The AICPA’s fundamental principles can be divided into four sections: purpose of the
audit, responsibility of the auditor, performance of the audit, and reporting of the
results.
A state insurance commission requires an insurance company to prepare its financial
statements in accordance with Statutory Accounting Principles. This situation may
prevent an auditor from issuing a special report on the financial statements as the
Statutory Accounting Principles are not a recognized alternative comprehensive basis.
If restructuring charges are not calculated correctly, the charges can be used to
fraudulently manipulate income.
The auditor tests significant repairs and maintenance expenses to ensure that an item
that should be capitalized has not been expensed.
The major accounts in the acquisition and payment cycle are inventory, cost of goods
sold, accounts payable, and other expense accounts.
As detection risk increases, the amount of evidence an auditor needs to obtain
decreases.
Physically examining a client’s assets is an audit procedure.
The materiality of a misstatement is based on only the quantitative amount of the
misstatement.
The intentional loading of sales at the end of a period to customers that do not need the
goods at that time should not be recorded as revenues.
When fraud risk is great in the organization under audit, procedures applied are likely to
be more extensive.
The population is a group of items in an account balance that the auditor wants to test.
The audit report is modified to five paragraphs as a result of another audit firm
performing part of the financial statement audit.
A policy providing a reserve for returned products at the original sales price rather than
at replacement cost violates GAAP.
The expected population deviation rate is the auditor’s best estimate of the percentage of
transactions processed for which a control is not effectively applied.
The relevance of audit evidence depends on the audit assertion being tested.
The auditor is required by generally accepted accounting principles (GAAP) to observe
the taking of physical inventory.
A report on agreed-upon procedures issued by accountants provides a form of
attestation assurance.
The auditor need not inform the audit committee about adjustments arising from the
audit that were considered to be material.
Because of conservatism considerations, auditors should allow a client to overestimate
its reserve for restructuring.
A compensating control would not be considered as a factor that could mitigate a
potential material weakness.
The audit team is required by auditing standards to make an ordinary presumption of
the risk of fraud due to revenue misstatements on every engagement.
A deficiency in design of internal controls exists when an existing control is not
properly designed so that, even if the control operates as designed, the control objective
would not be met.
If detection risk is low, the auditor is more willing to take a higher risk of the
substantive audit procedures not detecting a material misstatement.
The acquisition and payment cycle includes processes for identifying products or
services to be acquired, purchasing goods and services, receiving the goods, approving
payments, and paying for goods and services received.
Internal control is a process, effected by an entity’s board of directors, management, and
other personnel, designed to provide reasonable assurance regarding the achievement of
objectives relating to operations, reporting, and compliance.
A bank using Milton Company’s financial statements to determine the creditworthiness
of a potential loan to Milton is a good example of the need for unbiased reporting.
A major control benefit of a centralized purchasing department is the segregation of the
authorization function from the custody and recording functions.
A certain tendency for fraud exists when stock options are close to becoming exercised
by executives and financial personnel.
The risk of incorrect acceptance of an account balance as correct, when in fact it is not
correct, bears directly on the effectiveness of an audit.
The population for MUS is defined as the number of dollars in the population being
tested.
The auditor will modify the audit report on ICFR effectiveness when management’s
annual certification pursuant to Section 302 of the Sarbanes-Oxley Act is misstated.
Evidence of fraud, whether or not material, on the part of senior management, would
likely cause the auditor to conclude that the client had a material weakness in internal
control over financial reporting.
Being free from material errors is the same as being free from all errors.
A materiality level where the auditor believes that the errors below that level would not,
even when aggregated with all other misstatements, be material to the financial
statements is often based on whether something is considered clearly trivial.
It is not important for an organization to have controls to track the location, quantity,
condition, maintenance, and deprecation status of their long-lived assets as the external
auditor gathers evidence related to these issues.
Auditors do NOT need to know the business and economics of the business in order to
perform meaningful preliminary analytical procedures.
The audit report can be a verbal presentation to the audit committee about the client.
The direction of testing from recorded amounts toward supporting documentation
provides evidence as to existence of assets and revenues.
What are the PCAOB standards that present guidance in testing assertions and planning
for the audit are known as?
A.General standards.
B.Fieldwork standards.
C.Reporting standards.
D.None of the above.
In selecting a sample for attribute testing, systematic selection involves which of the
following approaches?
A.Each item in the population having an equal chance of selection.
B.Every nth item being selected after a random start.
C.An arbitrary selection with no conscious bias.
D.Selecting all items on a day or week.
The adjustments arising from the audit that were considered to be material should be
communicated by the auditor to which of the following?
A.Audit staff.
B.Management.
C.Audit committee.
D.Internal auditors.
Which type of auditor may perform a financial statement audit?
A.Public company auditors.
B.Internal auditors.
C.External auditor.
D.A and C.
Which of the following signals a potential fraud that may occur for the overstatement of
inventory accounts?
A.Reserves for contingencies are reducing rapidly.
B.Inventory amounts are growing faster than sales.
C.Repairs and maintenance accounts have significant credit entries.
D.The purchase of manufacturing equipment is occurring at a rapid rate.
The relationship between the sales cycle and an inventory system can best be noted in
which of the following examples?
A.Credit is established prior to completion of a sales order.
B.Invoices are sent to customers only after shipment is evidenced.
C.Availability of products ordered are verified prior to processing a sale.
D.Billing information is added to the database for new customers.
The reliability of a client’s internal documentation is most affected by which of the
following?
A.The auditor’s independence.
B.Management’s motivation to misstate accounts.
C.The type of audit report that will be issued.
D.Management’s ability to understand generally accepted audit standards.
Which of the following statements about the AICPA is true?
A.The AIPCA is historically self-regulated.
B.The AIPCA is regulated by the federal government.
C.The AIPCA is regulated the state governments.
D.The AIPCA is a new organization established by an act of congress in 2002.
Which of the following procedures would the auditor perform in testing the
completeness assertion for accounts payable?
A.Examine a sample of cash disbursements made after year end to determine whether
the disbursements were for goods applicable to the previous year.
B.Reconcile vendor’s statements with the accounts receivable trial balance.
C.Examine production equipment for useful lives.
D.Gather purchase orders immediately previous to and subsequent to year-end.
To satisfy the fieldwork standards, what must an auditor do?
A.Act with due care.
B.Gather sufficient appropriate evidence.
C.Be independent in mental attitude.
D.Have adequate knowledge about the client’s industry.
E.All of the above.
Assume that a major customer of the company that you are auditing files for bankruptcy
during the subsequent period because of a deteriorating financial condition. Neither you
nor the client becomes aware of the event until the bankruptcy filing is reported. What
type of subsequent event would this be?
A.Type I subsequent event
B.Type II subsequent event
C.Neither Type I or Type II
D.Both Type I and Type II
If the auditor decides to draw attention to large related party transactions occurring in
the financial statements of the client, which report will most likely be issued?
A.Qualified.
B.Unqualified with an explanatory paragraph
C.Adverse.
D.Consolidation.
Which of the following is not a significant challenge related to valuation issues for
audits of merger and acquisition transactions?
A.Valuing the assets upon acquisition.
B.Valuing the liabilities upon acquisition.
C.Measuring restructuring charges.
D.Measuring the qualifications of personnel from the acquired company.
Which one of the following general factors would not be considered when assessing
identified internal control deficiencies?
A.Control environment.
B.Audit evidence from a poorly controlled system.
C.Repeatability of a process.
D.Complexity and subjectivity of the account balance affected by the deficiency.
Which of the following is not a common test of control for marketable securities?
A.Review the minutes of the board meetings.
B.Review broker’s advice for accurate recording of security
C.Inquire of management about its process for reclassifications.
D.Review reports of internal audits.
Lithgow and Harris, CPAs are performing the audit of WildFlower Grocery Stores.
Lithgow and Harris relates annual revenue by sales per square feet and sales per
customer. What type of analysis is Lithgow and Harris most likely performing?
A.Ratio analysis.
B.Critical analysis.
C.Reasonableness tests.
D.Non-statistical analysis.
In analyzing misstatements using sampling techniques, the auditor should analyze the
misstatements in what manners?
A.Qualitatively and quantitatively.
B.Absolutely and proportionately.
C.Haphazardly and randomly.
D.Methodically and systematically.
Which of the following parties has the responsibility for designing and maintaining
policies and procedures to identify, evaluate, and account for contingencies?
A.Management.
B.The auditor.
C.The audit committee.
D.The client’s attorney.
Which one of the following is not a management assertion relevant to long-lived assets?
A.Existence.
B.Completeness.
C.Valuation.
D.Reporting.
An audit of the Flagler Company, a diamond mining company, brings to light the fact
that its equipment has been marked up to the owners’ expectation of market values.
Such a situation will most likely result in which type of report?
A.Disclaimer.
B.Review.
C.Adverse.
D.Unqualified with explanatory language.
Which of the following is a factor that the auditor should consider when choosing
between non-statistical and statistical sampling?
A.Whether the audit staff is adequately trained to use statistical sampling.
B.Whether the population lends itself to a random-based selection method.
C.Whether the auditor wants a statistical measure of the risk of drawing a wrong
conclusion.
D.All of the above.
With a dual purpose test, what is an auditor likely to do?
A.Perform a substantive procedure concurrently with a test of a control.
B.Perform a substantive procedure concurrently with a risk assessment test.
C.Perform a risk assessment test concurrently with a test of a control.
D.None of the above.
Which one of the following is not a decision the auditor makes when using attribute
sampling?
A.Sample size.
B.Selection of items included in the sample.
C.Evaluation of sample information.
D.Whether to document all phases.
Which of the following would not be included as part of the documentation related to
the substantive procedures for marketable securities?
A.A schedule of marketable securities prepared by the client.
B.Reports of any outside valuation experts.
C.Calculation of any potential impairments.
D.Policies over purchase or sale of marketable securities.
Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide
to confirm a sample of accounts receivable. This test is performed by Homer and Moe
primarily to substantiate which of the following assertions?
A.Existence of related party transactions.
B.Existence of accounts receivable.
C.Obligation of debt.
D.Cutoff of the allowance for bad debt.
Which of the following services provides limited assurance?
A.Review.
B.Audit.
C.Examination.
D.Compilation.
In which of the following cases is it not necessary for an auditor to revise the original
materiality level and document the new materiality amount, as well as the rationale for
changing the amount?
A.If there is a change in circumstances that involve laws, regulations, or the accounting
framework.
B.If there is new information resulting from the risk assessment of the client.
C.If there are changes in the understanding of the client about a new contractual
agreement.
D.If the client plans to change depreciation methods for new plant assets procured in
the future.
Livingston and Associates is a audit firm in Las Vegas, Nevada and it performs the
financial statement audit for Smith Plastics, Inc. For each non-related situation below,
determine if each individual represented is independent of Smith Plastics and if
Livingston and Associates (the Firm) is independent of Smith Plastics:
A. Sam Livingston, an audit partner, meets Jill Warner, CFO of Smith Plastics after the
engagement begins and they fall in love. Sam and Jill marry in Lake Tahoe, California a
short time later. Sam Livingston will not be on the audit engagement team of Smith
Plastics.
B. The Firm hires Billy Messer as a staff auditor. Billy is aware that his father has a
material investment in Smith Plastics. Billy will not work on the Smith Plastics audit.
C. Lucy Brown is an audit manager at the Firm. Bob, her high school aged son, owns
1% of the equity of Smith Plastics. The investment is not material to Bob or Lucy’s net
worth. Lucy is assigned as the audit manager for the Smith Plastics engagement.
D. Smith Plastics has paid all but $5,000 of the previous years audit fees.
E. Julie Simpson, tax partner at the Firm has a 401k plan with multiple securities
making up the balance. One of the securities in the plan is that of Smith Plastics which
comprises .05% of the total balance of Julie’s 401k. Julie does not have a significant
portion of her retirement or savings in this particular plan.
What does the quality of the evidence an auditor collects depend upon?
A.The nature of the procedures.
B.The extent of the procedures.
C.The timing of the procedures.
D.Both A and C.
E.All of the above.
Which of the following factors suggest that control risk should be assessed at a low
level?
A.A lack of segregation of duties.
B.A lack of approval for significant transactions.
C.A competent objective internal auditor.
D.Both A and C.
Which of the following statements is false regarding partner rotation and audit firm
rotation?
A.During a cooling off period, the individual or audit firm may not engage in any
meaningful audit-related interactions with the client.
B.Rules are the same internationally regarding the terms of mandatory partner rotation
and mandatory audit firm rotation.
C.The issue associated with mandatory partner or audit firm rotation is the familiarity
threat.
D.Having a longstanding relationship with the client could aid audit quality because of
the knowledge that the partner and members of the engagement team gain through time.
Which of the following is not a critical component of attestation services?
A.Information or process (the subject matter) on which the assurance service is
provided.
B.Criteria for evaluation, such as compliance with regulations.
C.Sufficient appropriate evidence.
D.Two parties involved, the practitioner (or the CPA) and the intended users of the
report.
What must an auditor do in an audit?
A.Consider how the economic activity is portrayed in the financial statements.
B.Force management to make operational decisions that will improve the company’s
financial performance.
C.Disregard independence in order to find the underlying truth of the evidence.
D.Establish new criteria by which financial statements may be compared.
Recalculations of the client’s computations would not include which of the following
types of evidence?
A.Cutoff.
B.Footing.
C.Extension.
D.Cross-footing.
Discuss the required communications between predecessor and successor auditors.
An external auditor assesses the quality of the internal audit function to determine
whether the internal auditors’ work is relevant to the external audit and of sufficient
quantity and quality. Describe the three factors of the internal audit function that would
be considered by the external auditor in this quality assessment.
List potential fraud schemes related to long-lived assets.
Why is “independence” referred to as the cornerstone of auditing?
Define the following terms as they relate to sampling for tests of controls:
When internal controls are strong, the auditor may decide to confirm receivables before
year end. Roll-forward procedures are then used to obtain adequate evidence for the
roll-forward period. Discuss why the auditor would want to confirm receivables before
balance sheet date, the risks involved, and at least three of the roll-forward procedures
that the auditor performs to gain assurance on the roll-forward period.
What are the two types of subsequent events identified in the accounting literature and
what is required when each occurs? Provide an example of each type of subsequent
event.
List the five management assertions relevant for long-lived assets and explain how each
one is relevant.
Describe non-statistical sampling for test of account balances and how it is used by the
auditor.
What is the expectations gap?
Explain the differences between performance materiality and tolerable misstatement.
Why do financial statement users need independent assurance about information
provided by management?
What are three common ways in which fraudulent financial reporting takes place?
What general factors should be considered by an auditor in evaluating whether or not a
control deficiency is a material weakness, or a significant deficiency, or a control issue
of lesser severity?
White Floyd, Inc., a retail store, is concerned about the lack of control procedures over
the recording of sales transactions. The company is concerned that the transactions
might not be recorded accurately and valued properly in accordance with GAAP.
Recommend control procedures to help ensure that transactions are recorded accurately
and valued properly.
What are four requirements of the Sarbanes-Oxley that seek to protect auditor
independence?
A CPA, engaged in the audit of financial statements of a large manufacturer with branch
offices that are widely dispersed, is not able to count the substantial undeposited cash
receipts at the close of business on the last day of the fiscal year at all branches. As an
alternative to this procedure to verify the accurate cutoff of cash receipts, the CPA
observes that deposits in transit as shown on the year-end bank reconciliation appeared
as credits on the bank statement on the first business day of the New Year. Based on
this, the auditor was satisfied as to the cutoff of cash receipts.
REQUIRED:
Which type of audit report would you suggest be issued this year and why?