In limited assurance engagements, practitioners perform limited procedures (usually
analysis of an issue but without significant testing) and checks to see if anything comes
to their attention indicating a problem.
When management is unable to provide an explanation for a previously unrecognized
risk identified through the analytical procedures, the auditor must issue an adverse
opinion.
For integrated audits, the auditor will test the operating effectiveness of important
controls as of the client’s year end.
Monthly statements provide a detailed list of the customer’s activity for the previous
month and a statement of all open items.
When the auditor becomes aware of an event that occurs after the audit report date, but
before the issuance of the audit report to the client and the event is disclosed in the
footnotes, the auditor would date the report as if this fact had been known at year-end.
One fraud risk factor includes the presence of domineering members of management
who seek the ultimate loyalty of subordinates.
One potential limitation to using industry data in preliminary analytical procedures is
that the data from the client may not be directly comparable to the data of the industry.
Brainstorming sessions should be led by the engagement team.
The purchasing department should make sure that only authorized goods are received,
the goods meet order specifications, an accurate count of the goods received is taken,
and that accountability is established to assure that all receipts are recorded.
An other-matter paragraph restricting the use of the auditor’s report is a reporting
requirement for a cash basis special purpose financial statement.
The Public Company Accounting Oversight Board was established by the AICPA in
response to Securities laws.
Public confidence is mostly maintained by the public accounting profession through
integrity based on personal moral standards and it is reinforced by codes of conduct.
The engagement quality review is a risk-based review.
A turnaround document is an effective control because it lists useful information for
further processing of the collection on account.
Loans between the auditor and the client are permitted in some circumstances.
Though often relying on the FASB, the SEC has authority to establish GAAP for
publicly traded companies.
Assuming that other assets have been properly valued, if the market value of the
reporting unit is equal to the carrying value of the assets of the reporting unit, the
presumption is that goodwill has been impaired.
The Principles of the AICPA Code of Professional Conduct provide a very detailed set
of rules that represent a low level of actions.
The significant judgments of “Assets of Held-for-Sale Operations” are subject to
impairment testing based on the most likely sale or disposal price.
Estimation of the allowance for doubtful accounts is a simple management decision as
it is determined as a percentage of sales.
An auditor may rely on a specialist when assessing the value of a company’s inventory.
A client that has a departure from generally accepted accounting principles that is
immaterial will receive a qualified or adverse opinion.
Evidence is required to be sufficient and appropriate in order to provide a reasonable
basis for audit conclusions.
A strong control environment can reduce all the financial reporting risks to zero.
Kiting involves the overstatement of a bank account by transferring funds at the end of
the year to another bank account and failing to record the disbursement.
The SEC requires public filers to have quarterly financial information reviewed by
independent auditors.
Appropriate evidence about inventory existence can be obtain through inspection.
Detection risk is controllable by the client.
The PCAOB’s requirement is that documentation must be able to be interpreted by an
auditor not connected to the engagement.
An important component of an audit report is that the title includes the word
“competent.”
Auditors are responsible for designing and maintaining policies and procedures to
identify, evaluate, and account for contingencies.
The Sarbanes-Oxley Act of 2002 amends the Securities and Exchange Act of 1934 and
places prohibitions on certain consulting services by auditors for their audit clients.
Corporate governance is a process by which the owners, but not the creditors, exert
control and require accountability for the resources entrusted to the organization.
Liabilities and expenses are most often tested for overstatements.
Management compensation that is tied to profits may create incentives to commit fraud.
If the auditor determines that informative disclosures are not reasonably adequate, the
auditor must identify that fact in the auditor’s report.
An individual outside of the purchasing department should be the only individual with
access to the vendor tables in the database.
Developing an understanding of the client’s business and industry is essential to
proficiency as discussed in the PCAOB’s general standards.
With whom does the tone of internal control typically originate?
A.Auditors.
B.Employees.
C.Management.
D.Stockholders.
Which of the following is not a normal edit test as part of computerized control for
checks?
A.Field checks.
B.Self-checking digits.
C.Cross-references.
D.Reasonableness tests.
What concepts does the AICPA Principles of Professional Conduct include?
A.Public interest, objectivity and independence.
B.Due professional care and supervision.
C.Scope and nature of services and adequate training.
D.Integrity and confidentiality.
A perpetual inventory system is preferable to a periodic system if adequately controlled
and maintained because of which of the following?
A.It requires that a full inventory count be taken at year-end by all warehouse
employees.
B.It allows management to calculate cost of goods sold at year end.
C.It provides information to management where book inventory is continuously in
agreement with inventory on hand within specified time periods.
D.It better controls the receipt of goods.
Which document is used by auditors to formally accept a new client?
A.Management representation letter.
B.Audit Report.
C.Engagement Letter.
D.Audit Contract.
Which of the following statements best describes what is meant by setting control risk
at100%?
A.Controls are effective.
B.Controls are relevant.
C.Controls are ineffective.
D.Cannot be determined from the information given.
When might an auditor modify the introductory paragraph and replace the scope
paragraph with explanatory paragraph?
A.When a scope limitation exists.
B.When there is substantial doubt about going-concern.
C.When the auditor lacks independence.
D.When there is an emphasis of a matter.
Which of the following is not a required communication with the audit committee?
A.Accounting policies.
B.Accounting estimates.
C.Economic trends.
D.Difficulties encountered.
Which of the following is a detective control?
A.Access controls.
B.Edit controls.
C.Reconciliations.
D.All of the above are detective controls.
For which of the following accounts receivable customer populations would the use of
negative confirmations be most appropriate?
A.A retail truck and trailer sales company with high inherent risk and moderate control
risk over the revenue cycle.
B.A utility company with control risk over the revenue cycle assessed high.
C.A mortgage banking company with excellent control over the purchasing cycle.
D.A cable company with control risk over the revenue cycle assessed low.
For nonprofit entities, appropriate benchmarks for materiality judgments would include
which of the following?
A.Total assets and total liabilities.
B.Total revenues and total assets.
C.Total liabilities, total income, or total assets.
D.Total expenses, total revenues, or total assets.
In which of the following cases should the auditor’s report on compliance not include a
statement that nothing came to the auditor’s attention that caused the auditor to believe
that the entity failed to comply with specified aspects of the contractual agreements or
regulatory requirements?
A.When the auditor has not identified any instances of noncompliance.
B.When the auditor has expressed an unmodified or qualified opinion on the financial
statements to which the applicable covenants of such contractual agreements or
regulatory requirements relate.
C.When the applicable covenants or regulatory requirements relate to accounting
matters that have been subjected to the audit procedures applied in the audit of financial
statements.
D.When the auditor needs to obtain further evidence to corroborate audit evidence
acquired from management and the accounting records.
Which of the following is not true regarding accounting estimates?
A.Accounting estimates are based on management’s knowledge and experience of past
and current events.
B.Accounting estimates are based on management’s assumptions about conditions that
are expected to exist and courses of action the company expects to take.
C.Accounting estimates are based on both subjective and objective factors
D.Because accounting estimates are based, in part, on management’s knowledge and
experience, they are not biased.
The partner performing an engagement quality review will review the working papers
and financial statements but will not perform which of the following?
A.Assess completeness of the audit work and sufficiency of the evidence.
B.Determine the adequacy of financial statement disclosures.
C.Raise questions about the reasonableness of various financial statement presentations.
D.Perform a substantial portion of the audit procedures as an additional check.
The auditor is responsible for evaluating the likelihood of a client continuing as a going
concern for a reasonable period of time. What is considered to be a reasonable time
period?
A.One year from the audit report date.
B.One year from the last day of field work.
C.One year from the balance sheet date.
D.Two years from the balance sheet date.
Reduction of the risk of understated payables can be accomplished by focusing on
which assertion?
A.Existence.
B.Rights.
C.Presentation and disclosure.
D.Completeness.
Sampling risk deals with which of the following?
A.Not carrying out the appropriate audit procedure.
B.Drawing an incorrect inference from the sample results.
C.Inappropriately diagnosing client’s problems.
D.Both A and C.
Which of the following is a term used to describe management’s recognition that a
significant portion of fixed assets is no longer as productive as had originally been
expected?
A.Asset depreciation.
B.Asset amortization.
C.Asset impairment.
D.Asset disposal.
Lockbox arrangements for the collection of cash have which of the following
advantages?
A.The manual processing associated with maintaining control of the receipts is now
shifted to a computer.
B.Cash is deposited directly into the bank.
C.The bank usually establishes only one lockbox geographically next to the client to
minimize delay in collections.
D.Eliminates the customer decision for the due date of payment.
How will the results of the auditor’s assessment of fraud risk factors affect the planned
audit procedures?
A.Audit procedures and fraud assessment do not relate.
B.The assessment may require a re-audit of previous periods.
C.Qualified audit staff will be assigned to relevant areas of the engagement.
D.Management will be called upon to assist in coordinating audit procedures.
Reconciling the physical asset inventory with the property ledger on a periodic basis is
a control related to which management assertion?
A.Completeness.
B.Rights and Obligations.
C.Existence.
D.Valuation
Which of the following is an estimate used by natural resource companies in
recognizing costs over the life of the resource, e.g., oil or coal?
A.Reserves.
B.Depletion rate.
C.Reclamation expense.
D.Both A and B.
E.All of the above.
Assume that the external auditor decides that because of work performed by internal
auditors, the audit risk has been reduced to an acceptable level. As a result of this
assessment, the auditor can do which of the following?
A.The auditor must test the assertions directly and document a separate conclusion.
B.The auditor can decide that direct testing is not necessary.
C.The auditor must delegate the responsibility of expressing an opinion to the internal
auditors.
D.The auditor can assume that inherent risk is zero.
Which of the following is not one of the underlying principles of an effective control
environment as developed by COSO?
A.The organization demonstrates a commitment to integrity and ethical values.
B.The board of directors demonstrates independence from management and exercises
oversight for the development and performance of internal control.
C.Management establishes, with board oversight, structures, reporting lines, and
appropriate authorities and responsibilities in pursuit of objectives.
D.The organization considers the potential for fraud in assessing risks to the
achievement of objectives.
The cash account is significant to the auditor for which of the following reasons?
A.The cash account is the culmination of a large volume of transactions.
B.The cash account is not as susceptible to fraud as most other accounts.
C.Cash is the only account that provides opportunity for fraud.
D.Automated systems do not possess the capability to maintain strong internal controls
over cash.
What is the term used to describe a systematic process of objectively obtaining
evidence regarding assertions about economic actions and events to ascertain the degree
of correspondence between those assertions and established criteria and communicating
the results to interested users?
A.Internal audit.
B.Financial audit.
C.External audit.
D.Integrated audit
In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a
number of shipping documents shortly before year-end and immediately following the
year under audit. The auditors compare the documents to the sales journal in order to
test which of the following assertions?
A.Existence of sales.
B.Presentation and disclosure of receivables.
C.Cutoff of sales transactions.
D.Completeness of receivables.
Which of the following is the primary source for evidence to corroborate the existence
of pending litigation?
A.Vendor confirmations.
B.Disclosures in financial statements.
C.Management representation letters.
D.Attorney confirmations.
Which of the following procedures do third-party users of the audit report not expect
the auditor to perform?
A.Evaluate measurements and disclosures made by management.
B.Provide a biased evaluation of the financial statements.
C.Determine whether financial statements are presented in accordance with GAAP.
D.Gather sufficient appropriate evidence to support their opinion.
What document communicates the conclusions of the financial statement audit?
A.The financial statement.
B.Written management assertion.
C.The audit report.
D.None of the above.
What is determined to be appropriate and sufficient will be affected by which of the
following?
A.The client’s risk of material misstatement.
B.The risk of material weakness in internal controls.
C.Either a or b.
D.None of the above.
The acquisition and payment process consists of each of the following phases except
which of the following?
A.Receipts of goods and services.
B.Approval of items for payment.
C.Application of cash receipts.
D.Authorized request for goods and services.