Engagement risk is
A. The risk of issuing an incorrect audit opinion.
B. The auditor’s risk of loss from events arising in connection with financial statements
audited and reported upon.
C. The overall risk of material misstatement.
D. The risk of the entity’s financial failure.
Which of the following procedures would normally be performed by the auditor when
conducting tests of payroll transactions?
A. Interview employees selected in a statistical sample of payroll transactions.
B. Vouch number of hours worked as shown on payroll to time sheets and time reports
signed by the foreman.
C. Confirm amounts withheld from employees’ salaries with proper governmental
authorities.
D. Examine signatures on paid salary checks.
Effective internal control over unclaimed payroll checks that are kept by the Treasury
Department would include Accounting Department procedures that require
A. effective cancellation and stop payment orders for checks representing unclaimed
wages.
B. redepositing unclaimed wages after a period of 3 months.
C. accounting for all unclaimed wages in a current liability account.
D. periodic accounting for the actual checks representing unclaimed wages.
The auditor gathers evidence about dividends that are declared and paid primarily
because of
A. concerns with violations of corporate bylaws or debt covenants.
B. the large dollar value of the transactions.
C. the ease with which the transactions can be audited.
D. fraud concerns.
This act increased protection available to whistleblowers.
A. Sarbanes-Oxley Act of 2002.
B. Securities Act of 1933.
C. Securities Act of 1934.
D. Securities Litigation Uniform Standards Act of 1998.
In the weekly computer run to prepare payroll checks, a check was printed for an
employee who had been terminated the previous week. Which of the following controls,
if properly utilized, would have been most effective in preventing the error or ensuring
its prompt detection?
A. A control total for hours worked, prepared from time sheets collected by the
Timekeeping Department.
B. Requiring the treasurer’s office to account for the numbers of the prenumbered
checks issued to the EDP department for the processing of the payroll.
C. Use of a check digit for employee numbers.
D. Use of a header label for the payroll input sheet.
Audit documentation prepared on audits of public entities is the property of the
A. Shareholders.
B. Auditor.
C. Management of the entity being audited.
D. SEC.
An “integrated audit”
A. Will, in most cases, lead to a substantive audit strategy.
B. Denies the auditor access to information about the entity’s controls.
C. May be performed by two separate audit firms.
D. Is comprised of audits of internal control over financial reporting and of financial
statements.
Significant deficiencies are matters that come to an auditor’s attention that should be
communicated to an entity’s audit committee because they represent
A. Disclosures of information that significantly contradict the auditor’s going concern
assumption.
B. Material fraud or illegal acts perpetrated by high-level management.
C. Significant design flaws in internal controls or poor implementation of internal
controls.
D. Manipulation or falsification of accounting records or documents from which
financial statements are prepared.
An auditor has withdrawn from an audit engagement of a publicly held company after
finding fraud that may materially affect the financial statements. The auditor should set
forth the reasons and findings in correspondence with the
A. Securities and Exchange Commission.
B. Client’s legal counsel.
C. Stock exchanges where the company’s stock is traded.
D. Audit committee of the board of directors.
When an auditor tests a computerized accounting system, which of the following is true
of the test data approach?
A. Test data are processed by the entity’s computer programs under the auditor’s control.
B. Test data must consist of all possible valid and invalid conditions.
C. Testing a program at year end provides assurance that the entity’s processing was
accurate for the entire year.
D. Several transactions of each type must be tested.
Statements on Standards for Accounting and Review Services establish standards and
procedures for which of the following engagements?
A. Assisting in adjusting the books of account for a partnership.
B. Examining prospective financial statements.
C. Processing financial data for clients of other accounting firms.
D. Compiling an individual’s personal financial statement to be used to obtain a
mortgage.
Walkthroughs usually involve all of the following audit procedures except:
A. Reperformance.
B. Inquiry.
C. Observation.
D. Inspection.
The in-charge auditor most likely would have a supervisory responsibility to explain to
the staff assistants
A. That immaterial fraud is not to be reported to the client’s audit committee.
B. How the results of various auditing procedures performed by the assistants should be
evaluated.
C. How the overall audit strategy will allow the firm to reach a sufficiently low level of
audit risk.
D. How overall materiality was selected.
An auditor includes a separate paragraph in an otherwise unmodified report to
emphasize that the entity being reported on had significant transactions with related
parties. The inclusion of this separate paragraph
A. is considered an “except for” qualification of the opinion.
B. violates generally accepted auditing standards if this information is already disclosed
in footnotes to the financial statements.
C. necessitates a revision of the opinion paragraph to include the phrase “with the
foregoing explanation.”
D. is appropriate and would not negate the unqualified opinion.
For which of the following internal controls would an auditor be least likely to perform
tests of internal controls closer to the “as of” date?
A. Withdrawals from Federal Bank of more than $5 million must include a manager’s
signature.
B. At the end of each day at Federal Bank, the total cash in the vault is reconciled with
daily registers of deposits and withdrawals.
C. Federal Bank has just started establishing trusts for its customers and it has only set
up ten such trusts. Before making an investment for a trust, bank employees must verify
that the investment is in accordance with stated investment policies.
D. On an annual basis, Federal Bank management performs credit checks on its loan
customers before determining the value of loans it will not be able to collect on.
An abnormal fluctuation in gross profit that might suggest the need for extended audit
procedures for sales and inventories would most likely be identified in the planning
phase of the audit by the use of
A. Tests of transactions and balances.
B. A preliminary review of internal controls.
C. Specialized audit programs.
D. Analytical procedures.
For each of the following tests, identify the assertion to which the test applies.
1) Trace a sample of payroll checks to the master employee list to verify occurrence.
2) Recalculate the mathematical accuracy of a sample of payroll checks.
3) Test a sample of bank reconciliations for the payroll bank account.
4) Estimate sales commissions by applying commission formulas to recorded sales
totals.
5) Compare amounts accrued to supporting documentation, such as payroll tax returns.
6) Compare payroll costs as a percentage of sales to industry data.
Management philosophy and operating style most likely would have a significant
influence on an entity’s control environment when
A. The internal audit function reports directly to management.
B. Management is dominated by one individual.
C. Accurate management job descriptions delineate specific duties.
D. The audit committee actively oversees the financial reporting process.
Direct services offered under PrimePlus include all of the following except:
A. Accounting for the entity’s income.
B. Providing assurances about the quality of care.
C. Supervising the entity’s investments.
D. Arranging for payment of care.
An example of audit evidence with a medium level of reliability is
A. Scanning.
B. Recalculation.
C. Observation.
D. All of these.
Recomputing the unexpired portion of insurance policies in effect tests which of the
following assertions for prepaid insurance?
A. Existence.
B. Classification.
C. Rights and obligations.
D. Valuation.
Hark, CPA, failed to follow generally accepted auditing standards in auditing Long
Corp.’s financial statements. Long’s management had told Hark that the audited
statements would be submitted to several banks to obtain financing. Relying on the
statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction
applying the Ultramares doctrine, if Third sues Hark, Hark will
A. win because there was no privity of contract between Hark and Third.
B. lose because Hark knew that banks would be relying on the financial statements.
C. win because there was contributory negligence on the part of Third in granting the
loan.
D. lose because Hark was negligent in performing the audit.
Analytical procedures performed in the overall review stage of an audit suggest that
several accounts have unexpected relationships. The results of these procedures most
likely would indicate that
A. Fraud exists within the relevant accounts.
B. Internal control activities are not operating effectively.
C. Additional tests of details are required.
D. The communication with the audit committee should be revised.
An accountant’s report expressing an opinion on an entity’s internal controls should
state that
A. only those controls on which the accountant intends to rely for purposes of the
financial statement audit were reviewed, tested, and evaluated.
B. the establishment and maintenance of the internal controls is the responsibility of
management.
C. the study and evaluation of the internal controls was conducted in accordance with
generally accepted auditing standards.
D. distribution of the report is restricted for use only by management and the board of
directors.
An auditor most likely would extend substantive tests of payroll when
A. payroll is extensively audited by the state government.
B. payroll expense is substantially higher than in the prior year due to company growth.
C. overpayments are discovered in performing tests of details.
D. employees complain to management about too much overtime.
Examining cancelled stock certificates addresses the assertion of
A. occurrence.
B. disclosures.
C. valuation.
D. completeness.
Which of the following is correct concerning required auditor communications about
fraud?
A. Fraud that involves senior management should be reported directly by the auditor to
the audit committee regardless of the amount involved.
B. Fraud with a material effect on the financial statements should be reported directly
by the auditor to the Securities and Exchange Commission.
C. Any requirement to disclose fraud outside the entity is the responsibility of
management and not that of the auditor.
D. The professional standards provide no requirements related to the communication of
fraud, but the auditor should use professional judgment in determining communication
responsibilities.
Which of the following best describes the distinguishing feature of statistical sampling?
A. It requires the examination of a smaller number of supporting documents.
B. It provides a means for measuring mathematically the degree of uncertainty that
results from examining only part of a population.
C. It reduces the problems associated with the auditor’s judgment concerning
materiality.
D. It is evaluated in terms of two parameters: statistical mean and random selection.
As one of the year-end audit procedures, the auditor instructed the entity’s personnel to
prepare a standard bank confirmation request for a bank account that had been closed
during the year. After the entity’s treasurer had signed the request, it was mailed to the
bank by the assistant treasurer. What is the major flaw in this audit procedure?
A. The confirmation request was signed by the treasurer.
B. Sending the request was meaningless because the account was closed before the
year-end.
C. The request was mailed by the assistant treasurer.
D. The CPA did not sign the confirmation request before it was mailed.
All of the following are incorporated into valuation models except:
A. the exercise price of the option.
B. the term of the option.
C. expected dividends.
D. current tax rates.
An auditor will usually trace the details of the test counts made during the observation
of the physical inventory count to a final inventory schedule. This audit procedure is
undertaken to provide evidence that items physically present and observed by the
auditor at the time of the physical inventory count are
A. owned by the entity.
B. not obsolete.
C. physically present at the time of the preparation of the final inventory schedule.
D. included in the final inventory schedule.
Which of the following is required of an auditor who is testing the fair value of options
in share-based compensation?
A. Using a specialist.
B. Testing the inputs used in the valuation model.
C. Becoming an expert in option-pricing.
D. Using the work of the internal audit function.