When obtaining evidence regarding litigation against an entity, the CPA would be least
interested in determining
A. an estimate of when the matter will be resolved.
B. the period in which the underlying cause of the litigation occurred.
C. the probability of an unfavorable outcome.
D. an estimate of the potential loss.
Which of the following audit procedures is the most appropriate when internal control
over cash is weak or when an entity requests an investigation of cash transactions?
A. Proof of cash.
B. Bank reconciliation.
C. Cash confirmation.
D. Evaluate ratio of cash to current liabilities.
If auditors conduct substantive procedures as of 10/31 for an entity with a 12/31
year-end
A. Additional tests are seldom conducted for the remaining period.
B. Additional control tests are required in the remaining period.
C. The entity’s controls likely are ineffective.
D. Additional tests likely will be performed in the remaining period.
When perpetual inventory records are maintained in quantities and in dollars and
internal control over inventory is weak, the auditor would probably
A. want the entity to schedule the physical inventory count at the end of the year.
B. insist that the entity perform physical counts of inventory items several times during
the year.
C. increase the extent of tests for unrecorded liabilities at the end of the year.
D. have to disclaim an opinion on the income statement for that year.
Which of the following presumptions is correct about the reliability of audit evidence?
A. Information obtained indirectly from outside sources is the most reliable audit
evidence.
B. To be reliable, audit evidence should be convincing rather than persuasive.
C. Reliability of audit evidence refers to the amount of corroborative evidence obtained.
D. An effective internal control system provides more reliable audit evidence.
Which of the following is the best statement of the general standard of performance
owed by an accountant in his or her professional work?
A. To do the job correctly and discover all irregularities.
B. To follow generally accepted accounting principles (GAAP) and generally accepted
auditing standards (GAAS).
C. To act as a professional and not commit fraud.
D. To exercise the skill and care of the ordinarily prudent accountant in the same
circumstances.
In statistical sampling, setting the appropriate confidence level and desired sample
precision are decisions made by the auditor that will affect sample size for a substantive
procedure. Which of the following should not be a factor in the choice of desired
precision?
A. The sampling risk.
B. The size of an account balance misstatement considered material.
C. The audit resources available for execution of the sampling plan.
D. The objectives of the audit test being conducted.
Which of the following most likely would be the result of ineffective internal control
policies and procedures in the revenue process?
A. Final authorization of credit memos by personnel in the Sales Department could
permit an employee defalcation scheme.
B. Fictitious transactions could be recorded, causing an understatement of revenues and
an overstatement of receivables.
C. Irregularities in recording transactions in the subsidiary accounts could result in a
delay in goods shipped.
D. Omission of shipping documents could go undetected, causing an understatement of
inventory.
To achieve good internal control, which department should perform the activities of
matching shipping documents with sales orders and preparing daily sales summaries?
A. Billing.
B. Shipping.
C. Credit.
D. Sales Order.
Which of the following situations would require adjustment to or disclosure in the
financial statements?
A. A merger discussion.
B. The application for a patent on a new production process.
C. Discussions with a customer that could lead to a 40 percent increase in the entity’s
sales if agreement is successful.
D. The bankruptcy of a customer who regularly purchased 30 percent of the company’s
output.
A special report related to compliance with contractual provisions provides
A. positive assurance.
B. negative assurance.
C. no assurance.
D. none of these.
An auditor established a $60,000 tolerable misstatement for an account balance of
$1,000,000. The auditor selected a sample of every twentieth item from the population
of 1,000 items that represented the asset account balance and discovered overstatements
of $3,700 and understatements of $200. Under these circumstances, the auditor most
likely would conclude that
A. there is an unacceptably high risk that the actual misstatements in the population
exceed the tolerable misstatement because the total projected misstatement is more than
the tolerable misstatement.
B. there is an unacceptably high risk that the tolerable misstatement exceeds the sum of
actual overstatements and understatements.
C. the asset account is fairly stated because the total projected misstatement is less than
the tolerable misstatement.
D. the asset account is fairly stated because the tolerable misstatement exceeds the net
of projected actual overstatements and understatements.
In which of the following circumstances would the use of the negative form of accounts
receivable confirmation most likely be justified?
A. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to a few major customers.
B. A substantial number of accounts may be in dispute and the accounts receivable
balance arises from sales to many customers with small balances.
C. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to a few major customers.
D. A small number of accounts may be in dispute and the accounts receivable balance
arises from sales to many customers with small balances.
To determine the sample size for a test of controls, an auditor should consider the
tolerable deviation rate, the desired confidence level, and the
A. expected population deviation rate.
B. computed upper precision limit.
C. risk of assessing control risk too high.
D. risk of incorrect rejection.
Which of the following circumstances should be recognized as a consistency
modification in the auditor’s report, whether or not the item is fully disclosed in the
financial statements?
A. A change in accounting estimate.
B. A change from an unacceptable accounting principle to a generally accepted one.
C. Correction of an error not involving a change in accounting principle.
D. A change in classification.
Which of the following situations would most likely require special audit planning?
A. Some items of factory and office equipment do not bear identification numbers.
B. Depreciation methods used on the client’s tax return differ from those used on the
books.
C. Assets costing less than $500 are expensed even though the expected life exceeds
one year.
D. Inventory is comprised of precious stones.
Which of the following is a control activity that most likely could help prevent
employee payroll fraud?
A. The Human Resource department promptly sends employee termination notices to
the payroll supervisor.
B. Employees who distribute payroll checks forward unclaimed payroll checks to the
absent employees’ supervisors.
C. Salary rates resulting from new hires are approved by the payroll supervisor.
D. Total hours used for determination of gross pay are calculated by the payroll
supervisor.
Which of the following best describes the general character of the three PCAOB
generally accepted auditing standards that are classified as standards of fieldwork?
A. The competence, independence, and professional care of persons performing the
audit.
B. Criteria for the content of the auditor’s report on financial statements and related
footnote disclosures.
C. The criteria of audit planning and evidence-gathering.
D. The need to maintain independence in mental attitude in all matters relating to the
audit.
Match the segregation of duties for investments with the misstatement (due to error or
fraud) it can help prevent.
1)The valuation-monitoring function is separate from the acquisition function
2)The initiation function is separate from the final approval function
3)Custody of the securities is separate from accounting for the securities
4)The maintenance of the securities ledger is separate from that of the general ledger
a) An individual can improperly record securities values or not report the values to
management
b) An individual can conceal a theft of securities
c) An individual can make fictitious transactions
d) An individual can conceal any defalcation that would normally be detected by
reconciliation of subsidiary records with general ledger control accounts
Equipment acquisitions that are misclassified as maintenance expenses most likely
would be detected by a control activity that provides for
A. segregation of duties of employees in the accounts payable department.
B. independent verification of invoices for disbursements recorded as equipment
acquisitions.
C. investigation of variances within a formal budgeting system.
D. authorization by the board of directors of significant equipment acquisitions.
Comparing amounts selected from the payroll account analysis for payroll accruals to
supporting documentation would provide evidence primarily for which assertion?
A. Completeness.
B. Existence.
C. Classification.
D. Presentation and disclosure.
Which of the following is a test of controls for the transaction assertion of completeness
for revenue?
A. Test a sample of sales invoices for authorized customer orders.
B. Review sales orders for proper credit approval.
C. Trace shipping documents to sales invoices and the sales journal.
D. Examine reconciliation of subsidiary ledger to general ledger control account.
Public reporting on the effectiveness of internal control over financial reporting, as
required by the Sarbanes-Oxley Act, includes
A. A statement that the public accounting firm that audited the financial statements has
provided input on the design of internal controls.
B. A statement of management’s responsibility for establishing and maintaining
adequate internal control over financial reporting.
C. An explicit statement as to whether management agrees with the public accounting
firm’s assessment of internal controls.
D. A detailed statement describing changes or additions to the internal control
environment that occurred in the current year.
The risk of material misstatement includes which of the following?
A. Detection risk.
B. Audit risk.
C. Inherent risk.
D. Nonsampling risk.
Abbot, CPA, as principal auditor for consolidated financial statements, is using a
qualified report of another auditor. Abbot does not consider the qualification material
relative to the consolidated financial statements and Abbot is willing to accept
responsibility for the work of the other auditor. What recognition, if any, must Abbot
make in his report to the report of the other audit?
A. He need make no reference.
B. He must refer to the qualification of the other auditor and qualify his report likewise.
C. He must include the other auditor’s report with his report but need not qualify his
report.
D. He must include the other auditor’s report with his report and give an explanation of
its significance.
The primary responsibility for preventing fraud in an organization lies with
A. The audit committee of the board of directors.
B. The internal audit function.
C. The external auditor.
D. The organization’s management.
An aged trial balance of accounts receivable is normally used by the auditor to
A. verify the existence of recorded receivables.
B. ensure that all accounts are promptly credited.
C. evaluate the results of tests of controls.
D. evaluate the provision for bad debts.
An attorney is responding to an independent auditor as a result of the entity’s letter of
inquiry. The attorney may appropriately limit the response to
A. asserted claims and litigation.
B. matters to which the attorney has given substantive attention in the form of legal
consultation or representation.
C. asserted, overtly threatened, or pending claims and litigation.
D. items that have an extremely high probability of being resolved to the entity’s
detriment.
Which of the following procedures is not included in a review engagement of a
nonpublic entity?
A. Inquiries of management.
B. Inquiries regarding significant events subsequent to the balance sheet date.
C. Any procedures designed to identify relationships among data that appear to be
unusual.
D. A study and evaluation of internal control.
With respect to a small company’s system of purchasing supplies, an auditor’s primary
concern should be to obtain satisfaction that supplies ordered and paid for have been
A. requested and approved by authorized individuals who have no incompatible duties.
B. received, counted, and checked to quantities and amounts on purchase orders and
invoices.
C. properly recorded as assets and systematically amortized over the estimated useful
life of the supplies.
D. used in the course of business and solely for business purposes during the year under
audit.
Which of the following is true regarding management’s documentation of internal
controls?
A. Some documentation should focus on controls designed to detect fraud.
B. Documentation should focus on controls over the interim financial reporting process.
C. Documentation must be done on paper.
D. Inadequate documentation is usually considered an insignificant deficiency in
internal control.
An examination of the balance in the accounts payable account is ordinarily not
designed to
A. determine that the amounts represent obligations of the company.
B. verify that accounts payable were properly authorized.
C. ascertain the reasonableness of recorded liabilities.
D. determine that all existing liabilities at the balance sheet date have been recorded.
Which of the following is a factual misstatement?
A. A management estimate that is outside the range of reasonable outcomes determined
by the auditor.
B. A fixed asset being recorded at the incorrect cost.
C. A projected misstatement resulting from errors found during sampling.
D. Difference in judgment between the auditor and management.