Which of the following procedures most likely would give the greatest assurance that
securities held as investments are safeguarded?
A. There is no access to securities between the year-end and the date of the auditor’s
security count.
B. Proceeds from the sale of investments are received by an employee who does not
have access to securities.
C. Investment acquisitions are authorized by a member of the Board of Directors before
execution.
D. Access to securities requires the presence of two designated officials.
In performing tests concerning the granting of stock options, an auditor should
A. confirm the transaction with the Secretary of State in the state of incorporation.
B. verify the existence of option holders in the entity’s payroll records or stock ledgers.
C. determine that sufficient treasury stock is available to cover any new stock issued.
D. trace the authorization for the transaction to a vote of the board of directors.
In an audit of inventories, an auditor would least likely verify that
A. all inventory owned by the entity is on hand at the time of the count.
B. the entity has used proper inventory pricing.
C. the financial statement presentation of inventories is appropriate.
D. damaged goods and obsolete items have been properly accounted for.
Which of the following sampling methods would be used to estimate a numerical
measurement of population, such as the dollar value of an account?
A. Attributes sampling.
B. Stop-or-go sampling.
C. Classical variables sampling.
D. Random-number sampling.
The risk of incorrect acceptance and the risk of overreliance relate to the
A. preliminary estimates of materiality levels.
B. allowable risk of tolerable error.
C. efficiency of the audit.
D. effectiveness of the audit.
When an auditor reports on financial statements prepared on an entity’s income tax
basis, the auditor’s report should
A. be titled so that the financial statements are not confused with statements prepared to
conform to generally accepted accounting principles.
B. disclaim an opinion on whether the statements were examined in accordance with
generally accepted auditing standards.
C. not express an opinion on whether the statements are presented in conformity with
the basis of accounting used.
D. include an explanation of how the results of operations differ from the cash receipts
and disbursements basis of accounting.
The person in charge of authorizing credit to customers does not properly understand
what constitutes a credit risk. This is an example of
A. A management deficiency.
B. A design deficiency.
C. A deficiency in operation.
D. This is not an internal control deficiency.
If auditors conducting attributes sampling found that the entity deviated from a
prescribed control in nine of the first 10 items examined, the auditor is most likely to
A. increase sample size.
B. increase the computed upper deviation rate.
C. decrease the tolerable deviation rate.
D. stop the test and increase control risk.
Mill Company uses a batch processing method to process its sales transactions. Data on
Mill’s sales transaction tapes are electronically sorted by customer number and are
subjected to programmed edit checks in preparing its invoices, sales journals, and
updated customer account balances. One of the direct outputs of the creation of these
tapes most likely would be a
A. report showing exceptions and control totals.
B. printout of the updated inventory records.
C. report showing overdue accounts receivable.
D. printout of the sales price master file.
Which of the following audit procedures is least likely to detect an unrecorded liability?
A. Analysis and recomputation of interest expense.
B. Analysis and recomputation of depreciation expense.
C. Mailing of standard bank confirmation forms.
D. Reading of the minutes of meetings of the board of directors.
Which of the following is likely the most effective audit procedure for the verification
of the legal ownership of real property?
A. Examination of correspondence with the corporate counsel concerning acquisitions.
B. Examination of ownership documents registered and on file at a public hall of
records.
C. Examination of corporate minutes and resolutions concerning the approval to acquire
property, plant, and equipment.
D. Examination of deeds and title guaranty policies on hand.
In performing an audit, Jackson, CPA, discovers that the professional competence
necessary for the engagement is lacking. Jackson informs management of the situation
and recommends another local CPA firm and management engages this other firm.
Under these circumstances
A. jackson may request compensation from the other CPA firm for any professional
services rendered to it in connection with the engagement.
B. jackson may accept a referral fee from the other CPA firm.
C. jackson has violated the AICPA Code of Professional Conduct because of
non-fulfillment of the duty of performance.
D. jackson’s lack of competence should be construed to be a violation of generally
accepted auditing standards.
Before applying substantive procedures to the details of asset and liability accounts at
an interim date, the auditor should
A. Assess the difficulty in controlling achieved audit risk for the remainder of the
period.
B. Investigate significant fluctuations that have occurred in the asset and liability
accounts since the previous balance sheet date.
C. Select only those accounts which can effectively be sampled during year-end audit
work.
D. Consider the compliance tests that must be applied at the balance sheet date to
extend the audit conclusions reached at the interim date.
The risk of incorrect acceptance relates to the
A. effectiveness of the audit.
B. efficiency of the audit.
C. preliminary estimates of materiality levels.
D. tolerable misstatement.
Under the Sarbanes-Oxley Act, the audit committee of a public company has the
following requirement(s):
A. Each member of the committee must be a board member and shall be independent.
B. The audit committee must preapprove all audit and nonaudit services.
C. The audit committee must establish and maintain procedures to handle all issues that
relate to accounting, internal control, and auditing.
D. All of these.
The physical count of inventory of a retailer was higher than shown in its perpetual
records. Which of the following could explain the difference?
A. Inventory items had been counted but tags placed on the items had not been taken
off the items and added to the inventory accumulation sheets.
B. Credit memos for several items returned by customers had not been prepared.
C. No journal entry had been made on the retailer’s books for several items returned to
its suppliers.
D. An item purchased “FOB shipping point” had not arrived at the date of the inventory
count and had not been reflected in the perpetual records.
An auditor tests an entity’s policy of obtaining credit approval before shipping goods to
customers in support of management’s financial statement assertion of
A. valuation or allocation.
B. completeness.
C. existence or occurrence.
D. rights and obligations.
The audit procedures used to verify accrued liabilities differ from those employed for
the verification of accounts payable because
A. accrued liabilities usually pertain to services of a continuing nature, while accounts
payable are the result of completed transactions.
B. accrued liability balances are less material than accounts payable balances.
C. evidence supporting accrued liabilities is nonexistent, while evidence supporting
accounts payable is readily available.
D. accrued liabilities at year-end will become accounts payable during the following
year.
Proper monitoring within an internal control framework may include all of the
following except:
A. An external auditor.
B. An effective audit committee.
C. An internal audit function.
D. The internal revenue service.
For a complex IT system, auditors are least likely to use which of the following when
documenting their understanding of internal controls?
A. Narratives.
B. Internal control questionnaires.
C. Flowcharts.
D. Organization charts.
An auditor is reporting on cash basis financial statements. These statements are best
referred to in his or her report by which one of the following descriptions?
A. Financial position and results of operations arising from cash transactions.
B. Assets and liabilities arising from cash transactions and revenue collected and
expenses paid.
C. Balance sheet and income statement resulting from cash transactions.
D. Cash balance sheet and the source and application of funds.
Substantive procedures to examine the occurrence assertion for accounts payable
include
A. selecting a sample of vouchers and agreeing them to authorized purchase orders.
B. selecting a sample of vouchers and tracing them to the purchases journal.
C. comparing dates on vouchers to dates in the purchases journal.
D. recomputing the mathematical accuracy of a sample of vendor invoices.
The accuracy of information included in footnotes accompanying the audited financial
statements issued by a company whose shares are traded on a stock exchange is the
primary responsibility of
A. The stock exchange officials.
B. The independent auditor.
C. The company’s management.
D. The Securities and Exchange Commission.
What is channel stuffing?
A. A company records revenue before delivery terms can be arranged.
B. A company records revenue on goods that will be shipped overseas.
C. A company induces distributors to buy substantially more inventory than they can
promptly resell.
D. A company alters the terms and conditions of recorded sales to entice customers to
accept delivery of goods.
Which of the following would be considered a part of a consulting services
(non-assurance) engagement?
I. Expressing a conclusion about the reliability of an entity’s financial statements.
II. Reviewing and commenting on a client-prepared business plan.
A. I only.
B. II only.
C. Both I and II.
D. Neither I nor II.
Which of the following is the best reason why an auditor should consider observing an
entity’s distribution of regular payroll checks?
A. To ensure that names on the company payroll are those of bona fide employees
presently on the job.
B. Total payroll costs are a significant part of total operating costs.
C. The auditor did not observe the distribution of the entire regular payroll during the
audit in the prior year.
D. Employee turnover is excessive.
After the auditor has prepared a flowchart of the internal controls surrounding sales and
evaluated the design of the system, the auditor would perform tests of controls on all
control activities
A. Documented in the flowchart.
B. Considered to be weaknesses that might allow errors to enter the accounting system.
C. That the auditor plans to rely on.
D. That would aid in preventing fraud.
An audit of stockholders’ equity ordinarily should include
A. tracing individual dividend payments to the capital stock records.
B. reviewing minutes of board meetings to determine the number of shares outstanding.
C. confirming shares outstanding with state officials.
D. determining that dividend declarations comply with debt agreements.
An accountant may accept an engagement to apply agreed-upon procedures to
prospective financial statements provided that
A. distribution of the report is restricted to the specified users involved.
B. the prospective financial statements also are examined.
C. responsibility for the adequacy of the procedures performed is taken by the
accountant.
D. negative assurance is expressed on the prospective financial statements taken as a
whole.
Which of the following statements extracted from an entity’s lawyer’s letter concerning
litigation, claims, and assessments most likely would cause the auditor to request
clarification?
A. “I believe that the possible liability to the company is nominal in amount.”
B. “I believe that the action can be settled for less than the damages claimed.”
C. “I believe that the plaintiff’s case against the company is without merit.”
D. “I believe that the company will be able to defend this action successfully.”
Internal controls are not designed to provide reasonable assurance that
A. Transactions are executed in accordance with management’s authorization.
B. Embezzlement will be eliminated.
C. Access to assets is permitted only in accordance with management’s authorization.
D. Amounts recorded for assets are compared with the actual existing assets at
reasonable intervals.
Management’s written representations concerning internal control are
A. Addressed to the users of the financial statements.
B. Normally drafted by management.
C. Included in the auditor’s final report.
D. Signed by the CEO and CFO.
What is an auditor’s responsibility for supplementary information, such as segment
information, that is outside the basic financial statements, but required by the FASB?
A. The auditor has no responsibility for required supplementary information as long as
it is outside the basic financial statements.
B. The auditor’s only responsibility for required supplementary information is to assist
in preparing the supplementary information.
C. The auditor is required to read the other information and consider whether such
information is consistent with the information in the financial statements.
D. The auditor should apply tests of details of transactions and balances to the required
supplementary information and report any material misstatements in such information.
A CPA firm evaluates its personnel advancement experience to ascertain whether
individuals assigned to increased degrees of responsibility meet predetermined criteria.
This policy is evidence of the firm’s adherence to which of the following prescribed
standards?
A. Professional ethics.
B. Supervision and review.
C. Accounting and review services.
D. Quality control.