Which of the following statements concerning control risk is correct?
A. Assessing control risk and obtaining an understanding of an entity’s internal controls
may be performed concurrently.
B. When control risk is high, an auditor is required to document the basis for that
assessment.
C. Control risk may be assessed sufficiently low to eliminate substantive procedures for
significant accounts.
D. When assessing control risk, an auditor should not consider evidence obtained in
prior audits about the operation of control activities.
An engagement to express an opinion on a system of internal control will generally
A. only require those procedures already applied in assessing control risk during a
financial statement audit.
B. increase the reliability of the financial statements that have already been audited.
C. be more extensive in scope than the assessment of control risk made during a
financial statement audit.
D. be more limited in scope than the assessment of control risk made during a financial
statement audit.
Before performing a compilation of the financial statements of a nonpublic entity, an
accountant should
A. perform a thorough study and evaluation of the internal control system.
B. complete a series of inquiries concerning the entity’s procedures for recording,
classifying, and summarizing transactions.
C. design working papers intended to provide sufficient competent evidential matter to
afford a reasonable basis for a compilation opinion.
D. obtain an understanding of the accounting principles and practices of the industry in
which the entity operates.
In a monetary-unit sampling plan, the upper misstatement limit is $11,200 and the risk
of incorrect acceptance is 5%. This means that
A. tolerable misstatement is $11,200.
B. there is a 95% chance that the actual misstatement in the account is $11,200 or more.
C. there is a 95% chance that the actual misstatement in the account is $11,200.
D. there is a 95% chance that the actual misstatement in the account is $11,200 or less.
Which of the following is least likely to be a possible cause of book-to-physical
differences in inventory quantities?
A. Inventory cutoff errors.
B. Misapplication of LIFO.
C. Unreported scrap or spoilage.
D. Theft.
The mailing of disbursement checks and remittance advices should be controlled by the
employee who
A. signed the checks last.
B. approved the vouchers for payment.
C. matched the receiving reports, purchase orders and vendors’ invoices.
D. verified the mathematical accuracy of the vouchers and remittance advices.
Which of the following best describes the independent auditor’s approach to obtaining
satisfaction concerning depreciation expense in the income statement?
A. Verifying the mathematical accuracy of the amounts charged to income as a result of
depreciation expense.
B. Determining the method for computing depreciation expense and ascertaining that it
is in accordance with generally accepted accounting principles.
C. Reconciling the amount of depreciation expense to those amounts credited to
accumulated depreciation accounts.
D. Establishing the reasonableness of useful lives and depreciation methods for
depreciable assets and recomputing the depreciation expense.
The auditor’s report is generally addressed to the
A. Chief operating officer.
B. Securities and Exchange Commission.
C. Stockholders of the company.
D. Chief financial officer.
Which of the following is not an element of management’s assessment process for the
effectiveness of internal control?
A. Evaluating the likelihood that failure of a control could result in a misstatement.
B. Determining the locations and business units to include in the evaluation.
C. Determining significant deficiencies and material weaknesses in controls.
D. Obtaining the auditor’s assessment of the internal control effectiveness.
Which of the following accounts would most likely be reviewed by the auditor to gain
reasonable assurance that additions to property, plant, and equipment are not
understated?
A. Depreciation expense.
B. Accounts payable.
C. Cash.
D. Repairs and maintenance expense.
The cash disbursements journal is also called the
A. voucher register.
B. purchases journal.
C. check register.
D. accounts payable subsidiary ledger.
In order for an external auditor to complete an audit of a public company, the entity’s
management must comply with all of the following except:
A. Accept responsibility for the effectiveness of the entity’s internal control over
financial reporting.
B. Evaluate the effectiveness of the entity’s internal control over financial reporting
using suitable control criteria.
C. Support its evaluation with sufficient evidence, including documentation.
D. Present an oral assessment of the effectiveness of the entity’s internal control over
financial reporting as of the end of the entity’s most recent fiscal year.
Who bears ultimate responsibility for the financial statements?
A. Management of the organization, equally with the external auditor that audits the
statements.
B. Management and the shareholders of the organization.
C. The external auditor that audits the statements.
D. Management of the organization.
Which of the following is a substantive procedure that an auditor most likely would
perform to verify the existence of recorded accounts payable?
A. Investigating the open purchase order file to ascertain that prenumbered purchase
orders are used and accounted for.
B. Receiving the entity’s mail, unopened, for a reasonable period of time after the
year-end to search for unrecorded vendor’s invoices.
C. Vouching selected entries in the accounts payable subsidiary ledger to purchase
orders and receiving reports.
D. Confirming accounts payable balances with known suppliers who have zero
balances.
In creating lead schedules for an audit engagement, what financial information is
needed to begin?
A. Interim financial information, such as third quarter sales, net income, and inventory
and receivables balances.
B. Specialized journal information, such as the invoice and purchase order numbers of
the last few sales and purchases of the year.
C. General ledger information, such as account numbers, prior-year account balances,
and current year unadjusted information.
D. Adjusting entry information, such as deferrals and accruals and reclassification
journal entries.
Alpha Company uses its sales invoices for posting perpetual inventory records.
Inadequate control activities over the invoicing function allow goods to be shipped that
are not invoiced. The inadequate control activities could cause an
A. understatement of revenues, receivables, and inventory.
B. overstatement of revenues and receivables and an understatement of inventory.
C. understatement of revenues and receivables and an overstatement of inventory.
D. overstatement of revenues, receivables, and inventory.
During a review of the financial statements of a nonpublic entity, the CPA finds that the
financial statements contain a material departure from generally accepted accounting
principles. If management refuses to correct the problem, the CPA should
A. disclose the departure in a separate paragraph of the report.
B. issue an adverse opinion.
C. attach a footnote explaining the effects of the departure.
D. issue a compilation report.
An imprest cash account is
A. used for investing in marketable securities.
B. the principal cash account for an entity.
C. one that contains a stipulated amount of money and is used for limited purposes.
D. the principal checking account for a branch of an entity.
An effective control environment
A. Allows management to identify all relevant risks.
B. Creates a commitment to competence.
C. Guarantees that all controls are followed as prescribed.
D. Requires an internal audit function.
An entity’s financial statements were misstated over a period of years due to large
amounts of revenue being recorded in journal entries that involved debits and credits to
an illogical combination of accounts. The auditor could most likely have been alerted to
this fraud by
A. Scanning the general journal for unusual entries.
B. Performing a revenue cutoff test at year-end.
C. Tracing a sample of journal entries to the general ledger.
D. Examining documentary evidence of sales returns and allowances recorded after
year-end.
Harvey, CPA is preparing an audit program for the purpose of ascertaining the
occurrence of subsequent events that may require adjustment or disclosure essential to a
fair presentation of the financial statements in conformity with generally accepted
accounting principles. Which one of the following procedures would be least
appropriate for this purpose?
A. Confirm, as of the completion of fieldwork, accounts receivable that have increased
significantly from the year-end date.
B. Read the minutes of the board of directors.
C. Inquire of management concerning events that may have occurred.
D. Obtain a lawyer’s letter as of the completion of fieldwork.
Which of the following audit risk components may be assessed in qualitative terms?
A. Risk of material misstatement.
B. Detection risk.
C. Neither risk of material misstatement nor detection risk.
D. Both risk of material misstatement and detection risk.
You are teaching a class of new hires at your international accounting firm. Explain the
audit risk model using a mathematical formula.
AR = RMM DR
AR = Audit risk
RMM = Risk of material misstatement
DR = Detection risk
The proper use of prenumbered termination notice forms by the Payroll Department
should provide assurance that all
A. uncashed payroll checks were issued to employees who have not been terminated.
B. personnel files are kept up to date.
C. employees who have not been terminated receive their payroll checks.
D. terminated employees are removed from the payroll.
Which of the following could test the occurrence assertion for payroll-related
liabilities?
A. Compare items in accrued payroll taxes to the supporting payroll tax return.
B. Search for unrecorded liabilities.
C. Examine payroll tax returns to determine that the expense was recorded in the proper
period.
D. Review payroll liabilities for proper classification as short- or long-term.
Which of the following are ordinarily designed to detect possible material monetary
errors in the financial statements?
A. Tests of controls.
B. Analytical procedures.
C. Computer controls.
D. Post-audit review of audit documents.
Which of the following are prospective financial statements upon which an accountant
may appropriately report for general use?
A. Pro forma financial statements.
B. Financial projections.
C. Partial presentations.
D. Financial forecasts.
Which of the following constitutes a control weakness related to factory equipment?
A. A policy requiring all purchases of factory equipment to be made by the department
in need of the equipment.
B. Checks issued in payment of purchases of equipment are not signed by the
controller.
C. Factory equipment replacements are generally made when estimated useful lives, as
indicated in depreciation schedules, have expired.
D. Proceeds from sales of fully depreciated equipment are credited to other income.
To gain assurance that all inventory items in an entity’s inventory listing schedule are
valid, an auditor most likely would trace
A. inventory tags noted during the auditor’s observation to items listed in the inventory
listing schedule.
B. inventory tags noted during the auditor’s observation to items listed in receiving
reports and vendors’ invoices.
C. items listed in the inventory listing schedule to inventory tags and the count sheets.
D. items listed in receiving reports and vendors’ invoices to the inventory listing
schedule.
Comparing selected items from the payroll register to employee time records that have
been approved by supervisory personnel tests which of the following assertions for
payroll expense?
A. Occurrence.
B. Completeness.
C. Authorization.
D. Cutoff.
Which of the following conditions or events most likely would cause an auditor to have
substantial doubt about an entity’s ability to continue as a going concern?
A. Significant related party transactions are pervasive.
B. Usual trade credit from suppliers is denied.
C. Arrearages in preferred stock dividends are paid.
D. Restrictions on the disposal of principal assets are present.
Which of the following input controls is a numeric value computed to provide
assurance that the original value has not been altered in construction or transmission?
A. Hash total.
B. Parity check.
C. Encryption.
D. Check digit.