Vouchers should be stamped PAID to
A. prevent duplicate payment.
B. generate a new purchase order.
C. indicate posting in the voucher register.
D. facilitate preparation of the bank reconciliation.
Independence permits internal auditors to render impartial and unbiased judgments. The
best way for internal audit departments to achieve independence is through
A. individual knowledge and skills.
B. organizational knowledge and skills.
C. supervision within the organization.
D. organizational status and individual objectivity.
“Recorded vouchers (accounts payable entries) in the voucher register (e.g., purchases
journal) supported by completed voucher documentation” is a specific example of
which management assertion?
A. Classification.
B. Occurrence.
C. Completeness.
D. Cutoff.
The purpose of tests of controls is to determine that
A. internal control policies and procedures are functioning as prescribed.
B. the extent of further audit procedures can be reduced.
C. errors and irregularities are prevented or detected in a timely manner.
D. the auditor has an understanding of internal control.
Assume that application of analytical procedures revealed significant unexplained
differences between recorded amounts and the expectations (estimates) developed by
the auditor. If management is unable to provide an acceptable explanation, the auditor
should
A. consider the matter a scope limitation.
B. perform additional audit procedures to investigate the matter further.
C. intensify the audit with the expectation of detecting management fraud.
D. withdraw from the engagement.
Which of the following is not a valid defense for auditors’ liability to third parties for
ordinary negligence under common law?
A. The loss was caused by factors other than the materially misstated financial
statements
B. Lack of proper standing (relationship) to bring suit in that jurisdiction
C. Lack of a privity relationship with auditors
D. Third parties did not rely upon the financial statements
An auditor selected items for test counts from a client’s inventory listing before
observing the client’s physical inventory at the warehouse. The auditor then found the
items selected at the warehouse and counted them. This procedure most likely obtained
evidence concerning management’s assertion of
A. rights and obligations.
B. completeness.
C. existence or occurrence.
D. valuation.
Which of the following is not a way in which auditors use the concept of overall
materiality?
A. As a guide to planning the audit plan
B. As a guide to the evaluation of evidence
C. As a guide for making decisions about the audit report
D. As a guide for assessing control risk
Which of the following characteristics of substantive procedures is most closely
associated with the use of sampling?
A. Extent of further audit procedures
B. Nature of further audit procedures
C. Timing of further audit procedures
D. All of these are closely associated with the use of sampling
When the client holds a large amount of negotiable securities, auditors need to plan to
guard against
A. unauthorized negotiation of the securities before they are counted.
B. unrecorded sales of securities after they are counted.
C. substitution of securities already counted for other securities that should be on hand
but are not.
D. substitution of authentic securities with counterfeit securities.
If the auditors obtains sufficient appropriate evidence on the entity’s accounts receivable
balance by alternative procedures because it is impracticable to confirm accounts
receivable, the opinion on the entity’s financial statements should be unmodified and
would
A. disclose the fact that alternative procedures were used due to client-imposed scope
limitation.
B. disclose in the opinion paragraph that confirmation of accounts receivable was
impracticable.
C. not mention the alternative procedures.
D. include an other-matter paragraph that discloses the performance of alternative
procedures.
An auditor would least likely initiate a discussion with a client’s audit committee
concerning
A. the methods used to account for significant unusual transactions.
B. the maximum dollar amount of misstatements that could exist without causing the
financial statements to be materially misstated.
C. indications of fraud and illegal acts committed by a corporate officer that were
discovered by the auditor.
D. disagreements with management as to accounting principles that were resolved
during the current year’s audit.
The purpose of the internal audit’s evaluation of the effectiveness of existing risk
management processes is to determine that
A. management has planned and designed operations to provide reasonable assurance
of achieving objectives and goals.
B. management’s policies and procedures will achieve objectives and goals.
C. the organization’s objectives and goals are established within risk limits established
by the internal audit organization.
D. the organization’s objectives and goals will be achieved in an accurate and timely
manner and with minimal use of resources.
Which of the following is NOT a condition that must be met before an accountant can
conduct an engagement concerning a nonpublic entity’s internal control over financial
reporting?
A. Management accepts responsibility for the effectiveness of its internal control.
B. Management has appropriately documented the internal controls.
C. Management’s evaluation of control can be supported by sufficient evidence.
D. Management presents a written assertion about the effectiveness of its internal
control.
SEC registrants’ financial statements should be accompanied by all of the following
reports except
A. auditors’ report on internal control over financial reporting.
B. management’s report on internal control over financial reporting.
C. auditors’ report on financial statements and related disclosures.
D. management’s report on financial statements and related disclosures.
The Securities Act of 1933
A. regulates trading in securities.
B. approves and guarantees investments.
C. regulates the initial issuance of securities.
D. regulates the accounting profession.
Which of the following is not a typical assertion relating to owners’ equity?
A. The number of shares shown as issued is in fact issued.
B. The accounting is proper for options, warrants, and other stock issue plans, and
related disclosure is adequate.
C. All owners’ equity transactions have been authorized by the board of directors.
D. The valuation of shares issued for noncash consideration is reflected at book value.
Auditors can gain sufficient understanding of the internal controls at a service
organization by
A. reviewing the contract with the service organization.
B. inquiry with management of the service organization.
C. reviewing a report on internal controls provided by the service organization’s
auditors.
D. sending a confirmation concerning internal controls to the service organization’s
auditors.
The following question appeared on an internal control questionnaire for sales. Next to
each of the question indicate the related assertion.
Which of the following is a category of general controls?
A. Detective controls
B. Input controls
C. Processing controls
D. Program change controls
A client’s physical count of inventories was higher than the inventory quantities shown
in the perpetual records. This situation could be the result of the failure to record
A. sales.
B. sales discounts.
C. purchases.
D. purchase discounts.
Which of the following does not affect the sample size in an attributes sampling
application?
A. Expected population deviation rate
B. Upper limit rate of deviation
C. Sampling risk
D. Tolerable rate of deviation
Management determined it was probable that a pending litigation claim would result in
a material loss. The loss was disclosed in the footnotes to the financial statements but
was not accrued in the income statement. If the auditors believe an accrual should be
made, what type of report should be issued?
A. Standard (unmodified) report
B. Unmodified opinion with an emphasis-of-matter paragraph
C. Qualified opinion based on a circumstance-imposed scope limitation
D. Qualified or adverse opinion based on a departure from GAAP
Which of the following is not a component of internal controls?
A. Control environment
B. Control activities
C. Inherent risk
D. Monitoring
The audit team is planning to examine a sample of control policies and procedures.
Assume that the audit team establishes a tolerable rate of deviation of 6% and, based on
past audits, estimates the expected population deviation rate to be 2%. Which of the
following is not true with respect to the impact of the risk of overreliance on sample
size?
A. The risk of overreliance has an inverse impact on sample size.
B. The risk of overreliance should be assessed at higher levels if the audit team wishes
to place lower levels of reliance on internal control.
C. If the audit team assesses the risk of overreliance at 10%, the resultant sample size
would be 88 items.
D. If the audit team reduced the risk of overreliance from 10% to 5%, the resultant
decrease in the sample size would be 39 items.
The typical business activity of the finance and investment cycle would not include
A. proposals for cash forecasts, capital budgets, and business expansion.
B. analysis of excess cash funds.
C. reconciliation of cash.
D. sale of stocks, bonds, or notes.
Each of the following types of controls is considered to be an entity-level control,
except those
A. relating to the control environment.
B. pertaining to the company’s risk assessment process.
C. regarding the company’s annual stockholder meeting.
D. addressing policies over significant risk management practices.
The auditor uses the assessed level of risk of material misstatement to determine the
acceptable level of detection risk for financial statement assertions. As the acceptable
level of detection risk decreases, the auditor may do one or more of the following
except change the
A. nature of substantive tests to more effective procedures.
B. timing of substantive tests, such as performing them at year-end rather than at an
interim date.
C. extent of substantive tests, such as using larger sample sizes.
D. assurances provided by substantive tests to a lower level.
In a classical variables sampling application, the sample size will be smaller when the
A. risk of incorrect acceptance is lower.
B. risk of incorrect rejection is lower.
C. tolerable misstatement is lower.
D. population variability is lower.
An auditor is examining a nonpublic company’s inventory procurement system and has
decided to perform tests of controls. Under which of the following conditions should
the auditor perform tests of controls?
A. Significant weaknesses were found in the company’s internal control.
B. The auditor hopes to reduce the amount of work to be done in assessing inherent
risk.
C. The auditor believes that testing the controls could lead to a reduction in overall
audit time and cost.
D. Tests of controls are always performed when the auditor begins to assess control
risk.
Describe how a lockbox works and indicate the advantages of such a system.
A lockbox is a post office box under the control of the bank. The bank will send
employees to retrieve checks from the box and deposit them in the company’s account.
The bank will provide a listing of deposits and the remittance advises to the company.
The bank may also provide images of the checks (if the company is willing to pay for
these additional services).
The ____________________________ confirmation form is used when individual
balances are ____________________________ or accounts are in
______________________________.
Once a fraud is discovered, the focus of the audit changes to an investigation with the
primary objective of ___________________________________________________.
What is operational auditing and by whom is it performed?
This question tests your ability to perceive the place(s) where various potential
problems may exist and the type of problem (overstatement or understatement) that
may exist. It asks that you supply the words or descriptions that complete the analysis
begun by applying analytical procedures.
For each of the items below, identify the account(s) that need(s) to be audited carefully
and the reason (i.e., potential overstatement or understatement of _______).
a. If the current year accounts receivable are larger than last year but the allowance for
doubtful accounts is the same.
b. If the current year inventory is larger than last year and the current year gross margin
(profit) is larger.
c. If current year long-term liabilities are larger than last year and the interest expense is
the same.
d. If current year fixed assets are larger and current depreciation expense is the same as
last year.
Using the following letters, identify the case to which each statement is most closely
related:
1. Fleet National Bank v. Gloucester Co. A. Established precedent for plaintiff’s
need to allege and prove scienter to impose section 10(b)
liability.
2. Credit Alliance v. Arthur Andersen B. Auditors willfully violated
Securities Exchange Act of 1934 by making false and misleading
statements in a proxy statement.
3. United States v. Benjamin C. Auditors are liable to reasonably
foreseeable third-party users for ordinary negligence.
4. Rosenblum Inc., v. Adler D. Auditors may be liable to third parties
for ordinary negligence if these parties should be foreseen by
auditors as relying on the financial statements.
5. Iselin v. Landau E. Conviction of auditors for willingly
conspiring to defraud in an engagement related to pro forma
financial statement.
6. Ernst & Ernst v. Hochfelder F. Third parties cannot rely on reviewed
financial statements to the same extent as they can on audited
financial statements.
7. United States v. Natelli G. (National Student Marketing) The
court applied the restatement of torts doctrine to identify the
plaintiff as a primary beneficiary.
This question relates to off-balance-sheet commitments. Match the type of commitment
with the typical procedures and sources of evidence.
1. Vouching of sales contracts; inquiry of sales personnel; confirmation by customer
A. Commitments to sell at fixed prices
2. Vouching of contracts; confirmation by customer; inquiry of client management
B. Loan commitments (as by a financial
institution)
3. Vouching of open commitment file; inquiry of loan officers
C. Repurchase or remarketing agreements
4. Vouching of open purchase orders; inquiry of purchasing personnel; confirmation by
supplier D. Commitments to purchase at fixed prices
5. Vouching of lease agreement; confirmation with lessor or lessee
E. Lease commitments
Distinguish between the “due diligence” and the “causation” defenses available to
auditors under section 11 of the Securities Act of 1933.
Government performance audits determine if
_________________________________________________________ and
_______________________________________________.
The Code of Professional Conduct is very important for the auditing profession. The
AICPA, State Boards, and other professional organizations spend a great deal of time
and effort implementing, and reinforcing the ethical standards, and penalizing those
who violate the ethical standards.
A. Why is the Code of Conduct important to the profession?
B. Many professionals believe that in today’s business environment it is more difficult
to adhere to the Code of Professional Conduct. Why might this be true?