An attestation engagement is one in which a CPA is engaged to
A. issue, or does issue, a report on subject matter or an assertion about the subject
matter that is the responsibility of another party.
B. provide tax advice or prepare a tax return based on financial information the CPA has
not audited or reviewed.
C. testify as an expert witness in accounting, auditing or tax matters, given certain
stipulated facts.
D. assemble prospective financial statements based on the assumptions of the entity’s
management without expressing any assurance.
Which of the following is the most important audit consideration when examining the
stockholders’ equity section of a client’s balance sheet?
A. Changes in the capital stock account are verified by an independent stock transfer
agent.
B. Stock dividends and stock splits during the year under audit were approved by the
stockholders.
C. Stock dividends are capitalized at par or stated value on the dividend declaration
date.
D. Entries in the capital stock account can be traced to resolutions in the minutes of
meetings of the board of directors.
An audit client hires a member of the audit engagement team to be its new controller.
Sarbanes-Oxley rules require that
A. the new controller sever all relations with the CPA firm, including any retirement
funds.
B. the new controller not take part in any discussions regarding the retention of the
audit form.
C. the client find a new audit firm.
D. the client disclose the controller’s relationship in the notes to the financial
statements.
For each situation (1-5), identify the most applicable AICPA rule of conduct and
whether there is a violation or no violation of the rule (A-F). One or more letters may
not be used.
A. Rule 101: Independence; no violation
B. Rule 101: Independence; violation
C. Rule 102: Integrity and Objectivity; no violation
D. Rule 102: Integrity and Objectivity; violation
E. Rule 203: Accounting Principles; no violation
F. Rule 203: Accounting Principles; violation
___ 1. Sterling Stevens, CPA, was auditing Global Services Company. Global Services
used an accounting principle that was not in conformity with GAAP. Nevertheless,
Stevens rendered a standard unqualified audit report.
___ 2. Christina Hall, CPA, provided expert testimony for a plaintiff. The defendant in
the case was a client of Hall’s.
___ 3. Sam Miller, CPA, owned 100 shares of Johnson Drilling, Inc., his audit client.
___ 4. Dewey Wise, CPA, obtained a loan from an insurance company using the cash
value of the insurance policy as collateral. The loan is for less money than the cash
value of the policy.
___ 5. Stella Steinbeck, CPA, was auditing Good Services Company. Good Services
used an accounting principle that was not in conformity with GAAP. Good Services
believed, and Steinbeck concurred, that using a generally accepted method would cause
the financial statements to be misleading. Therefore, Steinbeck rendered a standard
unqualified audit report.
When a real-time computerized processing system is in use, the computer controls can
be strengthened by
A. providing for the separation of duties between data input and error listing operations.
B. using a systems development life cycle for authorization, user involvement, and
testing of program modifications.
C. preparing batch totals to provide assurance that file updates are made for the entire
group of transactions.
D. performing a validity check of an identification number before a user can obtain
access to the computer files.
A customer reply on a positive confirmation says “We dispute the $250 charge. We
believe it is excessive.” This confirmation
A. provides evidence of existence.
B. does not provide evidence of existence because the customer may refuse to pay the
$250 charge.
C. provides evidence that the account was understated.
D. provides evidence that the account should be written off.
Which of the following is not included in The American Accounting Association (AAA)
definition of auditing?
A. Potential conflict of interest
B. Systematic process
C. Assertions about economic actions
D. Established criteria
The primary difference between operational auditing and financial auditing is that in
operational auditing, the auditor
A. is concerned only with the audited activity’s adherence to company policy and
procedures.
B. is seeking to help management use resources in the most effective manner possible.
C. starts the process with the financial statements of an activity being audited and works
backward to the basic processes involved in producing them.
D. can use analytical skills and tools that are not necessary in financial auditing.
The state of mind that characterizes the auditors’ appropriate questioning and critical
assessment of audit evidence is referred to as
A. due care.
B. independence in appearance.
C. professional judgment.
D. professional skepticism.
At the beginning of the observation of the inventory count, the auditor records the last
bill of lading used by the company to
A. search for unrecorded sales.
B. test inventory cut-off.
C. verify inventory ownership.
D. record the inventory valuation of items received.
Obtaining an understanding of an internal control involves evaluating the design of the
control and determining whether the control has been
A. authorized.
B. implemented.
C. tested.
D. monitored.
The confirmation of a cash balance provides primary evidence regarding which
management assertion?
A. Existence
B. Valuation
C. Allocation
D. Completeness
Which of the following control procedures most likely could prevent computer
personnel from modifying programs to bypass computer controls?
A. Periodic management review of computer utilization reports and systems
documentation
B. Separation of duties for computer programming and computer operations
C. Participation of user department personnel in designing and approving new systems
D. Physical security of computer facilities in limiting access to computer equipment
Which of the following subsequent events would represent an event that provides
information about conditions that arose following the date of the financial statements?
A. Settlement of long outstanding litigation
B. Collection of a past due accounts receivable
C. Loss of inventory as a result of a flood
D. An additional tax assessment on prior income
Failure to provide any level care in fulfilling a duty owed to another party, including
reckless disregard for the truth, is called
A. breach of contract.
B. ordinary negligence.
C. privity.
D. constructive fraud.
Which of the following would detect the understatement of a purchase discount?
A. Verify the arithmetic accuracy of the purchases journal.
B. Compare purchase disbursement records and checks with invoice terms.
C. Compare approved purchase orders to receiving reports.
D. Verify the receipt of items ordered and invoiced.
Which of the following use of computer-assisted audit techniques (CAATs) would most
likely be considered a search for fraudulent activities?
A. Selecting customers’ accounts receivable for confirmation
B. Recalculating inventory extensions
C. Scanning accounts receivable balances for amounts over the credit limit
D. Comparing a list of vendor addresses to employee address files
In auditing for unrecorded long-term bonds payable, an audit team most likely will
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.
An auditor is considering whether the omission of the confirmation of investments
impairs the auditor’s ability to support a previously expressed unmodified opinion. The
auditor need not perform this omitted procedure if
A. the results of alternative procedures that were performed compensate for the
omission.
B. the auditor’s assessed level of detection risk is low.
C. the omission is documented in a communication with the audit committee.
D. no individual investment is material to the financial statements taken as a whole.
An auditor who discovers that client employees have committed an illegal act that has a
material effect on the client’s financial statements most likely would withdraw from the
engagement if
A. the noncompliance is a violation of generally accepted accounting principles.
B. the client does not take the remedial action that the auditor considers necessary.
C. the illegal act was committed during a prior year that was not audited.
D. the auditor has already assessed control risk at the maximum level.
In evaluating the adequacy of the allowance for doubtful accounts, an auditor most
likely reviews the entity’s aging of receivables to support management’s financial
statement assertion of
A. existence.
B. valuation or allocation.
C. completeness.
D. rights and obligations.
In each of the circumstances listed below, indicate, by appropriate letter, which of the
following types of opinions should be rendered on the entity’s financial statements?
A. Unmodified
B. Qualified
C. Adverse
D. Disclaimer
___ 1. Departure from generally accepted accounting principles that is material but not
pervasive.
___ 2. Going-concern uncertainties that may have a material (but not pervasive) effect
on the financial statements.
___ 3. Emphasis of a matter, no GAAP departure.
___ 4. Material, but not pervasive, scope limitation.
___ 5. Material and pervasive departure from GAAP.
In performing tests of controls over authorization of cash disbursements, which of the
following statistical sampling methods would be most appropriate?
A. Variables
B. Stratified
C. Ratio
D. Attributes
The risk of incorrect acceptance relates to the
A. effectiveness of the audit.
B. efficiency of the audit.
C. preliminary estimate of materiality.
D. allowable risk of tolerable misstatement.
Auditors try to identify predictable relationships when using analytical procedures.
Relationships involving transactions from which of the following accounts most likely
would yield the highest level of evidence?
A. Accounts receivable
B. Interest expense
C. Accounts payable
D. Travel and entertainment expense
Which element of a system of quality control strives to provide the firm with reasonable
assurance that its policies and procedures are operating effectively?
A. Human resources
B. Leadership responsibilities for quality within the firm
C. Monitoring
D. Relevant ethical requirements
In performing a search for unrecorded retirements of fixed assets, an auditor most likely
would
A. inspect the property ledger and the insurance and tax records, and then tour the
client’s facilities.
B. tour the client’s facilities, and then inspect the property ledger, and the insurance and
tax records.
C. analyze the repair and maintenance account, and then tour the client’s facilities.
D. tour the client’s facilities, and then analyze the repair and maintenance account.
Which of the following is the responsibility of the Professional Ethics Executive
Committee?
A. Enforce SEC ethical standards.
B. Act as an investigative body of the AICPA when ethical violations are suspected.
C. Make and enforce all the rules of conduct for CPAs who are AICPA members.
D. Establish minimal ethical standards for financial reporting.
What evidence is appropriate to determine whether recorded purchase transactions are
valid and the vendors charged the correct prices?
A. Purchase requisitions and accounts payable entries.
B. Receiving reports and purchase orders.
C. Purchase requisitions and purchases orders.
D. Purchase orders and bid quotes.
To gain assurance that all inventory items in a client’s inventory listing schedule are
valid, an auditor most likely would trace
A. inventory tags noted during the auditor’s observation to items in the inventory listing
schedule.
B. inventory tags noted during the auditor’s observation to items listed in receiving
reports and vendors’ invoices.
C. items in the inventory listing schedule to inventory tags and the auditor’s recorded
count sheets.
D. items in receiving reports and vendors’ invoices to the inventory listing schedule.
If the audit team established a tolerable rate of deviation of 3%, an expected population
deviation rate of 2%, and desired to control the risk of overreliance to 5%, what sample
size would be appropriate in this situation?
A. 390 items
B. 568 items
C. 590 items
D. 846 items
An audit team would most likely verify the interest earned on bond investments by
A. vouching the receipt and deposit of interest checks.
B. confirming the bond interest rate with the issuer of the bonds.
C. recomputing the interest earned on the basis of face amount, interest rate, and period
held.
D. testing internal controls relevant to cash receipts.
In confirming with an outside agent, such as a financial institution, that the agent is
holding investment securities in the client’s name, an auditor most likely gathers
evidence in support of ASB balance assertion of existence and
A. valuation.
B. rights and obligations.
C. completeness.
D. accuracy.
Custody of inventory is transferred to the shipping area upon authorization of
A. the customer order.
B. the shipping order.
C. the invoice.
D. the purchase order.
If auditors assess control risk at the maximum level, they will tend to
A. perform a great deal of additional tests of controls.
B. perform a great deal of substantive testing during the audit.
C. perform substantive tests at an interim date.
D. perform more audit procedures using internal evidence.
GAO performs three types of government audits: ___________________,
____________________ and ____________________ audits.
Below are some of the specific activities performed in a monetary unit sampling
application. Match the major step in monetary unit sampling application is most closely
associated with the specific activity. Each step is associated with only one activity.
1. Identifying an example of what type of response from a customer constitutes an
exception to an accounts receivable confirmation.
2. Calculating the sampling interval.
3. Identifying the financial statement assertion(s) of interest in the audit of an account
balance or class of transactions.
4. Calculating the tainting percentage.
5. Estimating the expected misstatement and tolerable misstatement.
6. Calculating the basic allowance for sampling risk, projected misstatement, and
incremental allowance for sampling risk.
7. Determining the completeness of the client’s electronic accounts receivable file.
A. Determine sample size.
B. Define the attribute of interest.
C. Select the sample.
D. Determine the objective of sampling.
E. Measure sample items.
F. Evaluate sample results.
G. Define the population
Auditors are required to obtain a sufficient understanding of an entity’s internal control.
This understanding is required by the performance principle of GAAS.
The Single Audit Act requires the auditor to report on ____________________
___________________, ___________________________, and
___________________.
The ____________________________________ is the primary original record for
payroll accounting.
Why is it important for auditors to understand their clients’ business risks?
A sample from the source documents meets the _____________________________
requirement to determine whether transactions were actually recorded in the inventory
records.
The primary audit concern with the verification of long-term liabilities is that all
_________________ are recorded and that the ___________________ is properly paid
or ____________.
CPAs in public practice most often are involved in governmental audits as a result of
responding to an agency’s ___________________________________.
What is a compensating control?Describe what type of compensating controls might be
implemented in the finance and investment cycle.
Indicate whether each of the following factors is considered in determining sample size
in monetary unit sampling (M), classical variables sampling (C), both (B), or neither
(N).
____ 1. Population size.
____ 2. Standard deviation.
____ 3. Risk of incorrect acceptance.
____ 4. Expected misstatement.
____ 5. Tolerable misstatement.
____ 6. Risk of incorrect rejection.
____ 7. Tainting percentage.
What is the difference between a significant deficiency and a material weakness?
_________________________________ transactions are obligations and commitments
that are not required to be recorded.
The IIA auditing standards are classified into three major categories:
___________________, ___________________, and
_____________________________.