When an account receivable is considered uncollectible, the person who generally
authorizes the write-off is the client’s
A. credit manager.
B. treasurer.
C. accountant.
D. internal auditor.
Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in
approving the merger was the financial statements of Cord that were audited by Frank
& Co., CPAs. Sun had engaged Frank to audit Cord’s financial statements. While
performing the audit, Frank failed to discover certain irregularities that later caused Sun
to suffer substantial losses. For Frank to be liable under common law liability, Sun at a
minimum must prove that Frank
A. knew of the irregularities.
B. failed to exercise the appropriate level of professional care.
C. demonstrated gross negligence.
D. acted with scienter.
For which of the following judgments may an independent auditor share responsibility
with an entity’s internal auditor who is assessed to be both competent and objective?
A. Assessment of inherent risk, yes; assessment of control risk, yes
B. Assessment of inherent risk, yes; assessment of control risk, no
C. Assessment of inherent risk, no; assessment of control risk, yes
D. Assessment of inherent risk, no; assessment of control risk, no
An auditor most likely would make inquiries of production and sales personnel
concerning possible obsolete or slow-moving inventory to support management’s
financial statement (PCAOB) assertion of
A. valuation or allocation.
B. rights and obligations.
C. existence or occurrence.
D. presentation and disclosure.
Each of the following is a type of known misstatement, except
A. an inaccuracy in processing data.
B. the misapplication of accounting principles.
C. differences between management and the auditor’s judgment regarding estimates.
D. a difference between the classification of a reported financial statement element and
the classification according to generally accepted accounting principles.
During the initial planning phase of an audit, a CPA most likely would
A. test specific internal control activities that are likely to prevent fraud.
B. evaluate the reasonableness of the client’s accounting estimates of inventory
obsolescence.
C. discuss the timing of the audit procedures with the client’s management.
D. inquire of the client’s attorney as to whether any unrecorded claims are probable of
assertion.
Allister is auditing a client’s accounts balance recorded at $500,000 using monetary unit
sampling and determined a sample size of 100 items. The following two misstatements
were identified as a result of the substantive tests:
Confidence factors for a 5% risk of incorrect acceptance are shown below:
What is the incremental allowance for sampling risk?
A. $3,500
B. $5,000
C. $8,500
D. $15,000
When a firm decides to withdraw from an engagement, it should document all of the
following except
A. significant issues influencing the decision to withdraw from the engagement.
B. the basis for any conclusions related to this decision to withdraw from the
engagement.
C. significant consultations related to the decision to withdraw from the engagement.
D. significant effects the decision to withdraw from the engagement could have on the
firm.
ABC Company had a major sale to XYZ Company. This sale accounted for 20% of the
revenue of ABC Company. The auditors performed the audit procedures listed 1-3. For
each audit procedure select the ASB transaction assertion that is most likely being
tested.
A. Occurrence
B. Completeness
C. Cutoff
D. Accuracy
E. Classification
1. The auditor reviewed the shipping documents to check the date that product was
shipped to XYZ Company.
2. The auditor reviewed the shipping documents to ensure that all product included in
the sales revenue to XYZ had been shipped.
3. The auditor reviewed the invoice sent to XYZ Company to ensure that XYZ had been
properly billed.
If fictitious credit sales were recorded, and the fictitious accounts receivable were later
directly written off as bad debt expense,
A. income would be overstated.
B. income would be understated.
C. income would not be misstated.
D. accounts receivable would be understated.
The purpose of test data is to determine whether
A. the audit team’s test data are consistent with the client’s normal transactions.
B. controls operate as described in responses to internal control questionnaire items and
program flowcharts.
C. every possible error is prevented or detected by the client’s computer controls.
D. all possible combinations of valid data are correctly processed.
Which of the following analytical procedures most likely would be used during the
planning stage of an audit?
A. Comparing current-year to prior-year sales volumes
B. Reading the financial statements and notes and considering the adequacy of evidence
C. Comparing the current-year ratio of aggregate salaries paid to the number of
employees to the prior-year’s ratio
D. Reading the letter from the client’s attorney and considering the threat of litigation
In auditing long-term bonds payable, an auditor most likely would
A. perform analytical procedures on the bond premium and discount accounts.
B. examine documentation of assets purchased with bond proceeds for liens.
C. compare interest expense with the bond payable amount for reasonableness.
D. confirm the existence of individual bondholders at year-end.
Which of the following would not need to be demonstrated by third parties bringing suit
against auditors for losses sustained under the Securities Act of 1933?
A. Auditors were aware of the materially misstated financial statements.
B. Third-party purchasers suffered a loss.
C. The client’s financial statements contained a material misstatement.
D. Purchasers would need to demonstrate all of these.
To be proficient as an auditor, a person must first be able to accomplish which of these
tasks in a decision-making process?
A. Identify audit evidence relevant to the verification of assertions management makes
in its unaudited financial statements and notes.
B. Formulate evidence-gathering procedures (audit plan) designed to obtain sufficient,
competent evidence about assertions management makes in financial statements and
notes.
C. Recognize the financial assertions made in management’s financial statements and
footnotes.
D. Evaluate the evidence produced by the performance of procedures and decide
whether management’s assertions conform to generally accepted accounting principles
and reality.
According to the profession’s ethical standards, an auditor would be considered
independent in which of the following instances?
A. The auditor is the officially appointed stock transfer agent of a client.
B. The auditor’s checking account that is fully insured by a federal agency is held at a
client financial institution.
C. The client owes the auditor fees for more than two years prior to the issuance of the
audit report.
D. The client is the only tenant in a commercial building owned by the auditor.
Which of the following procedures would a CPA most likely perform in the planning
phase of a financial statement audit?
A. Make inquiries of the client’s lawyer concerning pending litigation.
B. Perform cutoff tests of cash receipts and disbursements.
C. Compare financial information with nonfinancial operating data.
D. Recalculate the prior year’s accruals and deferrals.
Perry Pinkney, CPA, is one of the general partners in a partnership, which in turn
invested 70% of its assets in the common stock of Pinkney’s audit client (Darby
Corporation). According to the AICPA Code of Professional Conduct, Pinkney is
considered to have
A. an indirect financial interest in Darby.
B. a direct financial interest in Darby.
C. no financial interest in Darby.
D. a partial financial interest in Darby.
A level of performance that would be exercised by reasonable auditors in similar
circumstances is referred to as
A. due care.
B. independence.
C. professional judgment.
D. professional skepticism.
After examining sample items and classifying items as deviations, the auditor can
divide the number of deviations by the sample size and calculate the
A. expected population deviation rate.
B. risk of underreliance.
C. sample rate of deviation.
D. tolerable rate of deviation.
In determining the number of documents to select for a test to obtain assurance that all
sales returns have been properly authorized, an auditor should consider the tolerable
rate of deviation from the control activity. The auditor should also consider
1. Likely rate of deviations
2. Allowable risk of underreliance.
A. 1 only
B. 2 only
C. Both 1 and 2
D. Either 1 or 2
The audit objective that all transactions are recorded in the proper account is related
most closely to which one of the ASB transaction assertions?
A. Occurrence
B. Completeness
C. Accuracy
D. Classification
The auditors’ responsibility to express an opinion on the financial statements is
A. implicitly represented in the auditors’ standard report.
B. explicitly represented in the introductory paragraph of the auditors’ standard report.
C. explicitly represented in the scope paragraph of the auditors’ standard report.
D. explicitly represented in the opinion paragraph of the auditors’ standard report.
In sampling, an individual makes a statement about a _____ of interest by examining a
_____ (or subset) of items.
A. sample; population
B. sampling unit; population
C. population; sample
D. population; sampling unit
A typical objective for internal auditors in the company’s sustainability program is for
the auditor to
A. determine whether the financial statements fairly present the company’s expenditures
on regulatory compliance.
B. establish funding requirements for sustainability programs.
C. assist management in establishing measurements for achieving company objectives.
D. report on the company’s relative success in attaining sustainability objectives.
Which of the following is an example of the appropriate implementation of a system of
quality control?
A. The firm requires all documents obtained during the audit to be destroyed
immediately following the engagement to ensure the client’s information remains
confidential.
B. The firm’s quality control policies have evolved through the performance of audit
procedures but are not formally developed or communicated to staff members.
C. All firm employees must verbally confirm their compliance with the appropriate
independence requirements before being assigned to an engagement.
D. The firm uses manuals and standardized forms for audit documentation to help
ensure engagement performance objectives and quality standards are met.
Which of the following is not a major control risk in the payroll cycle?
A. Paying fictitious “employees.”
B. Overpaying for time or production.
C. Losing employees to competitors.
D. Incorrect accounting for costs or expenses.
Why is the auditor more concerned with the risk of assessing control risk too low rather
than the risk of assessing control risk too high?
A. The risk of assessing control risk too high is not a type of sampling risk.
B. The risk of assessing control risk too low exposes the auditor to an efficiency loss.
C. The risk of assessing control risk too low may result in the auditor failing to perform
sufficient substantive procedures.
D. The risk of assessing control risk too low cannot be measured by the auditor during
the sampling process.
Which of the following account titles would not be appropriate for a company that
prepared its financial statements using the tax basis of accounting?
A. Balance Sheet
B. Statement of Assets, Liabilities, and Owner’s Equity
C. Statement of Revenue and Expenses
D. Statement of Change in Partners’ Capital Accounts
Which of the following guidelines should be followed when a disclaimer of opinion is
issued?
A. The report should identify the financial statements accompanying the disclaimer of
opinion.
B. The report should be addressed to the client and specific users who originally
retained the auditors.
C. If the disclaimer is due to a lack of independence, the report should indicate the
specific reasons for the auditors not being independent.
D. The report should include a reference to any auditing procedures performed prior to
issuing the disclaimer.
Which of the following types of auditors’ reports does not require an additional
paragraph to support the opinion?
A. Unmodified opinion
B. Adverse opinion
C. Qualified opinion
D. Disclaimer of opinion
The basic auditing application of the personal computer as an audit tool would not
include
A. spreadsheet analysis.
B. sample planning, selection, and evaluation.
C. continuous monitoring of a client’s internal control system.
D. analytical review.
Below is a listing of major steps in the sampling process. Indicate, using the correct
letter, the phase in which each step belongs. Each phase may be associated with more
than one step.
A. Planning.
B. Performing.
C. Evaluating.
___ 1. Determine the sample size.
___ 2. Determine the objective of sampling.
___ 3. Evaluate the sample results.
___ 4. Define the population.
___ 5. Measure sample items.
___ 6. Select sample items.
___ 7. Define the characteristic of interest.
Why does the risk of incorrect rejection result in an efficiency loss to the auditor?
A. Additional time is necessary to propose adjustments to the client’s account balances.
B. The auditor typically expands the sample to examine additional components or
transactions of the account balance.
C. More detailed audit procedures are performed on sample items already examined by
the auditor.
D. The auditor typically extends the study of internal control to attempt to obtain a
reduction in the level of risk of material misstatement.
SCA is auditing a client’s accounts receivable balance recorded at $10 million using
MUS sampling. The following parameters have been established for this account:
– Tolerable misstatement = $500,000
– Expected misstatement = $100,000
– Risk of incorrect acceptance = 10%
Which of the following statements would not be true with respect to the sample size in
this situation?
A. The correct sample size is 69 customer accounts.
B. Decreasing tolerable misstatement from $500,000 to $200,000 (holding all other
factors constant) will reduce the sample size by 331 accounts.
C. If SCA wishes to reduce its exposure to the risk of incorrect acceptance to 5%
(holding all other factors constant), sample size will be increased by 24 accounts.
D. Increasing expected misstatement to $200,000 (holding all other factors constant)
will increase the sample size to 115 customer accounts.