Generally accepted auditing standards are the cornerstone for the interpretation of
financial accounting.
For an auditor to test the existence assertion of assets, testing will be performed
beginning with the recorded asset and ending with the source documents.
Cash flow is often managed by organizations through the use of lockboxes and
outsourced cash management arrangements with banks.
An auditor does not express an opinion on the fairness of the financial statements when
issuing a standard compilation report.
Physical controls to safeguard assets are not intended to include simple controls such as
fences and locks.
The auditor utilizes the same audit program and the same procedures each year for each
client in order to ensure that nothing is missed in the current year audit.
Auditors can choose to test the client’s warranty reserves using primarily tests of
controls and substantive analytical procedures.
Presentation and disclosure assertions imply that all transactions and balances are
properly presented, disclosures represent what actually happened, and the footnote
disclosures are appropriate and adequate.
The American Institute of CPAs sets auditing standards for non-publicly traded
companies.
In an audit where there is a heightened risk of fraud related to inventory, the auditor
may want to observe all inventory locations simultaneously.
A client that treats a material lease transaction as an operating lease when it is in fact a
capital lease has deviated from GAAP and will receive a qualified or adverse opinion.
One strategy used by auditors in testing assertions is to perform directional testing to
find overstatements or understatements.
A free market can only exist if there is sharing of perfectly reliable information.
Accruals, such as estimates of bad debt and income tax expenses, are not usually as
precise on interim financial reports as they are on year-end financial reports.
Assertions are not relevant to an audit because they relate to the auditor and financial
statements are management’s responsibility instead of the auditor’s.
Noncompliancewith laws and regulations includes only acts of omission by the entity
that are considered to be unintentional and contrary to the prevailing laws or
regulations.
Effective internal controls over long-lived assets include the use of identification tags
secured to assets for proper tracking.
An auditor’s primary concern with identifying related party sales and receivables rests
with the presentation and disclosure assertion.
Natural resource companies cannot reassess the amount of reserves even if more
information becomes available during the course of mining, harvesting, or extracting
resources.
Edge and Gregg, LLP would most likely discover channel stuffing in the financial
statements of a client through the use of trend analysis.
The auditor is not responsible for the presentation of financial statements; therefore, the
auditor has no responsibility for fraud in the financial statements.
When auditing accounts payable, the auditor would most likely review a sample of cash
disbursements throughout the year end to determine whether disbursements for goods
and services are applicable to the subsequent year.
The auditor would be most likely review the depreciation policy and test depreciation
calculations to satisfy the auditor about the valuation of long-lived assets.
When auditing financial hedges, the auditor should understand the product, identify
relevant risks and controls, and understand the appropriate accounting.
The standard bank confirmation is used by the auditor to test for lapping.
Testing debt securities and commercial paper would typically include an analysis of
interest income.
Documentation that is produced electronically by the client’s internal systems is not
considered appropriate to the audit process.
In analysis of the results of an attribute sampling plan, an auditor may determine that
the sample size must be increased.
Gains on the sale of equipment usually indicate that the depreciation lives of the assets
are too long.
Audit sampling is the application of an audit procedure to less than 100 percent of the
items within an account balance or class of transactions for the purpose of evaluating
some characteristic.
The auditor is responsible for evaluating the likelihood of a client not being a going
concern for the next 12 months. What basis will the auditor use to assess this issue?
A.Management integrity.
B.Control environment.
C.Absolute assurance.
D.Substantial doubt.
When the auditor wishes to emphasize a matter in the financial statements, which of the
following would the audit report contain?
A.A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
B.A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C.A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D.A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
What does business risk include?
A.Economic factors.
B.Competitive factors.
C.Regulatory risk.
D.All of the above.
Which of the following is a major component of an organization’s internal control
structure?
A.Major new financing.
B.The financial environment.
C.Risk assessment.
D.Telecommunication equipment.
Performance of audit procedures at an interim date causes the risk of material
misstatement occurring between the interim date and the end of the year to do which of
the following?
A.Decrease.
B.Increase.
C.Remain the same.
D.Become more difficult to ascertain.
Which of the following controls is not a typical control that affects multiple assertions
for long-lived assets?
A.Unlimited physical access to assets.
B.Formal budgeting process with appropriate follow-up variance analysis.
C.Periodic comparison of physical assets to subsidiary records with the general ledger.
D.Periodic reconciliations of subsidiary records with the general ledger.
Which of the following procedures is not a review procedure for interim financial
information?
A.Making inquiries.
B.Performing analytical procedures.
C.Reading the minutes of the board of directors’ meetings
D.Obtaining oral assurance from management that there are no subsequent events.
The partial or complete outsourcing of internal audit activities is most likely made to
public accounting firms or to other specialized firms who perform which of the
following?
A.Primarily risk, control, and audit activities.
B.Attestation services as demanded by market place.
C.Operations analysis and risk analysis.
D.Analytical and substantial procedures.
In evaluating cost of evidence, which of the following evidence qualities of the audit
usually has the lowest cost?
A.High quality.
B.Medium quality.
C.Low quality.
D.All cost the same.
The Standards of the PCAOB can be broken up into three categories, i.e., general,
fieldwork, and reporting. Which of the following is considered in the fieldwork
standards?
A.Independence.
B.GAAP.
C.Internal control.
D.Disclosure.
Which of the following information should be included in management’s documentation
regarding intangible assets?
A.Manner of acquisition.
B.Basis for the capitalized amount
C.Expected period of benefit.
D.All the above should be included.
Which of the following groups is not a user of the audited financial statements?
A.Management.
B.Vendors.
C.Retired Employees.
D.Competitors.
Which one of the following statements is not accurate about goodwill impairment
valuations?
A.Goodwill arising from acquisitions can be netted into one test at the operating
segment level, but not netted at the company level.
B.Market valuation may be volatile. A temporary decline in market value may not be a
good indicator of FMV.
C.FMV might not exist, might require independent appraisals by investment bankers or
estimates using cash flow and discounted present value factors.
D.No assumptions are required about competition, economic development, product
placement, and so forth.
In the audit approach for assessing fair value, which should the auditor determine for
Level 2 assets?
A.The correspondence of the client’s assets to similar assets in an active market.
B.Contingent liabilities.
C.Sensitivity of model used for marking to model.
D.The performance of tests of controls.
When financial statements contain a material, unjustified departure from GAAP, which
of the following is contained in the audit report?
A.A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: No.
B.A Qualification: Yes; An Explanatory Paragraph After the Opinion Paragraph: Yes.
C.A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: Yes.
D.A Qualification: No; An Explanatory Paragraph After the Opinion Paragraph: No.
An example of an external document would include which of the following?
A.Vendor invoices.
B.Customer orders.
C.Confirmation replies from customers.
D.All the above.
Which of the following is false regarding the use of an audit checklist for disclosures?
A.It is a convenient documentation format.
B.It reminds the auditor of matters that should be considered for disclosure.
C.It can be organized to include relevant professional guidance.
D.It covers all potential unusual circumstances.
Which of the following would not affect an auditor’s judgment concerning internal
controls?
A.The assertion being tested.
B.The design of the control.
C.The operation of the control.
D.The level of inherent risk.
Which of following best describes the audit committee’s oversight responsibility?
A.Provide oversight of reporting outside the organization.
B.Provide oversight of internal auditing function.
C.Provide oversight of the external audit.
D.All of the above.
Which of the following is not an aspect of Rule 201 of the General Standards of the
Code of Professional Conduct?
A.A member must not take on an engagement that is beyond the member’s professional
competence.
B.A member must exercise duties prudently and professionally.
C.A member must adequately plan and supervise the performance of professional
services.
D.A member firm must not advertise services to competing clients.
Which of following is not required by Rule 201?
A.Professional competency.
B.Integrity and objectivity.
C.Planning and supervision.
D.Gathering sufficient relevant data.
Which one of the following is not a purpose of the management representation letter?
A.It clearly documents the audit procedures that were performed by the auditors.
B.It further acknowledges management’s responsibility for the financial statements.
C.It confirms oral responses obtained by the auditor earlier in the audit and the
continuing appropriateness of those responses.
D.It reduces the possibility of misunderstanding concerning the matters that are the
subject of the representations.
Fraud related to revenue recognition will most likely be identified by the auditor
through which of the following independent situations?
A.Sales have increased 5% in the current period over the previous period and is
consistent with the results of competitors.
B.Gross margin is equivalent in the current period to previous periods and is below that
of the industry.
C.Sales are higher in the month preceding each quarter end.
D.The sales of a revolutionary new product are increasing beyond that of the
competition in the periods immediately following its introduction.
Among close relatives of the covered member, e.g., brothers, sisters, mother, father, and
cousins, when is ownership of the client’s stock by them considered the same as
ownership by the covered member?
A.When the relative holds a key financial position with the client.
B.When it is an immaterial financial interest in the client with covered member’s
knowledge.
C.When it is a material financial interest in the client without the covered member’s
knowledge.
D.In all of the above scenarios.
Which of the following is not true of the concepts that are embodied in the COSO
framework of internal controls?
A.Internal controls relate to the organization’s objectives.
B.The six components of internal control are logically and operationally intertwined.
C.Internal controls apply across all activities of the organization.
D.All of the above are true.
Which of the following is a change that is not being debated by auditing standard setters
and investors?
A.Adding disclosure about which engagement partner at the firm supervised the audit
and who from outside the audit firm participated in the audit
B.Adding commentary on areas of risk of material misstatement of the financial
statements identified by the auditor.
C.Adding commentary about the level of materiality applied by the auditor to perform
the audit.
D.All of the above are being debated.
Which of the following does the design of a MUS sample not require the auditor to
determine?
A.Risk of incorrect acceptance.
B.Inherent risk.
C.Ratio of expected misstatement to tolerable misstatement.
D.Ratio of tolerable misstatement to the total population value.
Which of the following is explicitly required by the Sarbanes-Oxley Act of 2002 for
audits of public companies?
A.Subsequent event review.
B.Engagement quality review.
C.Disclosure of all contingent liabilities.
D.Seven year client rotation.
Which of the following is not an estimate that requires significant auditor judgment and
skepticism?
A.Obligations for pension plans.
B.Valuation of goodwill.
C.Allowance for bad debt.
D.Common stock and related additional paid-in capital.
What type of relationship exists between audit risk and detection risk?
A.Direct.
B.Inverse.
C.Indirect.
D.No relationship.
Which of the following is the most severe?
A.Material weaknesses in internal control.
B.Significant deficiencies in internal control.
C.Operational deficiencies in internal control.
D.Each is equally severe because it could result in inaccuracies in financial reporting.
Which is not an example of the theft of accounts receivable?
A.Recording discounts to customers, stealing the cash, and then reducing accounts
receivable for the amount of cash stolen.
B.Creating fictional invoices and customers and recording accounts receivable.
C.Writing off accounts receivable as uncollectible to hide receipts taken.
D.Posting upcoming payments to the account of a customer whose most recent payment
was diverted.
Under which of the following approaches is the client expected to estimate fair value
based on a model of the future cash flows associated with the instrument or the asset?
A.Mark to market model.
B.Replacement model.
C.Mark to model.
D.Historical cost model.
Which of the following is not a circumstance indicating potential impairment of
intangible assets?
A.A change in circumstances, such as the legal environment or business climate that
could affect the asset’s value.
B.An accumulation of costs that are significantly in excess of the amount originally
expected to be needed to acquire or construct the asset.
C.The asset generates just as much cash flow as in the past.
D.Losses or projections indicating continuing losses associated with an asset used to
generate revenue.
What is the primary benefit of effective internal control in an organization?
A.Achievement of certain organizational goals.
B.Completion of a successful audit for the entity.
C.Shareholder involvement in the company’s success.
D.Obtaining profitability and financial strength.
Research consistently shows that there are three factors associated with most frauds.
List these factors and at least three indicators that the factor may exist for a particular
company.
You have been engaged to perform a compilation service for Raven Company.
Management informs you that it will not include the required disclosures in the
financial statements. What effect will this have on the engagement?
Under what circumstances would an auditor issue a qualified opinion?
Distinguish between internal documentation and external documentation as types of
audit evidence. Give two examples of each. Which type is considered more reliable?
Discuss the importance of the phrase ‘sufficient appropriate evidence is to be
obtained…”
How do auditing standards define sufficiency and appropriateness?
Identify at least three types of users of financial statements. Describe their primary use
of the financial statements and how the misstatement of those statements might injure
the user.
Write the full name of the following regulatory and professional acronyms and describe
the function of each entity:
PCAOB
AICPA
SEC
IIA
FASB
Describe the concept of kiting and identify the best method for the auditor to use to
detect kiting.
Star Appliance Corp. has requested that Malfie Thomas, CPA provide a report,
including a debt compliance letter, to Great Northern Bank about the existence or
nonexistence of certain loan conditions. The conditions to be reported on are the
working capital ratio, dividends paid on preferred stock, aging of accounts receivable,
and the competence of management. This is Malfie’s first experience with Star
appliance. Should Malfie accept this engagement? Provide justification for your answer.
Define what is meant by the term intangible asset, provide an example and identify
typical controls over intangible assets.
The auditor assesses the identified fraud risks after taking into account an evaluation of
the client’s programs and controls. How might the auditor respond to the results of the
assessment of higher fraud risk?
Assume that an auditor determines that a client’s policy related to recording repairs and
maintenance is reasonable, but the auditor has concerns about whether the policy is
adhered to. What might cause such concerns and how will the auditor adjust the
substantive procedures to be performed?
What are three drivers of audit quality according to the Financial Reporting Council
(FRC)’s “The Audit Quality Framework”?
Newburg Company is in an industry in the early development stage, where there are
minimal barriers to entry to the client’s business model. Newburg Company’s audit
committee decided to put their 2014 audit out for bids. One of the Big Four CPA firms
had performed their audits from 2011-2013, and although happy with the previous
auditor, the audit committee believed they should rotate to another firm. On the last
audit, the Big Four’s audit fees were $500,000. Barnaby, CPAs, came in as the low
bidder, making a proposal to Newburg Company regarding audit fees for 2014. Their
proposed audit fee was $250,000.
Required:
(1) Based on this scenario, describe the ethical decisions that an auditor must make
during portfolio management decisions such as the client acceptance and client
continuance decision. What is the relationship between ethics and high audit quality?
(2) What issues should the client’s audit committee consider before going with the
lowest bid?
Identify how an increase in each of the following factors (assuming the other factors
remain unchanged) will affect planned audit evidence.
Audit risk,
– Inherent risk,
– Control risk,
– Detection risk,
– Tolerable misstatement