
A. Ensuring proper accountability.
B. Defining areas of authority.
C. Creating clear lines of reporting.
D. Ensuring a proper commitment to controls.
An inventory turnover analysis is useful to the auditor because it may detect
A. inadequacies in inventory pricing.
B. methods of avoiding cyclical holding costs.
C. the optimum automatic reorder points.
D. the existence of obsolete merchandise.
Which of the following internal control activities could best prevent direct labor from
being charged to manufacturing overhead?
A. Reconciliation of work in process inventory with cost records.
B. Comparison of daily journal entries with the factory labor summary.
C. Comparison of period costs budgets and time sheets.
D. Reconciliation of the unfinished job summary and production cost records.
Which of the following describes the PCAOB generally accepted auditing standard
requiring a critical review of the work done and the judgment exercised by those
assisting in an audit at every level of supervision?
A. Proficiency.
B. Audit risk.
C. Inspection.
D. Due care.
You are a new staff auditor and you are auditing a company’s inventory account. Briefly
describe one way you might obtain direct evidence and one way you might obtain
indirect evidence that the inventory account balance is fairly stated.
What are the factors that must be considered to determine if a permanent decline in the
value of an investment security has occurred?
What are four potential tools available to the auditor for documenting her understanding
of an entity’s system of internal control?
What are the three PCAOB general auditing standards found within the 10 GAAS
(NOT the three main categories of GAAS) and why is each important?
There are several important disclosure items to consider when auditing the purchasing
process. Discuss what they are and why they are important.
Mike has just graduated from State University with a bachelor’s degree in accounting.
He would like to pursue a career in auditing. What options does Mike have? Describe
three auditing career options, including a description of the organization Mike would
work for.
How would an auditor identify related parties and what is the importance of doing so?
To bridge the gap between a changing business environment and the guidance that was
then available, the IIA developed a Professional Practices Framework. This framework
consists of two broad categories of guidance. List these categories of guidance and what
they include.
Auditors obtain evidence about the inventory account through, among other procedures,
observing the counting of inventory. What are some limitations “observation” has as an
audit procedure?
You are an experienced audit senior. The new staff accountant on your audit team does
not understand what a control deficiency is. Give him a definition of “control
deficiency.” Include examples of two types of control deficiencies.
Identify the primary functions in the purchases cycle and describe each function.
Functions in the purchasing process include:
AS5 requires that the auditor appropriately document the processes, procedures,
judgments, and results relating to the audit of internal control. Specifically, what must
this documentation include?
What should an auditor look for when testing for proper classification of securities?
Several factors may influence the reliability of evidence. Identify and describe two of
these factors.
In one sentence each, define misstatements arising from fraudulent financial reporting
and misstatements arising from misappropriation of assets.
For each test of transactions and each test of account balances for investments listed
below, identify the assertion for which the test provides evidence.
1) Determine whether there has been any permanent impairment in the value of the cost
basis of an individual security.
2) Inspect securities if they are maintained by the entity or obtain a confirmation from
an independent custodian.
3) Search for purchases of securities by examining transactions for a few days after
year-end.
4) Examine brokers’ advices for a sample of securities purchased during the year.
For each of the following tests, state whether it is a test of details of account balances or
a test of details of transactions. Then note for which property management assertion the
test provides evidence.
Test depreciation calculations for a sample of capital assets
For assets written off, test amounts charged against income and accumulated
depreciation
Physically examine the capital asset additions
Vouch transactions included in repairs and maintenance for items that should be
capitalized
Vouch significant additions and dispositions to vendor invoices or other supporting
documentation
Examine of confirm deeds or title documents for proof of ownership
Explain the importance of the bank reconciliation to the audit and list some of the items
found on the reconciliation.