As part of assessing the risk of material misstatement, the audit team must assess the
control risk in the computerized processing system. Initially, the audit team must
identify the overall processing scope of the system(s), which would include each of the
following considerations except
A. the types of transactions that are processed through the system.
B. the specific control procedures that have been implemented by the client to prevent
or detect misstatements that could occur based on the audit team’s analysis.
C. the programs and files that are accessed by the system in processing transactions.
D. the type of output that is created as a result of processing transactions through the
system.
Which of the following is not true with respect to the effect of the population standard
deviation in a classical variables sampling application?
A. The standard deviation can be determined based on experience from prior audits or a
small sample taken during the current audit.
B. The standard deviation has a direct relationship with sample size.
C. When the standard deviation is larger, the audit team is more likely to select a
representative sample.
D. The standard deviation represents the variability of the population being examined.
Reference in a group auditors’ report to the fact that part of the audit of group financial
statements was performed by component auditors most likely would be an indication of
A. involvement of component auditors in the audit of the group financial statements.
B. the portion of the group statements audited by the component auditors not being
considered material.
C. group auditors’ recognition of the component auditors’ competence, reputation, and
professional certification.
D. different opinions the auditors are expressing on the components of the financial
statements that each audited.
_____ sampling methods use normal distribution theory and the central limit theorem to
provide a range estimate of the account balance or class of transactions or the
misstatement in the account balance or class of transactions.
A. Attributes
B. Classical variables
C. Nonstatistical
D. Monetary unit sampling (MUS)
Based on the results of attributes sampling, the audit team assessed control risk too low
and did not modify the nature, timing, and extent of its further audit procedures to
reduce detection risk. This situation would most likely result in a(n)
A. higher level of audit risk than planned.
B. lower level of inherent risk.
C. greater efficiency loss.
D. lower effectiveness loss.
Which of the following statements is not included in the Auditor’s responsibility section
of the standard (unmodified) report on the entity’s financial statements?
A. “We have audited the accompanying financial statements”
B. “Those standards require that we plan and perform the audit”
C. “The procedures selected depend upon the auditor’s judgment”
D. “An audit involves performing procedures to obtain audit evidence about the
amounts and disclosures”
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 301: Confidential Client Information; no violation
D. Rule 301: Confidential Client Information; violation
E. Rule 503: Commissions and Referrals; no violation
F. Rule 503: Commissions and Referrals; violation
___ 1. Brandon Frisby, CPA, found out that his client, Uptonogood, Inc., had failed to
properly account for several leases. Frisby informed Uptonogood’s management that he
must issue a qualified audit report and disclose the lease problem in the report.
Uptonogood’s management indicated that such a disclosure would constitute a
disclosure of confidential information. Nevertheless, Frisby rendered the qualified audit
report, including an explanatory paragraph about the inadequate lease accounting.
___ 2. Priscilla Hudson, CPA, a partner in Hudson and Danhoffer, CPAs, holds the
position of honorary director for the Friends of the Symphony Orchestra, a firm audit
client.
___ 3. The wife of Gerald Skoch, CPA, is the controller of Fine Corporation. Skoch is
an audit partner for Barnes and Bucknell, CPAs, in their Long Island office. The Long
Island office of Barnes and Bucknell audits Fine Corporation, but Skoch is not part of
the audit team and provides no other services to Fine Corporation.
___ 4. Johnny Beacon, CPA, is the auditor of Novak Wholesale, Inc. Beacon received a
10% commission from Computer Systems, Inc. for hardware sold to Novak Wholesale,
Inc. The sale was made based on Beacon’s recommendation to Novak Wholesale that
the company needed a new accounting information system. Beacon disclosed the
commission to Novak’s management. Beacon also performs an annual audit for Novak.
___ 5. Cecilia Hart, CPA, provides tax services to Myers Company. Hart received a
10% commission from Computer Systems, Inc. for hardware sold to Myers Company.
The sale was made based on Hart’s recommendation to Myers Company that the
company needed a new accounting information system. Hart disclosed the commission
to Myers’ management.
(Appendix) Smith, CPA, is using attributes sampling to test Swimmer Inc., internal
controls related to the accuracy of sales invoices. Smith defined the population as all
5,000 of Swimmer’s sales invoices and determined the appropriate sample size was 200
invoices. What is Smith’s sampling interval if systematic random selection is used?
A. 20
B. 25
C. 50
D. 250
Enhanced Business Reporting (EBR) focuses on improving business reporting by
developing a voluntary framework for presentation and disclosure of value drivers and
non-financial measures of performance. The advantages of EBR include all of the
following except
A. more efficient and effective regulatory process.
B. reduced financing costs for companies.
C. better allocation of capital by investors.
D. better footnote disclosure in the companies’ SEC filings.
Which of the following statements is correct with respect to the elements of the “fraud
triangle”?
A. Motive is a cause that pressures people into action.
B. Opportunity refers to a situation that allows someone with motive to carry out fraud.
C. A lack of integrity describes a person who does not stick to the social or
organizational ethical code.
D. Fraud is most common when these three factors exist together.
E. All of these statements are correct.
Management’s report on internal controls must include each of the following except
A. a statement that management is responsible for establishing and maintaining
adequate internal control over financial reporting.
B. a statement identifying the framework management uses to evaluate the effectiveness
of the company’s internal control.
C. a statement providing management’s assessment of the effectiveness of the
company’s internal control.
D. a statement providing management’s evaluation of the company’s control
environment.
Which of the following would not likely be found in the minutes of the board of
directors?
A. Amount of dividends declared
B. Approval to pledge assets as security for debts
C. Authorization of officers’ salaries
D. Approval of a new desktop computer for the controller
Which of the following is the least important audit reason for the auditor’s obtaining an
understanding of a company’s internal control?
A. To serve as a basis for constructive suggestions
B. To plan subsequent substantive tests
C. To identify types of possible misstatements that may occur
D. To consider factors that may affect the risk of material misstatement
Assurance services are defined as independent professional services that
A. establish criteria for effective measurement of business activity.
B. improve the quality of information, or its context, for decision makers.
C. attest to the adequacy of controls over business operations.
D. develop efficient and effective accounting systems to ensure compliance with
accounting standards and policy.
An auditor confirms a representative number of open accounts receivable as of
December 31 and investigates respondents’ exceptions and comments. By this
procedure, the auditor would be most likely to learn of which of the following?
A. One of the cashiers has been covering a personal embezzlement by lapping.
B. One of the sales clerks has not been preparing charge slips for credit sales to family
and friends.
C. One of the IT control clerks has been removing all sales invoices applicable to his
account from the data file.
D. The credit manager has misappropriated remittances from customers whose accounts
have been written off.
In which of the following situations would auditors ordinarily choose between
expressing a qualified opinion or an adverse opinion on the entity’s financial
statements?
A. The auditors did not observe the entity’s physical inventory and are unable to
become satisfied as to its balance by other auditing procedures.
B. The financial statements fail to disclose information that is required by generally
accepted accounting principles.
C. The auditors are asked to report only on the entity’s balance sheet and not on the
other basic financial statements.
D. Events disclosed in the financial statements cause the auditors to have substantial
doubt about the entity’s ability to continue as a going concern.
Which of the following presumptions does not relate to the reliability of audit evidence?
A. The more effective the client’s internal control, the more assurance it provides about
the accounting data and financial statements.
B. The auditors’ opinion, to be economically useful, is formed within reasonable time
and based on evidence obtained at a reasonable cost.
C. Evidence obtained from independent sources outside the entity is more reliable than
evidence secured solely within the entity.
D. The independent auditors’ direct personal knowledge, obtained through observation
and inspection, is of higher quality than information obtained indirectly.
Lincoln, CPA, selected a sample of 100 items by dividing the population of 100,000
sales invoices by 100. With a random start, she then selected every 1,000th invoice. This
selection process is referred to as
A. unrestricted random selection.
B. nonstatistical selection.
C. systematic random selection.
D. judgmental selection.
Which of the following is not true with respect to the concept of reasonable assurance?
A. Reasonable assurance allows for mistakes and misinterpretations by the audit team
throughout the examination.
B. The nature of many audit procedures is such that they cannot always be relied upon
to detect misstatements.
C. Audit teams should evaluate all transactions and components of an account balance
or class of transactions.
D. Auditors should control the overall risk in an audit to an acceptably low level.
An entity’s internal control structure requires for every check request that there be an
approved voucher, supported by a prenumbered purchase order and a prenumbered
receiving report. To determine whether checks are being issued for unauthorized
expenditures, an auditor most likely would select items for testing from the population
of all
A. purchase orders.
B. canceled checks.
C. receiving reports.
D. approved vouchers.
Which of the following is not an objective of internal controls over financial reporting
as defined by the Sarbanes-Oxley Act?
A. Policies and procedures that pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of the assets of the
registrant.
B. Policies and procedures that provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and receipts and expenditures of the registrant
are being made only in accordance with authorizations of management and directors of
the registrant.
C. Policies and procedures that provide reasonable assurance regarding the compliance
with applicable laws and regulations.
D. Policies and procedures that provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the registrant’s assets
that could have a material effect on the financial statements.
Auditors most likely would issue a disclaimer of opinion on the entity’s financial
statements because of
A. inadequate disclosure of material information.
B. the omission of the Statement of Cash Flows.
C. a material departure from generally accepted accounting principles.
D. management’s refusal to furnish written representations.
To be successful in a civil action under section 11 of the Securities Act of 1933 against
auditors for liability for a materially misstated registration statement, the plaintiff must
prove
A. Auditors’ intent to deceive: Yes; Plaintiff’s reliance on the registration statement: Yes
B. Auditors’ intent to deceive: Yes; Plaintiff’s reliance on the registration statement: No
C. Auditors’ intent to deceive: No; Plaintiff’s reliance on the registration statement: Yes
D. Auditors’ intent to deceive: No; Plaintiff’s reliance on the registration statement: No
The procedures for statistical evaluation of tests of controls with the AICPA Sample
Evaluation Tables would not include the following step
A. identify the population deviation rate.
B. identify the sample size in the left margin.
C. identify the number of actual deviations for the sample size.
D. identify the upper limit rate of deviation given the sample size and number of
deviations.
In a classical variables sampling application, if the _____ exceeds the maximum
difference between the recorded balance and any point within the precision interval, the
auditor would decide to _____ the account balance as fairly stated.
A. sample estimate; accept
B. sample estimate; reject
C. tolerable misstatement; accept
D. tolerable misstatement; reject
Which of the following statements about the Securities Act of 1933 is not true?
A. The plaintiff must prove damages or an economic loss.
B. The plaintiff must prove they read and relied upon the financial statements.
C. Any purchaser of securities may sue auditors.
D. The plaintiff need not prove that the materially misstated financial statements are the
direct cause of the loss.
When preparing an audit report, an internal auditor must convince management to take
action concerning the report’s findings. When reporting on an audit finding, an auditor
must include some key elements about that finding in the report. These key elements
are
A. condition, criteria, cause, effect, and recommendation.
B. condition, criteria, cause, effect, and requirement.
C. condition, source, cause, effect, and recommendation.
D. location, criteria, cause, effect, and recommendation.
Purchase cutoff procedures should be designed to produce evidence of whether
merchandise is included in the inventory of the client company if the company
A. has paid for the merchandise.
B. has physical possession of the merchandise.
C. holds legal title to the merchandise.
D. holds the shipping documents for the merchandise issued in the company’s name.
Appropriate audit inquiries regarding estimates include all of the following except:
A. Who prepares the estimates?.
B. Why are they prepared?.
C. What data are used?.
D. When are they prepared?.
To make a year-to-year comparison of inventory turnover most meaningful, the auditor
will perform the analysis
A. for the company as a whole.
B. by division.
C. by product.
D. all of the above.
Under the Securities Act of 1933, which of the following defenses is related to auditors
performing a reasonable investigation of the financial statements?
A. Causation
B. Contributory negligence
C. Due diligence
D. Prudent auditor
Situations in which auditors provide additional copies of a previous issued report or
grant entities permission to use a previously issued report in a document containing
financial statements after its original date are known as
A. additional use reports.
B. reissued reports.
C. subsequent use reports.
D. updated reports.
The overall attitude and awareness of an entity’s board of directors concerning the
importance of the client’s internal control usually is reflected in its
A. computer-based control activities.
B. system of separation of duties.
C. control environment.
D. safeguards over access to assets.
Control strengths and weaknesses should be documented in audit documentation,
sometimes called
A. questionnaires, narratives, and flowcharts.
B. bridge working papers.
C. communications of significant deficiencies.
D. internal control letters.
Capital stock may be subject to _____________________________ when independent
registrars and transfer agents are employed.
Compliance auditing refers to the process of ensuring that a company is operating
within _________________, ___________________, and
_________________________.
What kind of error or fraud could happen if the inventory warehouse manager also had
responsibility for making the physical inventory count and reconciling discrepancies to
the perpetual inventory records?
When circumstances call for extended procedures, information on outstanding stock
may be ________________________________________________.
You are auditing Green Corporation for the calendar year 2014. Among other items
related to the audit, Green Corporation was being sued for personal injury resulting
from the malfunction of one of their products. The lawsuit was initiated by Sue Ewe in
September, 2014. Management and the company’s outside legal counsel estimated the
loss from the suit to be approximately $250,000. This amount is accrued and properly
disclosed in the footnotes of the financial statements. You have no reason to believe that
the estimate is inaccurate. You completed your audit and dated your report March 2,
2015. The financial statements were issued on March 14, 2015. On March 20, 2015,
you read in a national business periodical that the jury in the trial awarded Sue Ewe
$1.5 million.
Discuss the nature of these events and what responsibility, if any, you have regarding
the news of March 20, 2015.
Using the following letters, identify the case to which each statement is most closely
related:
1. Credit Alliance v. Arthur Andersen A. Concluded that auditors could
be liable to third parties who were not in privity with them. 3
2. Ernst & Ernst v. Hochfelder B. Concluded that reckless
misstatements, even if not deliberate, are the basis for liability to
third parties.
3. Ultramares Corp. v. Touche C. Was the first United States
case involving a suit against auditors.
4. 1136 Tenants’ Corp. v. Max Rothenberg & Co. D. Concluded that auditors had
a duty to inform clients of instances of fraud, even if hired
for write-up work.
5. Escott v. BarChris Construction Corp. E. Established precedent for the
plaintiff to prove scienter to recover damages under section
10(b) of the Securities Exchange Act of 1934.
6. Smith v. London Assurance Corp. F. Found auditors liable for
ordinary negligence under the Securities Act of 1933.
7. State Street Trust v. Ernst G. Established a three point test for
auditor liability, including that auditors demonstrate
some action to acknowledge the existence of the third party and
the third party’s intent to rely
on the opinion and financial statements.
Indicate whether each of the following represents an application of a statistical (S) or
nonstatistical (N) sampling application.
____ 1. In order to begin testing the occurrence assertion for Bear’s sales invoices, Lion
determined the expected population deviation rate to be 1.25%, the tolerable rate of
deviation to be 4% and the risk of overreliance to be 5%.
____ 2. Lion determined the tolerable rate of deviation to be low while testing controls
concerning loan agreements. The audit team considered the sample size provided by the
AICPA tables but decided that more loans needed to be tested to accurately evaluate the
population.
____ 3. To test the accuracy of Bear’s accounts receivable, Lion ordered the accounts
into an aging list and selected the last fifty items for examination.
____ 4. A list of pre-numbered purchase orders was used to test the completeness
assertion. Lion decided to randomly select items from the list for examination by
identifying them from a perusal of files.
____ 5. Lion suspected the existence of fraud in Bear’s payroll department. As a result,
Lion set the expected population deviation rate at zero and used quantitative measures
to ensure that sampling risk was controlled to acceptable levels.
____ 6. Lion used professional judgment to estimate the allowance for sampling risk to
determine the likely rate of deviation in the population when testing the cutoff of Bear’s
sales invoices.
A production order usually includes a ________________________________.