Fractal Software Limited has acquired a 100% subsidiary in Malaysia that produces
keyboards and other types of computer hardware. Fractal is refusing to consolidate its
financial statements, as this would increase the debt to equity ratio to the point that
Fractal would violate its debt agreement, although it would benefit the current ratio
with a sizeable increase in inventory. Instead, Fractal would like to record the
investment in the Malaysian subsidiary at cost. What type of effect does the
non-consolidation have upon the financial statements?
A) Material and isolated
B) Material
C) Material and pervasive
D) Immaterial
If a company employs a capital stock registrar and/or transfer agent, the registrar or
agent, or both, should be requested to confirm directly to the auditor the number of
shares of each class of stock
A) surrendered and cancelled during the year.
B) authorized at the balance sheet date.
C) issued and outstanding at the balance sheet date.
D) authorized, issued, and outstanding during the year.
When verifying current-year additions to manufacturing equipment, the two major
objectives for this part of the audit are
A) accuracy and classification.
B) detail tie-in and cutoff.
C) disclosure and completeness.
D) rights and existence.
If all other factors specified in a sampling plan remain constant, changing the estimated
population exception rate (EPER) from 2% to 4% would cause the required sample size
to
A) increase.
B) remain the same.
C) decrease.
D) become indeterminate.
The first step for management in the risk assessment process is to identify factors that
may increase risk, for example failure to meet prior objectives. Then, management will
A) assess the likelihood of the risk occurring.
B) make sure that procedures are developed to eliminate the risk.
C) estimate the significance of that risk.
D) develop specific actions to reduce the risk to an acceptable level.
Which analytical procedures will help the auditor identify possible misstatements in
compilation, unit costs, or extensions that affect inventory and cost of goods sold?
Compare
A) compare gross margin percentage with previous years’.
B) unit costs of inventory with previous years’.
C) inventory turnover with previous years’.
D) extended inventory value with previous years’.
According to CAS 700, the standard unqualified report’s title should be
A) Unqualified report of the auditor.
B) Audited financial statements.
C) Auditor’s report.
D) Independent auditor’s report.
Tamra is performing a test of control consisting of looking at the numerical sequence of
credit memos issued by the company. Tamra is performing a block test by looking for
any missing number in the sequence. This test will provide evidence of
A) completeness.
B) occurrence, completeness.
C) occurrence and accuracy.
D) accuracy and completeness.
The inherent risks of programming errors with resulting data loss increases when
A) packaged software is used that has to be updated every year.
B) complex configurations such as ERP at multiple locations are used.
C) functional systems are used (such as separate systems for sales and payroll).
D) sequential file systems are used rather than database management systems.
You are the auditor for GreenAcres, a non-profit home for homeless elderly.
GreenAcres has a December 31 year end. It receives government funding, and also
relies upon donations for revenue. GreenAcres has a major funding drive in November,
when it collects pledges by means of activities at a garage sale, a walkathon, and fall
bake sale events in the community.
During late February you had a meeting with Ellen Famous, the President of
GreenAcres, at the organization’s premises. Ellen reviews and approves bank statements
and is the second and final cheque signer. Two other accounting staff have the following
responsibilities:
– Paul approves pledge write-offs (which normally average about 15%), opens the mail,
endorses cheques received in the mail, prepares and delivers bank deposits, and posts
transactions into the accounting system.
– Diana, a retired bookkeeper, volunteers about 10 hours per week to reconcile the bank
account, review journal entries posted to the general ledger, and prepare payroll and
accounts payable transactions for processing.
Ellen normally reviews pledge write-offs, but was very busy in February, so she took a
look while you were there. To her surprise, she found that about 40% of the pledges had
been written off. She asked Diana to investigate, and Diana found that most of the
write-offs had actually been paid.
Required:
A) What are possible causes of the inconsistency with the pledge write-offs?
B) What are the weaknesses in internal control that could allow the excess write-offs to
occur? Provide recommendations for improvement.
C) Identify audit procedures that you would complete to quantify any potential
misstatement with respect to the pledges receivable balance as at December 31.
An important role of inherent risk assessment during the audit process is the need to
A) document the quality of the disaster recovery plan.
B) attempt to predict where misstatements are most and least likely in the financial
statement segments.
C) train the audit staff to assess the integrity of management.
D) increase the level of analytical review.
The sole shareholder of Jade Company had a contractor pave the parking lot at the
company building, and also pave the driveway of his home. Both paving jobs were
billed to the company on a single invoice. The general balance-related audit objective
affected by this activity is
A) existence.
B) allocation.
C) completeness.
D) rights and obligations.
You have just finished documenting your understanding of cycle controls at an audit
engagement.
Required:
A) Explain how you will identify the controls that will be tested.
B) What process will you follow for weakness in internal controls?
Jane’s employer purchased a new calculator this month. When Jane added up the sales
for the day, she was a bit confused with the new calculator and made numerous adding
errors. The daily sales total for the next week was incorrectly posted to the general
ledger. The general balance-related audit objective affected by this activity is
A) cutoff.
B) accuracy (of allocation).
C) classification.
D) existence.
What is one of the first things that an auditor would do upon discovering an illegal act
at an audit client?
A) resign from the audit
B) inform the Board of Directors
C) consult with a lawyer
D) call the police
Assessing design effectiveness and conducting tests of controls are required when the
auditor
A) chooses to set control risk below 100 percent and relies on the controls.
B) chooses to set control risk below 100 percent even it there is no reliance placed on
controls.
C) is planning the audit.
D) should always test the design effectiveness.
Management has several responsibilities that are important to the auditor. One of these
is that management is responsible for
A) internal controls that prevent material misstatements either due to fraud or error.
B) maintaining control of evidence (such as confirmations) until assessed by the
auditor.
C) evaluating evidence against acceptable criteria.
D) providing reasonable assurance that the financial statements are fairly stated.
When an auditor calculates the gross margin as a percent of sales and compares it with
previous periods, this type of evidence is called
A) physical examination.
B) analytical procedures.
C) observation.
D) enquiries of client.
The auditor wants to trace credits from the accounts receivable transaction history files
to the duplicate bank deposit slips and other authorized sources as a test for fictitious
credits in the data files. Which of the following sampling methods would be the least
costly to use in this situation?
A) simple random
B) block
C) systematic
D) probability proportionate-to-size
The standard letter of confirmation sent to the client’s legal counsel should be prepared
on the
A) auditor’s stationery and signed by an audit partner.
B) lawyer’s stationery and signed by the lawyer.
C) client’s stationery and signed by a company official.
D) plain paper and be unsigned.
The following are two unrelated situations. For each situation outline possible
deviations (if any) from a standard auditor’s report that may be necessary, and give
reasons. State your assumptions.
A) During 2012, your client was sued by a customer who had a serious car accident as a
result of scrap metal that had been dumped in the parking lot. The customer drove over
the scrap metal, which was imbedded in the tires of her vehicle. The tires blew, and the
car went out of control on a major highway. The amount in dispute is $400,000, with
estimated legal bills of about $20,000. The client does not wish to disclose the suit in
the financial statements.
B) During the current year, your client leased a large amount of equipment. As the lease
qualifies as a capital lease, the equipment has been recorded as an asset, with the
corresponding liabilities recorded on the financial statements. The implicit interest rate
in the lease is seven percent. The annual payments due over the terms of the lease have
been disclosed in the notes to the financial statements.
The test of details of balances procedure to “inspect the accounts payable trial balance
and master file for related parties, notes, or other interest-bearing liabilities” satisfies
the objective of
A) existence.
B) completeness.
C) classification.
D) detail tie-in.
The auditor has reconciled the dividend payment amounts disbursed according to the
cash disbursements journal to the dividend declared. Which audit assertions is this test
associated with?
A) valuation and existence
B) accuracy and valuation
C) accuracy and completeness
D) valuation and understandability
One of the most important test of details of balances for accounts receivable is
A) recalculation of the aged receivables and uncollectible accounts.
B) confirmations.
C) tracing from shipping documents to journals to the accounts receivable ledger.
D) tracing credit memos for returned merchandise to receiving room reports.
A) Describe the differences between statistical and nonstatistical sampling in terms of
(1) the sample selection methods used, and (2) measurement (quantification) of
sampling risk.
B) Describe each of the three types of sample selection methods commonly associated
with nonstatistical audit sampling.
C) Directed sample selection is the selection of each item in the sample based on some
judgment criteria established by the auditor. Describe three commonly used criteria.
Poor controls over credit limit approval or in changing the credit limit in the master file
may result in
A) confused and frustrated customers.
B) incomplete sales records.
C) financial statement errors for sales and AR accounts.
D) excessive bad debts and uncollectible account receivables.
What type of opinion does the auditor provide with respect to FOFI (future-oriented
financial information)? An opinion about the
A) underlying assumptions.
B) achievability of the forecast.
C) statistical nature of projections.
D) plausibility of forecasts.
A client has a calendar year-end. Listed below are four events that occurred after
December 31. Which one of these subsequent events might result in adjustment of the
December 31 financial statements?
A) adoption of accelerated depreciation methods
B) write-off of a substantial portion of inventory as obsolete
C) collection of 90% of the accounts receivable existing at December 31
D) sale of a major subsidiary
There are many types of analytical procedures that the auditor can conduct during the
planning stage of the financial statement audit. What is the purpose of comparing the
gross margin with those of prior years, looking for large fluctuations?
A) understand the client’s industry and business
B) assess going concern
C) indicate possible misstatements
D) reduce detailed tests
What type of information is available from www.sedar.com (System for Electronic
Document Analysis and Retrieval)? Documents such as
A) minutes of shareholders and directors meetings.
B) transaction reports from major credit card companies.
C) annual reports and management discussion and analysis.
D) listings of all of the shareholders on record.