If internal auditors provide direct assistance to the external audit team, the independent
external auditor must
(a) reperform all of the work provided by the internal auditors.
(b) supervise and evaluate the work performed by the internal auditors.
(c) refuse to issue an audit opinion, due to a lack of independence.
(d) indicate a division of responsibility in the performance of the audit.
Which of the following individuals could be a member of the Audit Committee?
a. A member of the company’s Board of Directors.
b. A member of the PCAOB.
c. An audit partner of the CPA firm who performs the annual audit.
d. None of the above.
Application controls are part of the effectiveness of ITGC in that they are the controls
that:
(a) are specific to a single process or activity within the system but depend upon the
validity of the ITGC environment.
(b) occur at the entity-level to link the operation of automated and manual controls.
(c) occur at the transaction-level to integrate the financial reporting aspects of a given
activity.
(d) are intended to enhance the access control limitations provided by passwords.
Fraud:
a. Involves deception on the part of the auditor in conducting an audit of the financial
statements.
b. Is similar to gross negligence.
c. Is defined in the Securities Acts of 1933 and 1934.
d. All of the above.
Which of the following is an example of an entity-level ITGC?
(a) A corporate code of conduct.
(b) Programmed recalculations for checking accuracy of data files.
(c) User-identification and passwords requirements for system access.
(d) Supervisory review and approval of supporting documents.
Rule 201, General Standards, of the AICPA Rules of Conduct, includes all of the
following, except:
A. professional competence.
B. independence.
C. due professional care.
D. planning and supervision.
Generally, the closer the relationship between auditor and plaintiff, the:
a. Easier it is to prove negligence.
b. The harder it is to prove negligence.
c. The more likely a plaintiff is to prevail.
d. None of the above.
Which of the following is not a control concern for inventory?
a. Inventory records are adjusted to reflect the inventory that has been verified through
a physical count.
b. Any decrement in inventory value is properly reflected in the amounts.
c. Inventory is safeguarded through all stages of movement and the production process.
d. Reported inventory amounts are properly estimated through management
authorization of completeness.
The auditor assesses a client’s handles possible impairment: TYPO ” what is the
question?
a. during tests of transactions.
b. during tests of the ICFR.
c. during tests of balances.
d. None of the above.
Deliverables refers to the
(a) timing of the auditor’s acceptance of the client company.
(b) products and services as contracted in the engagement letter.
(c) degree of correlation between the audit work to the specific characteristics of the
client.
(d) auditor’s experience in the client’s industry.
The document used to authorize the retrieval of a product from the warehouse or
storage and ship it to the customer is called the:
a. capitation agreement.
b. co-payment.
c. pick ticket.
d. credit-approval form.
e. negative confirmation.
Audit steps for the revenue cycle are anchored in the overall:
a. audit plan.
b. groundwork.
c. integrated audit.
d. design effectiveness.
e. Operating effectiveness.
Outsourcing:
a. affects the ICFR of the organization doing the outsourcing.
b. if significant, the auditor must consider the controls that surround the service
provider.
c. payroll is not considered significant.
d. Both a and b.
Individuals at this level of moral development consider impacts beyond those that will
affect them personally.
A. Pre-development level.
B. Pre-conventional level.
C. Conventional level.
D. Post-conventional level.
When providing limited assurance that the reviewed financial statements of a nonpublic
entity require no material modifications to be in accordance with generally accepted
accounting principles, the accountant should
a. assess the risk that a material misstatement could occur in a financial statement
assertion.
b. confirm with the entity’s lawyer that material loss contingencies are disclosed.
c. understand the accounting principles of the industry in which the entity operates.
d. develop audit plans to determine whether the entity’s financial statements are fairly
presented.
Match the audit step below with its appropriate area. You may use an area more than
once and more than one area may apply.
(a) Trace amounts per the cash disbursement journal to the appropriate liability account:
(b) Trace the stock issued per the transfer agent report to equity:
(c) Trace EPS to net income and stockholders’ equity:
(d) Trace overfunded liability amount to actuary report:
(e) Recalculate interest expense using face amount and current terms:
(f) Recalculate compensation expense using stock compensation plans approved by the
board of directors:
(g) Recalculate stock compensation expense using a model such as Black-Scholes for
valuation:
(h) Recalculate taxes payable:
(i) Review debt covenants:
(j) Review cash equivalents for maturity:
Debt securities:
(a) are carried at fair value on the balance sheet.
(b) are carried at amortized cost on the balance sheet.
(c) Either “a” or “b” depending on management’s intentions.
(d) None of the above.
The “highest” level of a CPA firm hierarchy is:
a. The shareholders.
b. The partners.
c. The managers.
d. Both a and b.
Employers must submit payroll tax forms:
a. every pay period.
b. every month.
c. every quarter.
d. every month or pay period, whichever is more frequent.
Each of the following is a monitoring procedure from the COSO monitoring guidance
except:
(a) periodic evaluation and testing of controls by the internal auditors.
(b) supervisory reconciliations and other reviews of controls.
(c) analysis of and follow up on metrics that might identify control failures.
(d) cumulative access and authority of a super-user.
The main difference between fraud and negligence is:
a. The amount of the loss.
b. The degree of audit failure.
c. The state of whether the auditor knew what (s)he was doing was wrong.
d. All of the above.
Cash receipts from sales on account have been misappropriated. Which of the following
acts would conceal this defalcation and be least likely to be detected by an auditor?
a. Understating the sales journal.
b. Overstating the accounts receivable control account.
c. Overstating the accounts receivable subsidiary ledger.
d. Understating the cash receipts journal.
e. Overstating the sales journal.
The Sarbanes-Oxley Act requires that the audit committee:
A. oversees the auditor’s compensation.
B. interact with the auditor as needed regarding issues of the audit.
C. select and hire the auditor.
D. All of the above.
The first step in making an ethical decision would be to:
A. identify alternative courses of action that are available.
B. identify the values related to the situation.
C. determine the facts in the situation.
D. consider the consequences of viable courses of action.
During the client acceptance and continuance procedures, auditors strive to gather
evidence regarding the numbered topics listed below. Match each of the following
Caution Indicators with the type of information to which it most closely pertains. Each
caution indicator should be used for only one topic.
1> Performance Information
2> Accounting Practices and Financial Disclosures
3> Management Integrity
4> Company Leadership
5> Audit Committee and Board of Directors Involvement
6> Business Locations
7> Accounting Systems
8> Organizational Structure
9> Financial Difficulty and Going Concern
Caution Indicators:
(a) inadequate internal control over assets that may increase the client’s susceptibility of
misappropriation of those assets
(b) marginal ability to meet debt repayment requirements
(c) unusual legal entities or managerial lines of authority
(d) significant declines in customer demand accompanied by increasing business
failures in the industry
(e) domination of management by a single person without compensating controls
(f) ineffective support of the company’s ethical standards
(g) significant bank accounts in jurisdictions for which there appears to be no clear
business justification
(h) significant related party transactions not in the ordinary course of business
(i) ineffective oversight over ICFR
Cut-off procedures:
a. can be tested at interim and rolled forward.
b. can be tested at any point in the audit.
c. apply only to balance sheet accounts.
d. can only be tested at year-end.
Engagement risk is defined as:
(a) the risk that the client will not pay you on time.
(b) the risk that being associated with the client will not be good for the accounting
firm.
(c) the risk that the client will not reappoint the auditor after the first year.
(d) All of the above.
If an entity’s financial records do not contain sufficient evidentiary matter the auditor
must:
(a) issue a qualified opinion.
(b) decline the audit.
(c) perform the audit and obtain the evidence itself.
(d) None of the above.
SOX section 103 and AS #7 require:
a. second partner review of the work papers.
b. an independent review of the audit engagement.
c. an independent approval of the audit report.
d. All of the above.
Accounts involved in the sales and collection cycle include all of the following except:
a. Cash.
b. Accounts Receivable.
c. Sales.
d. Bad Debt Expense.
e. Purchase Returns and Allowances.
If the auditor decides that the internal controls are not designed appropriately then:
(a) the auditor tests those controls in-depth.
(b) the auditor performs tests of internal control for those transactions and accounts
deemed risky.
(c) the auditor performs substantive procedures.
(d) All of the above.
SFAC 6 addresses which assertion:
a. existence.
b. allocation.
c. rights and obligations.
d. All of the above.
Auditors, as professionals, have a contract with society. This means that the
professional group, as well as the individuals within that group:
A. commit to certain behaviors and receive rewards in return.
B. commit to protecting the public interest.
C. maintain standards of excellence.
D. All of the above.
In accounting for inventory, the quality of estimates made by a client’s management is
directly related to:
a. the likelihood of error in the allocation of common costs.
b. the strength of internal controls of the inventory process.
c. the degree of sophistication of the client’s automated inventory processes.
d. the number of tags or count sheets used in the client’s physical inventory count.
The credit approval or insurance verification process must be completed and
documented.
The SEC requires that stock that has mandatory redemption requirements or has
redemption considerations that are out of the issuer’s control be shown outside of the
stockholders’ equity section. .
The components of the fraud triangle include incentive, opportunity, and rationalization.
The auditor can control all components of audit risk.
Dual purpose tests allow the auditor to perform the audit in an efficient manner.
When a payment is received through the mail, it is usually in the form of a check and is
accompanied by a bill of lading.
If a material event is discovered prior to issuance of the financial statements the auditor
must issue an audit report with two separate dates, one disclosing the date the regular
field work ended and a separate date for disclosure of the subsequent event.
Part 3 of the Circular 133 Compliance Supplement identifies four types of compliance
requirements and the related audit objectives for every audit conducted under Circular
A-133.
Under PCAOB and AICPA audit standards, audits must be planned and designed to
provide reasonable assurance that financial statements are free of material
misstatements from any source.
What is a top down approach to planning an audit? What are the steps? How does this
approach link the financial statements to ultimate audit program steps? Why does AS 5
direct the auditor to use this approach in assessing materiality?
Incorrect rejection is an audit effectiveness issue.
Related-party transactions frequently present greater risk than those transacted at “arm’s
length”.
Because of regulatory requirements, a not-for-profit organization’s audit report may be
different from that of a for-profit company.
Why is it more important for an auditor to perform a search for unrecorded notes
payable than for unrecorded notes receivable? Discuss some audit procedures the
auditor may use to uncover any unrecorded notes payable.
One of the first concerns regarding the revenue cycle is that all recorded sales entries
are the result of real transactions that do not meet the criteria for revenue recognition.
Proof of cash detects deposits not recorded in the books.
An auditor’s report on an integrated audit will be unqualified if internal control over
financial reporting does not have any material weaknesses and the financial statements
are fairly presented.
A company uses inventory tags that are electronically scanned into its accounting
information system to track receipt, movement, and removal of items of inventory from
the manufacturing floor. Prior to producing quarterly and annual financial statements,
the company performs a physical count of inventory. The typical outcome of the
physical count is that journal entries must be made after the count to correct the
inventory accounts and records because some employee theft and unrecorded waste
always occurs.
Does the occurrence of inventory loss that the company routinely records mean that a
deficiency in ICFR exists? Why or why not?
Selecting the wrong control to test is an example of non sampling risk.
Discuss an auditor’s objectives in the audit of equity accounts. Describe
appropriate analytical procedures an auditor may apply to equity accounts.