Which of the following is a true statement regarding CPAs’ liability?
A) The amounts assessed under joint and several liability will not differ significantly
from the amounts assessed under separate and proportionate liability.
B) When lawsuits are brought under the federal securities laws, the joint and several
liability approach will always apply.
C) If one owner was directly involved in the actions of the owner causing the liability,
the personal assets of neither owner can be subject to the damages that arise.
D) Under the federal statutes, the amount of damages under separate and proportionate
liability can be increased if the main defendant is insolvent.
Under the Securities Act of 1933,
A) any party who relies on the company’s audited financial statements can recover from
the auditors.
B) third-party users must prove that the auditor was negligent.
C) the burden of proof is on the defendant.
D) auditors face potential legal exposure for information contained in the Form 10-Q.
An auditor is confirming a population of accounts receivable for monetary correctness.
The population totals $2,000,000 and a sample of 200 confirmations is obtained. Upon
audit, no misstatements are uncovered in the sample. Assuming an ARIA of 10%, the
confidence factor would be 2.31. Applied to a sampling interval of $10,000, the upper
misstatement bound is calculated as
A) $462.
B) $4,329.
C) $23,100.
D) $865,801.
The auditor’s principal objective when using a sample of tests of details of balances is
whether the
A) account balance being audited is fairly stated.
B) transactions being audited are free of misstatements.
C) controls being tested are operating effectively.
D) transactions and account balances being audited are fairly stated.
The physical counting of inventory may be performed at which of the following times?
A)
B)
C)
D)
Which of the following statements is not true?
A) Analytical procedures emphasize the overall reasonableness of transactions and
balances.
B) Tests of controls are concerned with evaluating whether controls are sufficiently
effective to justify reducing control risk and thereby reducing analytical review
procedures.
C) Substantive tests of transactions emphasize the verification of transactions recorded
in the journals and then posted in the general ledger.
D) Tests of details of balances emphasize the ending balances in the general ledger.
Which of the following is a true statement regarding auditing standards?
A) Prior to the passage of Sarbanes-Oxley, the FASB established auditing principles for
U.S. public companies.
B) PCAOB auditing standards are applicable to entities outside the U.S.
C) There are no similarities between PCAOB standards and International Standards on
Auditing.
D) The Auditing Standards Board has revised most of its standards to converge with the
international standards.
“Absence of reasonable care that can be expected of a person in a set of circumstances”
defines
A) pecuniary negligence.
B) gross negligence.
C) extreme negligence.
D) ordinary negligence.
When performing the test of details of balances, the balance-related audit objective of
classifications is closely related to the objective of
A) accuracy.
B) detail tie-in.
C) existence.
D) completeness.
The concept of reasonable assurance indicates that the auditor is
A) not a guarantor of the correctness of the financial statements.
B) not responsible for the fairness of the financial statements.
C) responsible only for issuing an opinion on the financial statements.
D) responsible for finding all misstatements.
When purchasing software or developing in-house software,
A) cost should be the only factor.
B) extensive testing of the software is generally not required.
C) a team of both IT and non-IT personnel should be involved in the decision process.
D) the librarian and the IT manager should be the only ones involved in the decision
process.
Which of the following is a correct statement regarding confirmations?
A) Confirmations can be in oral or written form.
B) Electronic confirmations are not acceptable under generally accepted auditing
standards.
C) Confirmations are generally used in the audit of fixed asset additions.
D) Auditors consider alternative evidence available when determining if confirmations
should be used.
The fieldwork for the December 31, 2016 audit of Treble Corporation ended on March
17, 2017. The financial statements and auditor’s report were issued and mailed to
stockholders on March 29, 2017. In each of the material situations (1 through 5) below,
indicate the appropriate action (a, b, c, d, or e). The possible actions are as follows:
a. Adjust the December 31, 2016 financial statements.
b. Disclose the information in a footnote in the December 31, 2016 financial statements.
c. Request the client revise and reissue the December 31, 2016 financial statements. The
revision should involve an adjustment to the December 31, 2016 financial statements.
d. Request the client revise and reissue the December 31, 2016 financial statements.
The revision should involve the addition of a footnote, but no adjustment, to the
December 31, 2016 financial statements.
e. No action is required.
The situations are as follows:
________ 1. On January 16, 2017 a lawsuit was filed against Treble for a patent
infringement action that allegedly took place in early 2014. In the opinion of Treble’s
attorneys, there is a reasonable (but not probable) danger of a significant loss to Treble.
________ 2. On February 19, 2017, Treble settled a lawsuit out of court that had
originated in 2015 and is currently listed as a contingent liability.
________ 3. On March 30, 2017, Treble settled a lawsuit out of court that had
originated in 2014 and is currently listed as a contingent liability.
________ 4. On February 2, 2017, you discovered an uninsured lawsuit against Treble
that had originated on August 30, 2013. There is a reasonable (but not probable) danger
of a significant loss to Treble.
________ 5. On April 7, 2017, you discovered that a debtor of Treble went bankrupt on
January 22, 2017, due to a major uninsured fire that occurred on January 2, 2017.
One of the shortcomings in evaluating the allowance for uncollectible accounts by
reviewing individual noncurrent balances on the aged trial balance is
I. it is difficult to compare the results of the current year with those of the previous year.
II. current accounts are ignored in establishing the adequacy of the allowance.
A) I only
B) II only
C) both I and II
D) neither I nor II
Which audit procedure would be used to test for the existence balance-related audit
objective?
A) Trace ten accounts from the aged trial balance to the accounts receivable master file.
B) Confirm accounts receivable.
C) Review large sales returns and allowances before and after the balance sheet date.
D) Trace ten accounts from the trial balance to the accounts on the master file.
When the auditor attempts to understand the operation of the accounting system by
tracing a few transactions through the accounting system, the auditor is said to be
A) tracing.
B) vouching.
C) performing a walkthrough.
D) testing controls.
Audit documents
A) are kept by the client for easy reference for their accounting staff.
B) should be considered as a substitute for the clients accounting records.
C) are designed to facilitate the review and supervision of the work performed by the
audit team by a reviewing partner.
D) prepared during the engagement are the property of the client once the audit bill is
paid.
Which of the following is not an accurate statement regarding the acquisition and
payment cycle?
A) The personnel in the receiving department should be independent of the storeroom
personnel.
B) Goods received should be physically controlled from the time of their receipt until
their use or disposal.
C) Accounting records should transfer responsibility for the goods each time they are
moved.
D) The accounting department should be responsible for receiving goods and preparing
the receiving report.
When comparing client data with similar prior-period data,
A) if there has been no significant changes in the client’s operations in the current year,
much of the detail making up the totals in the financial statements should remain
unchanged.
B) comparison of details must take the form of details over time.
C) comparing totals with previous years considers growth in the business activity.
D) percent relationships fail to consider declines in the business activity.
The organization that is responsible for providing oversight for auditors of public
companies is called the
A) Auditing Standards Board.
B) American Institute of Certified Public Accountants.
C) Public Oversight Board.
D) Public Company Accounting Oversight Board.
When drawing statistical inferences about the population when using variables
sampling,
A) a confidence interval cannot be calculated.
B) there is always a possibility that the sample is not sufficiently representative of the
population to provide a sample mean or standard deviation reasonably close to those of
the population.
C) the auditor does not know the reliability fo the statistical inference process that is
used to draw the conclusions.
D) all of the above are correct.
One of the purposes of an engagement letter is to avoid misunderstandings with the
client. This is important for
A)
B)
C)
D)
The net realizable value of accounts receivable is equal to:
A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.
When reviewing the summary of misstatements found in the audit
A) an adjusting journal entry must be made by the auditor for all material
misstatements.
B) auditors must combine individually immaterial misstatements to evaluate whether
the combined amount is material.
C) the auditor is not required to consider the impact on the current financial statements
of misstatements in the prior year that were not corrected.
D) auditors only need to consider the misstatements that impact the income statement.
When determining the sample size for the number of items the auditor should count
during the physical inventory,
A) it is easy to quantify the number of items based on a formula developed by the
AICPA.
B) one of the key determinants that must be considered is internal control over the
physical count.
C) one of the key determinants that must be considered is the cost involved.
D) generally accepted auditing standards require that at least 80% of the dollar value of
the inventory should be included in the sample.
The failure to capitalize a permanent asset, or the recording of an asset acquisition at
the improper amount, affects the balance sheet
A) forever.
B) for the current period.
C) for the depreciable life of the asset.
D) until the firm disposes of the asset.
Which of the following is an accurate statement regarding the misappropriation of
assets?
A) In most cases, the amounts involved are material to the financial statements.
B) Misappropriation of assets can easily increase in size over time and can lead to
significant reputational harm.
C) Management should not be concerned about minor misappropriations.
D) Asset misappropriation schemes are less common than fraudulent financial
statement schemes.
When allocating materiality, most practitioners choose to allocate to
A) the income statement accounts because they are more important.
B) the balance sheet accounts because most audits focus on the balance sheet.
C) both balance sheet and income statement accounts because there could be errors on
either.
D) all of the financial statements because it is required by GAAS.
Match the terms below (a-h) with the definitions provided below (1-8):
a. preliminary judgment about materiality
b. inherent risk
c. planned detection risk
d. audit assurance
e. acceptable audit risk
f. performance materiality level
g. control risk
h. materiality
________ 1. a measure of the risk that audit evidence for a segment will fail to detect
misstatements exceeding the performance materiality amount, should such
misstatements exist
________ 2. a measure of the auditor’s assessment of the likelihood that misstatements
exceeding a performance materiality in a segment will not be prevented or detected by
the client’s internal controls
________ 3. a measure of how much risk the auditor is willing to take that the financial
statements may be materially misstated after the audit is completed and an unqualified
audit opinion has been issued
________ 4. the materiality allocated to any given account balance
________ 5. the maximum amount by which the auditor believes that the statements
could be misstated and still not affect the decisions of reasonable users
________ 6. This term is synonymous with acceptable audit risk.
________ 7. the magnitude of an omission or misstatement of accounting information
that makes it probable that the judgment of a reasonable person would have been
changed
________ 8. a measure of the auditor’s assessment of the likelihood that there are
material misstatements before considering the effectiveness of internal control
When dealing with materiality,
A) if the client refuses to correct a material misstatement, the auditor is required to
adjust the financial statements.
B) management is responsible for determining whether financial statements are
materially misstated.
C) materiality must be determined as as percentage of sales.
D) the auditor must bring any material misstatements to the client’s attention.
Which of the following is not one of the three phases in an operational audit?
A) planning
B) training and supervising employees
C) evidence accumulation and evaluation
D) reporting and follow-up
Which of the following tests of controls is least useful in assessing the
transaction-related audit objective related to occurrence?
A) Examine documents in voucher package for occurrence.
B) Examine supporting documents for indication of approval.
C) Account for sequence of vouchers.
D) Attempt to input transactions with valid and invalid vendors.